##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

|    |  |                                                                                        
|--- |  | ---------------------------------------------------------------------------------------
|[X] |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the quarterly period ended August 2, 2003

OR

|     |  |                                                                                         
|---- |  | ----------------------------------------------------------------------------------------
|[  ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from

to

Commission file number 0-3747

THE CATO CORPORATION AND SUBSIDIARIES




(Exact name of registrant as specified in its charter)


|                                               |  |                                     
|---------------------------------------------- |  | ------------------------------------
|Delaware                                       |  | 56-0484485                          
|                                              
|(State or other jurisdiction
of incorporation) |  | (I.R.S. Employer
Identification No.)

8100 Denmark Road, Charlotte, North Carolina 28273-5975




(Address of principal executive offices)
(Zip Code)


(704) 554-8510




(Registrants telephone number, including area code)


Not Applicable




(Former name, former address and former fiscal year,
if changed since last report)


Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.



| | Yes [X] No [  ]
| | ---------------

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 126-2 of the Act).



| | Yes [X] No [  ]
| | ---------------

As of August 19, 2003, there were 19,864,378 shares of Class A common stock and
5,637,834 shares of Class B common stock outstanding.





---



##### 



THE CATO CORPORATION

FORM 10-Q

August 2, 2003

Table of Contents

|                                           |                                                                                                                                  |  |       |       | 
|------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------- |  | ----- | ----- | 
|                                           |                                                                                                                                  |  | Page 
|                                           |                                                                                                                                  |  | No.  
|                                           |                                                                                                                                  |  |      
|PART I - FINANCIAL INFORMATION (UNAUDITED) |                                                                                                                                  |  |       |      
|                                           | Condensed Consolidated Statements of Income
For the Three Months and Six Months Ended
August 2, 2003 and August 3, 2002          |  |       | 2     | 
|                                           | Condensed Consolidated Balance Sheets
At August 2, 2003, August 3, 2002 and February 1, 2003                                     |  |       | 3     | 
|                                           | Condensed Consolidated Statements of Cash Flows
For the Six Months Ended August 2, 2003 and August 3, 2002                       |  |       | 4     | 
|                                           | Notes to Condensed Consolidated Financial Statements
For the Three Months and Six Months Ended
August 2, 2003 and August 3, 2002 |  |       | 510  | 
|                                           | Managements Discussion and Analysis of
Financial Condition and Results of Operations                                            |  |       | 1115 | 
|                                           | Control Procedures                                                                                                               |  |       | 16    | 
|PART II - OTHER INFORMATION                |                                                                                                                                  |  | 1740 |      





---



##### 



Page 2

PART I FINANCIAL INFORMATION

THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

|                           |                                                               |                         |        |                                               |         |                  |        |             |         |             |        |         |         |   |        |         |         | 
|-------------------------- | ------------------------------------------------------------- | ----------------------- | ------ | --------------------------------------------- | ------- | ---------------- | ------ | ----------- | ------- | ----------- | ------ | ------- | ------- | - | ------ | ------- | ------- | 
|                           |                                                               |                         |        | Three Months Ended                            |         | Six Months Ended
|                           |                                                               |                         |        |                                               |         |                 
|                           |                                                               |                         |        | August 2,                                     |         | August 3,        |        | August 2,   |         | August 3,  
|                           |                                                               |                         |        | 2003                                          |         | 2002             |        | 2003        |         | 2002       
|                           |                                                               |                         |        | (Unaudited)                                   |         | (Unaudited)      |        | (Unaudited) |         | (Unaudited)
|                           |                                                               |                         |        |                                               |         |                  |        |             |         |            
|                           |                                                               |                         |        | (Dollars in thousands, except per share data)
|REVENUES                   |                                                               |                         |        |                                               |         |                  |        |             |         |             |        |         |         |   |        |        
|                           | Retail sales                                                  |                         | $      | 188,218                                       |         |                  | $      | 186,900     |         |             | $      | 385,522 |         |   | $      | 383,517 |        
|                           | Other income (principally finance, late, and layaway charges) |                         |        | 3,775                                         |         |                  |        | 3,815       |         |             |        | 7,681   |         |   |        | 7,689   |        
|                           |                                                               |                         |        |                                               |         |                  |        |             |         |             |        |         |         |   |        |        
|                           |                                                               | Total revenues          |        |                                               | 191,993 |                  |        |             | 190,715 |             |        |         | 393,203 |   |        |         | 391,206 | 
|                           |                                                               |                         |        |                                               |         |                  |        |             |         |             |        |         |         |   |        |        
|COSTS AND EXPENSES, NET    |                                                               |                         |        |                                               |         |                  |        |             |         |             |        |         |         |   |        |        
|                           | Cost of goods sold                                            |                         |        | 132,616                                       |         |                  |        | 125,854     |         |             |        | 259,614 |         |   |        | 250,314 |        
|                           | Selling, general and administrative                           |                         |        | 44,565                                        |         |                  |        | 44,061      |         |             |        | 88,010  |         |   |        | 89,444  |        
|                           | Depreciation                                                  |                         |        | 4,562                                         |         |                  |        | 3,254       |         |             |        | 9,013   |         |   |        | 6,362   |        
|                           | Interest and other income, net                                |                         |        | (1,887                                        | )       |                  |        | (1,667      | )       |             |        | (3,014  | )       |   |        | (2,810  | )      
|                           |                                                               |                         |        |                                               |         |                  |        |             |         |             |        |         |         |   |        |        
|                           |                                                               | Costs and expenses, net |        |                                               | 179,856 |                  |        |             | 171,502 |             |        |         | 353,623 |   |        |         | 343,310 | 
|                           |                                                               |                         |        |                                               |         |                  |        |             |         |             |        |         |         |   |        |        
|INCOME BEFORE INCOME TAXES |                                                               |                         | 12,137 |                                               |         |                  | 19,213 |             |         |             | 39,580 |         |         |   | 47,896 |        
|Income tax expense         |                                                               |                         | 4,406  |                                               |         |                  | 6,955  |             |         |             | 14,368 |         |         |   | 17,338 |        
|                           |                                                               |                         |        |                                               |         |                  |        |             |         |             |        |         |         |   |        |        
|NET INCOME                 |                                                               | $                       | 7,731  |                                               |         | $                | 12,258 |             |         | $           | 25,212 |         |         | $ | 30,558 |        
|                           |                                                               |                         |        |                                               |         |                  |        |             |         |             |        |         |         |   |        |        
|BASIC EARNINGS PER SHARE   |                                                               | $                       | .30    |                                               |         | $                | .48    |             |         | $           | .99    |         |         | $ | 1.20   |        
|                           |                                                               |                         |        |                                               |         |                  |        |             |         |             |        |         |         |   |        |        
|DILUTED EARNINGS PER SHARE |                                                               | $                       | .30    |                                               |         | $                | .47    |             |         | $           | .98    |         |         | $ | 1.18   |        
|                           |                                                               |                         |        |                                               |         |                  |        |             |         |             |        |         |         |   |        |        
|DIVIDENDS PER SHARE        |                                                               | $                       | .16    |                                               |         | $                | .15    |             |         | $           | .31    |         |         | $ | .285   |        
|                           |                                                               |                         |        |                                               |         |                  |        |             |         |             |        |         |         |   |        |        

See accompanying notes to condensed consolidated financial statements.





---



##### 



Page 3

THE CATO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                                |                                                                                                                                                                                                                                |                            |         |        |         |                        |         |             |         |             |         |        |         |         |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------- | ------- | ------ | ------- | ---------------------- | ------- | ----------- | ------- | ----------- | ------- | ------ | ------- | ------- | ------- | 
|                                                                                                                                                                                |                                                                                                                                                                                                                                |                            |         |        |         | August 2,              |         | August 3,   |         |             |         |       
|                                                                                                                                                                                |                                                                                                                                                                                                                                |                            |         |        |         | 2003                   |         | 2002        |         | February 1,
|                                                                                                                                                                                |                                                                                                                                                                                                                                |                            |         |        |         | (Unaudited)            |         | (Unaudited) |         | 2003       
|                                                                                                                                                                                |                                                                                                                                                                                                                                |                            |         |        |         |                        |         |             |         |            
|                                                                                                                                                                                |                                                                                                                                                                                                                                |                            |         |        |         | (Dollars in thousands)
|ASSETS                                                                                                                                                                          |                                                                                                                                                                                                                                |                            |         |        |         |                        |         |             |         |             |         |       
|Current Assets                                                                                                                                                                  |                                                                                                                                                                                                                                |                            |         |        |         |                        |         |             |         |             |         |       
|                                                                                                                                                                                | Cash and cash equivalents                                                                                                                                                                                                      |                            | $       | 59,836 |         |                        | $       | 73,517      |         |             | $       | 32,065 |        
|                                                                                                                                                                                | Short-term investments                                                                                                                                                                                                         |                            |         | 66,255 |         |                        |         | 37,474      |         |             |         | 74,871 |        
|                                                                                                                                                                                | Accounts receivable - net                                                                                                                                                                                                      |                            |         | 53,092 |         |                        |         | 51,973      |         |             |         | 54,116 |        
|                                                                                                                                                                                | Merchandise inventories                                                                                                                                                                                                        |                            |         | 79,998 |         |                        |         | 86,372      |         |             |         | 93,457 |        
|                                                                                                                                                                                | Deferred income taxes                                                                                                                                                                                                          |                            |         | 1,530  |         |                        |         | 983         |         |             |         | 1,392  |        
|                                                                                                                                                                                | Prepaid expenses                                                                                                                                                                                                               |                            |         | 5,651  |         |                        |         | 4,875       |         |             |         | 4,990  |        
|                                                                                                                                                                                |                                                                                                                                                                                                                                |                            |         |        |         |                        |         |             |         |             |         |       
|                                                                                                                                                                                |                                                                                                                                                                                                                                | Total Current Assets       |         |        | 266,362 |                        |         |             | 255,194 |             |         |        | 260,891 |        
|Property and equipment - net                                                                                                                                                    |                                                                                                                                                                                                                                |                            | 113,131 |        |         |                        | 107,666 |             |         |             | 113,307 |       
|Other assets                                                                                                                                                                    |                                                                                                                                                                                                                                |                            | 9,617   |        |         |                        | 9,128   |             |         |             | 9,212   |       
|                                                                                                                                                                                |                                                                                                                                                                                                                                |                            |         |        |         |                        |         |             |         |             |         |       
|                                                                                                                                                                                |                                                                                                                                                                                                                                |                            |         | Total  |         | $                      | 389,110 |             |         | $           | 371,988 |        |         | $       | 383,410 | 
|                                                                                                                                                                                |                                                                                                                                                                                                                                |                            |         |        |         |                        |         |             |         |             |         |       
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                            |                                                                                                                                                                                                                                |                            |         |        |         |                        |         |             |         |             |         |       
|Current Liabilities                                                                                                                                                             |                                                                                                                                                                                                                                |                            |         |        |         |                        |         |             |         |             |         |       
|                                                                                                                                                                                | Accounts payable                                                                                                                                                                                                               |                            | $       | 52,304 |         |                        | $       | 62,660      |         |             | $       | 66,620 |        
|                                                                                                                                                                                | Accrued expenses                                                                                                                                                                                                               |                            |         | 27,698 |         |                        |         | 29,505      |         |             |         | 28,776 |        
|                                                                                                                                                                                | Income taxes                                                                                                                                                                                                                   |                            |         | 8,012  |         |                        |         | 7,921       |         |             |         | 2,886  |        
|                                                                                                                                                                                |                                                                                                                                                                                                                                |                            |         |        |         |                        |         |             |         |             |         |        |        
|                                                                                                                                                                                |                                                                                                                                                                                                                                | Total Current Liabilities  |         |        | 88,014  |                        |         |             | 100,086 |             |         |        | 98,282  |        
|Deferred income taxes                                                                                                                                                           |                                                                                                                                                                                                                                |                            | 6,310   |        |         |                        | 5,177   |             |         |             | 6,310   |       
|Other noncurrent liabilities                                                                                                                                                    |                                                                                                                                                                                                                                |                            | 8,700   |        |         |                        | 8,343   |             |         |             | 8,654   |       
|                                                                                                                                                                               
|Commitments and contingencies                                                                                                                                                   |                                                                                                                                                                                                                                |                            |         |        |         |                        |         |             |         |             |         |       
|                                                                                                                                                                               
|Shareholders Equity:                                                                                                                                                           |                                                                                                                                                                                                                                |                            |         |        |         |                        |         |             |         |             |         |       
|                                                                                                                                                                                | Preferred stock, $100 par value per share, 100,000
shares authorized, none issued                                                                                                                                              |                            |         |       |         |                        |         |            |         |             |         |       |        
|                                                                                                                                                                                | Class A common stock, $.033 par value per share,
50,000,000 shares authorized; issued 25,612,313
shares, 25,156,782 shares and 25,218,678 shares at
August 2, 2003, August 3, 2002, and February 1,
2003, respectively         |                            |         | 854    |         |                        |         | 839         |         |             |         | 840    |        
|                                                                                                                                                                                | Convertible Class B common stock, $.033 par value per
share, 15,000,000 shares authorized; issued
5,796,078 shares, 6,085,149 shares and 6,085,149
shares at August 2, 2003, August 3, 2002 and
February 1, 2003, respectively |                            |         | 193    |         |                        |         | 202         |         |             |         | 203    |        
|Additional paid-in capital                                                                                                                                                      |                                                                                                                                                                                                                                |                            | 96,087  |        |         |                        | 92,355  |             |         |             | 94,947  |       
|Retained earnings                                                                                                                                                               |                                                                                                                                                                                                                                |                            | 253,226 |        |         |                        | 228,288 |             |         |             | 235,904 |       
|Accumulated other comprehensive gains (losses)                                                                                                                                  |                                                                                                                                                                                                                                |                            | 10      |        |         |                        | (901    | )           |         |             | 253     |       
|Unearned compensation  restricted stock awards                                                                                                                                 |                                                                                                                                                                                                                                |                            | (1,935  | )      |         |                        | (2,863  | )           |         |             | (2,375  | )     
|                                                                                                                                                                                |                                                                                                                                                                                                                                |                            |         |        |         |                        |         |             |         |             |         |        |        
|                                                                                                                                                                                |                                                                                                                                                                                                                                |                            | 348,435 |        |         |                        | 317,920 |             |         |             | 329,772 |       
|Less Class A common stock in treasury,
at cost (5,906,179 shares at August 2, 2003, 5,737,079
shares at August 3, 2002, and 5,741,179 shares
at February 1, 2003, respectively) |                                                                                                                                                                                                                                |                            | (62,349 | )      |         |                        | (59,538 | )           |         |             | (59,608 | )     
|                                                                                                                                                                                |                                                                                                                                                                                                                                |                            |         |        |         |                        |         |             |         |             |         |        |        
|                                                                                                                                                                                |                                                                                                                                                                                                                                | Total Shareholders Equity |         |        | 286,086 |                        |         |             | 258,382 |             |         |        | 270,164 |        
|                                                                                                                                                                                |                                                                                                                                                                                                                                |                            |         |        |         |                        |         |             |         |             |         |       
|                                                                                                                                                                                |                                                                                                                                                                                                                                |                            | Total   |        | $       | 389,110                |         |             | $       | 371,988     |         |        | $       | 383,410 |        
|                                                                                                                                                                                |                                                                                                                                                                                                                                |                            |         |        |         |                        |         |             |         |             |         |       

See accompanying notes to condensed consolidated financial statements.





---



##### 



Page 4

THE CATO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

|                     |                                                                                   |                                                                         |                                        |        |                        |         |             |         |       |        |  
|-------------------- | --------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | -------------------------------------- | ------ | ---------------------- | ------- | ----------- | ------- | ----- | ------ | -
|                     |                                                                                   |                                                                         |                                        |        | Six Months Ended      
|                     |                                                                                   |                                                                         |                                        |        |                       
|                     |                                                                                   |                                                                         |                                        |        | August 2,              |         | August 3,  
|                     |                                                                                   |                                                                         |                                        |        | 2003                   |         | 2002       
|                     |                                                                                   |                                                                         |                                        |        | (Unaudited)            |         | (Unaudited)
|                     |                                                                                   |                                                                         |                                        |        |                        |         |            
|                     |                                                                                   |                                                                         |                                        |        | (Dollars in thousands)
|OPERATING ACTIVITIES |                                                                                   |                                                                         |                                        |        |                        |         |             |        
|                     | Net income                                                                        |                                                                         | $                                      | 25,212 |                        |         | $           | 30,558  |      
|                     | Adjustments to reconcile net income to net cash
provided by operating activities: |                                                                         |                                        |        |                        |         |             |         |      
|                     |                                                                                   | Depreciation                                                            |                                        |        | 9,013                  |         |             |         | 6,362 |       
|                     |                                                                                   | Amortization of investment premiums                                     |                                        |        | 4                      |         |             |         | 48    |       
|                     |                                                                                   | Compensation expense related to restricted stock
awards                 |                                        |        | 440                    |         |             |         | 261   |       
|                     |                                                                                   | Loss on disposal of property and equipment                              |                                        |        | 243                    |         |             |         | 283   |       
|                     |                                                                                   | Changes in operating assets and liabilities which
provided (used) cash: |                                        |        |                        |         |             |         |       |       
|                     |                                                                                   |                                                                         | Accounts receivable                    |        |                        | 1,024   |             |         |       | 320    |  
|                     |                                                                                   |                                                                         | Merchandise inventories                |        |                        | 13,459  |             |         |       | (5,965 | )
|                     |                                                                                   |                                                                         | Other assets                           |        |                        | (1,066  | )           |         |       | (271   | )
|                     |                                                                                   |                                                                         | Accounts payable and other liabilities |        |                        | (15,485 | )           |         |       | 8,956  |  
|                     |                                                                                   |                                                                         | Accrued income taxes                   |        |                        | 5,126   |             |         |       | 7,101  |  
|                     |                                                                                   |                                                                         |                                        |        |                        |         |             |        
|                     | Net cash provided by operating activities                                         |                                                                         |                                        | 37,970 |                        |         |             | 47,653  |      
|                     |                                                                                   |                                                                         |                                        |        |                        |         |             |        
|INVESTING ACTIVITIES |                                                                                   |                                                                         |                                        |        |                        |         |             |        
|                     | Expenditures for property and equipment                                           |                                                                         |                                        | (9,080 | )                      |         |             | (14,174 | )    
|                     | Purchases of short-term investments                                               |                                                                         |                                        | (7,686 | )                      |         |             | (234    | )    
|                     | Sales of short-term investments                                                   |                                                                         |                                        | 16,055 |                        |         |             | 5,300   |      
|                     |                                                                                   |                                                                         |                                        |        |                        |         |             |        
|                     | Net cash used in investing activities                                             |                                                                         |                                        | (711   | )                      |         |             | (9,108  | )    
|                     |                                                                                   |                                                                         |                                        |        |                        |         |             |        
|FINANCING ACTIVITIES |                                                                                   |                                                                         |                                        |        |                        |         |             |        
|                     | Dividends paid                                                                    |                                                                         |                                        | (7,874 | )                      |         |             | (7,230  | )    
|                     | Purchases of treasury stock                                                       |                                                                         |                                        | (2,741 | )                      |         |             | (1,116  | )    
|                     | Proceeds from employee stock purchase plan                                        |                                                                         |                                        | 245    |                        |         |             | 263     |      
|                     | Proceeds from stock options exercised                                             |                                                                         |                                        | 882    |                        |         |             | 1,283   |      
|                     |                                                                                   |                                                                         |                                        |        |                        |         |             |        
|                     | Net cash used in financing activities                                             |                                                                         |                                        | (9,488 | )                      |         |             | (6,800  | )    
|                     |                                                                                   |                                                                         |                                        |        |                        |         |             |        
|                     | Net increase in cash and cash equivalents                                         |                                                                         |                                        | 27,771 |                        |         |             | 31,745  |      
|                     | Cash and cash equivalents at beginning of period                                  |                                                                         |                                        | 32,065 |                        |         |             | 41,772  |      
|                     |                                                                                   |                                                                         |                                        |        |                        |         |             |        
|                     | Cash and cash equivalents at end of period                                        |                                                                         | $                                      | 59,836 |                        |         | $           | 73,517  |      
|                     |                                                                                   |                                                                         |                                        |        |                        |         |             |         |      

See accompanying notes to condensed consolidated financial statements.





---



##### 



Page 5

THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 2, 2003
AND AUGUST 3, 2002

NOTE 1 - GENERAL:

The condensed consolidated financial statements have been prepared from the
accounting records of The Cato Corporation and its wholly-owned subsidiaries
(the Company), and all amounts shown as of and for the periods ended August 2,
2003 and August 3, 2002 are unaudited. In the opinion of management, all
adjustments (consisting solely of normal recurring adjustments) considered
necessary for a fair presentation have been included. The results of the
interim period may not
be indicative of the entire year.

The interim financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, included in the Companys
Annual Report on Form 10-K for the fiscal year ended February 1, 2003.

Cash equivalents consist of highly liquid investments with original maturities
of three months or less. Investments with original maturities beyond three
months are classified as short-term investments. The fair values of short-term
investments are based on quoted market prices.

The Companys short-term investments are classified as available-for-sale. As
they are available for current operations, they are classified in condensed
consolidated balance sheets as current assets. Available-for-sale securities
are carried at fair value, with unrealized gains and temporary losses, net of
income taxes, reported as a component of accumulated other comprehensive
income. Other than temporary declines in fair value of investments are
recorded as a reduction in the cost of the investments in the accompanying
Consolidated Balance Sheets and a reduction of interest and other income, net
in the accompanying Statements of Consolidated Income. The cost of debt
securities is adjusted for amortization of premiums and accretion of discounts
to maturity. The amortization of premiums, accretion of discounts and realized
gains and losses are included in other income.

Total comprehensive income for the second quarter and six months ended August
2, 2003 was $7,374,000 and $24,969,000, respectively. Total comprehensive
income for the second quarter and six months ended August 3, 2002 was
$12,234,000 and $30,224,000, respectively. Total comprehensive income is
composed of net income and net unrealized gains and losses on
available-for-sale securities.

Merchandise inventories are stated at the lower of cost (first-in, first-out
method) or market as determined by the retail inventory method.

For the six months ended August 2, 2003, the Company repurchased 165,000 shares
of Class A Common Stock for $2,740,619, or an average market price of $16.61
per share, all which incurred in the first quarter of fiscal 2003. For the six
months ended August 3, 2002, the Company repurchased and accepted a combined
total of 110,581 mature shares of Class A Common Stock for $2,260,264, or an
average market price of $20.44 per share. In the second quarter of fiscal
2002, the Company repurchased 61,900 shares of Class A Common Stock for
$1,115,764, or an average





---



##### 



Page 6

THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 2, 2003
AND AUGUST 3, 2002

NOTE 1  GENERAL (CONTINUED):

market price of $18.03 per share. Additionally, in the first quarter of fiscal
2002, the Company accepted in an option transaction from an officer for payment
of an option exercise, 48,681 mature shares of Class A Common Stock for
$1,144,500, or an average market price of $23.51 per share, the average fair
market value on the date of the exchange.

In May 2003, the Board of Directors increased the quarterly dividend by 7% from
$.15 per share to $.16 per share.

On August 22, 2003, the Company repurchased 5,137,484 shares of Class B Common
Stock from a limited partnership and trust affiliated with Wayland H. Cato,
Jr., a Company founder and Chairman of the Board and a limited partnership
affiliated with Edgar T. Cato, a Company founder and a member of the Board of
Directors. Shares were purchased at $18.50 per share (a 21% discount off the
then market value) for a total cost of $95,043,454 which was funded by the
Company through a new $30 million five-year term loan facility and
approximately $65 million of cash and liquidated short-term investments.
Payments on the new term loan are due in monthly installments of $500,000 plus
accrued interest. Interest is based on LIBOR. Both the repurchase of the
shares from the co-founders and the new term loan facility will be recorded in
the Companys third quarter.

On August 29, 2003, the Company entered into agreements with Mr. Wayland H.
Cato, Jr., a Company founder and Chairman of the Board and Mr. Edgar T. Cato, a
Company founder and a member of the Board of Directors. The agreements provide
for the retirement of Mr. Wayland Cato and Mr. Edgar Cato from the Company and
the Board of Directors effective January 31, 2004. Mr. Wayland Cato will be
available to the Company for consulting services following his retirement. In
the third quarter of fiscal 2003, the Company expects to take a charge of
approximately $2.8 million representing the present value of certain payments
and benefits to Mr. Wayland Cato and Mr. Edgar Cato under the terms of the
agreements. The charge will be approximately $1.8 million on an
after-tax basis, or $.08 per diluted share for the third quarter and year. The
benefits include compensation for three years commencing on the retirement
date, life insurance coverage for three years, continuation of medical
insurance coverage, and assistance with the relocation of their offices and are
in consideration of the consulting services, non-competition covenants and
confidentiality covenants, among other obligations of the retirees.

The provisions for income taxes are based on the Companys estimated annual
effective tax rate. As allowed by SFAS No. 109, Accounting for Income Taxes,
deferred income taxes are calculated annually.

Certain reclassifications have been made to the condensed consolidated
financial statements for prior periods to conform to the current period
presentation.





---



##### 



Page 7

THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 2, 2003
AND AUGUST 3, 2002

NOTE 2  RECENT ACCOUNTING PRONOUNCEMENTS:

On November 25, 2002 the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, which elaborates on the disclosures to
be made by a guarantor about its obligations under certain
guarantees issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The
interpretation expands on the accounting guidance of SFAS No. 5, Accounting
for Contingencies, SFAS No. 57, Related Party Disclosures, and SFAS No. 107,
Disclosures about Fair Value of Financial Instruments. The interpretation
also incorporates, without change, the provisions of FASB Interpretation No.
34, Disclosure of Indirect Guarantees of Indebtedness of Others, which it
supersedes. The initial recognition and measurement provisions of
Interpretation No. 45 apply on a prospective basis to guarantees issued or
modified after December 31, 2002, regardless of the guarantors fiscal
year-end. The disclosures are effective for financial statements of interim or
annual periods ending after December 31, 2002. The Company adopted
Interpretation No. 45 on February 2, 2003 and the impact of this Interpretation
on the Companys financial position or results of operations was not material
and additional disclosure is not required.

On December 31, 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide for alternative methods
of transition to SFAS No. 123s fair value method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure provisions of
SFAS No. 123 and APB Opinion No. 28, Interim Financial
Reporting, to require disclosure in the summary of significant policies of the
effects of an entitys accounting policy with respect to stock-based employee
compensation on reported net income and earnings per-share in annual and
interim financial statements. While SFAS No. 148 does not amend SFAS No. 123
to require companies to account for employee stock options using the fair value
method, the disclosure provisions of SFAS No. 148 are applicable to all
companies with stock-based compensation, regardless of whether they account for
that compensation using the fair value method of SFAS No. 123 or the intrinsic
value method of APB Opinion No. 25, Accounting for Stock Issued to Employees.
SFAS No. 148s amendment of the transition and the annual disclosure
requirements of SFAS No. 123 are effective for fiscal years ending after
December 15, 2002.

The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock option
plans. Accordingly, no compensation expense has been recognized for
stock-based compensation where the option price of the stock approximated the
fair market value of the stock on the date of grant. Had compensation expense
for the stock options granted been determined consistent with SFAS No. 123,
Accounting for





---



##### 



Page 8

THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 2, 2003
AND AUGUST 3, 2002

NOTE 2  RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED):

Stock-Based Compensation, the Companys net income and basic and diluted
earnings per share amounts for the three months ended August 2, 2003 and August
3, 2002 and for the six months ended August 2, 2003 and August 3, 2002 would
approximate the following proforma amounts (dollars in thousands, except per
share data):

|  |                                         |                            |   |                    |     |                  |   |                |     |                |   |        |     |  |   |        |      | 
|- | --------------------------------------- | -------------------------- | - | ------------------ | --- | ---------------- | - | -------------- | --- | -------------- | - | ------ | --- |  | - | ------ | ---- | 
|  |                                         |                            |   | Three Months Ended |     | Six Months Ended
|  |                                         |                            |   |                    |     |                 
|  |                                         |                            |   | August 2, 2003     |     | August 3, 2002   |   | August 2, 2003 |     | August 3, 2002
|  |                                         |                            |   |                    |     |                  |   |                |     |               
|  | Net income  as reported                |                            | $ | 7,731              |     |                  | $ | 12,258         |     |                | $ | 25,212 |     |  | $ | 30,558 |     
|* | Pro forma stock-based compensation cost |                            |   | (131               | )   |                  |   | (179           | )   |                |   | (266   | )   |  |   | (391   | )   
|  |                                         |                            |   |                    |     |                  |   |                |     |                |   |        |     |  |   |        |     
|  | Net income  pro forma                  |                            | $ | 7,600              |     |                  | $ | 12,079         |     |                | $ | 24,946 |     |  | $ | 30,167 |     
|  | Net income per share as reported:       |                            |   |                    |     |                  |   |                |     |                |   |        |     |  |   |        |     
|  |                                         | Basic earnings per share   |   | $                  | .30 |                  |   | $              | .48 |                |   | $      | .99 |  |   | $      | 1.20 | 
|  |                                         | Diluted earnings per share |   | $                  | .30 |                  |   | $              | .47 |                |   | $      | .98 |  |   | $      | 1.18 | 
|  | Net income per share-pro forma          |                            |   |                    |     |                  |   |                |     |                |   |        |     |  |   |        |     
|  |                                         | Basic earnings per share   |   | $                  | .30 |                  |   | $              | .47 |                |   | $      | .98 |  |   | $      | 1.18 | 
|  |                                         | Diluted earnings per share |   | $                  | .29 |                  |   | $              | .46 |                |   | $      | .97 |  |   | $      | 1.16 | 

* determined using fair value method

In January 2003, the FASB issued Interpretation No. 46 Consolidation of
Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51, Consolidated Financial Statements. This interpretation applies
immediately to variable interest entities created after January 31, 2003 and to
variable interest entities in which an enterprise obtains an interest after
that date. It applies in the first fiscal year or interim period beginning
after June 15, 2003, to variable interest entities in which an enterprise holds
a variable interest it acquired before February 1, 2003.
This interpretation may be applied prospectively with a cumulative-effect
adjustment as of the date on which it is first applied or by restating
previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated.
The implementation of this interpretation had no effect on the Companys
financial position or results of operations.

In May 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
(SFAS 150). SFAS 150 improves the accounting for certain financial
instruments that, under previous guidance, issuers could account for as equity.
The new Statement requires that those instruments be classified as liabilities
in statements of financial position. We do not expect the provisions of SFAS
150 to have a material impact on our financial position or results of
operations.





---



##### 



Page 9

THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 2, 2003
AND AUGUST 3, 2002

NOTE 3 - EARNINGS PER SHARE:

Earnings per share is calculated by dividing net income by the weighted-average
number of Class A and Class B common shares outstanding during the respective
periods. The weighted-average
shares outstanding is used in the basic earnings per share calculation, while
the weighted-average shares and common stock equivalents outstanding are used
in the diluted earnings per share calculation.

|                                                                                 |  |                    |            |                  |  |           |            |           |  |  |            |  |  |  |            | 
|-------------------------------------------------------------------------------- |  | ------------------ | ---------- | ---------------- |  | --------- | ---------- | --------- |  |  | ---------- |  |  |  | ---------- | 
|                                                                                 |  | Three Months Ended |            | Six Months Ended
|                                                                                 |  |                    |            |                 
|                                                                                 |  | August 2,          |            | August 3,        |  | August 2, |            | August 3,
|                                                                                 |  | 2003               |            | 2002             |  | 2003      |            | 2002     
|                                                                                 |  |                    |            |                  |  |           |            |          
|Weighted-average shares outstanding                                              |  |                    | 25,478,008 |                  |  |           | 25,516,138 |           |  |  | 25,458,696 |  |  |  | 25,397,580 | 
|Dilutive effect of stock options                                                 |  |                    | 410,325    |                  |  |           | 503,984    |           |  |  | 391,925    |  |  |  | 550,970    | 
|                                                                                 |  |                    |            |                  |  |           |            |           |  |  |            |  |  |  |            | 
|Weighted-average shares and
common stock equivalents
(stock options) outstanding |  |                    | 25,888,333 |                  |  |           | 26,020,122 |           |  |  | 25,850,621 |  |  |  | 25,948,550 | 
|                                                                                 |  |                    |            |                  |  |           |            |           |  |  |            |  |  |  |            | 

NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION:

Income tax payments, net of refunds received, for the six months ended August
2, 2003 and
August 3, 2002 were $9,277,450 and $10,364,500, respectively.

NOTE 5 - FINANCING ARRANGEMENTS:

On August 22, 2003, the Company entered into a new $30 million five-year term
loan facility, the proceeds of which were used to purchase Class B Common Stock
from the Companys founders. Payments are due in monthly installments of
$500,000 plus accrued interest. Interest is based on LIBOR.

On August 22, 2003, the Company entered into a new revolving credit agreement
which provides for borrowings of up to $35 million. The revolving credit
agreement is committed until August 22, 2006, unless extended. This agreement
replaces a prior revolving credit agreement which was due to expire on October
31, 2004. The credit agreement contains various financial covenants and
limitations, including the maintenance of specific financial ratios with which
the Company was in compliance. There were no borrowings outstanding during the
six months ended August 2, 2003 or the fiscal year ended February 1, 2003.





---



##### 



Page 10

THE CATO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND SIX MONTHS ENDED AUGUST 2, 2003
AND AUGUST 3, 2002

NOTE 6  REPORTABLE SEGMENT INFORMATION:

The Company has two reportable segments: retail and credit. The following
schedule summarizes certain segment information (in thousands):

|                            |        |       |   |                    |         |                  |   |           |         |           |   |         |         |  |   |         |         | 
|--------------------------- | ------ | ----- | - | ------------------ | ------- | ---------------- | - | --------- | ------- | --------- | - | ------- | ------- |  | - | ------- | ------- | 
|                            |        |       |   | Three Months Ended |         | Six Months Ended
|                            |        |       |   |                    |         |                 
|                            |        |       |   | August 2,          |         | August 3,        |   | August 2, |         | August 3,
|                            |        |       |   | 2003               |         | 2002             |   | 2003      |         | 2002     
|                            |        |       |   |                    |         |                  |   |           |         |          
|Revenues:                   |        |       |   |                    |         |                  |   |           |         |           |   |         |         |  |   |        
|                            | Retail |       | $ | 188,415            |         |                  | $ | 187,296   |         |           | $ | 386,013 |         |  | $ | 384,460 |        
|                            | Credit |       |   | 3,578              |         |                  |   | 3,419     |         |           |   | 7,190   |         |  |   | 6,746   |        
|                            |        |       |   |                    |         |                  |   |           |         |           |   |         |         |  |   |         |        
|                            |        | Total |   | $                  | 191,993 |                  |   | $         | 190,715 |           |   | $       | 393,203 |  |   | $       | 391,206 | 
|                            |        |       |   |                    |         |                  |   |           |         |           |   |         |         |  |   |         |        
|Income before income taxes: |        |       |   |                    |         |                  |   |           |         |           |   |         |         |  |   |        
|                            | Retail |       | $ | 11,066             |         |                  | $ | 17,808    |         |           | $ | 37,541  |         |  | $ | 45,243  |        
|                            | Credit |       |   | 1,071              |         |                  |   | 1,405     |         |           |   | 2,039   |         |  |   | 2,653   |        
|                            |        |       |   |                    |         |                  |   |           |         |           |   |         |         |  |   |         |        
|                            |        | Total |   | $                  | 12,137  |                  |   | $         | 19,213  |           |   | $       | 39,580  |  |   | $       | 47,896  | 
|                            |        |       |   |                    |         |                  |   |           |         |           |   |         |         |  |   |         |        





---



##### 



Page 11

THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS:

The following table sets forth, for the periods indicated, certain items in the
Companys unaudited Condensed Consolidated Statements of Income as a percentage
of total retail sales:

|                                    |  |                    |       |                  |  |           |       |           |  |  |       |   |  |  |       |  
|----------------------------------- |  | ------------------ | ----- | ---------------- |  | --------- | ----- | --------- |  |  | ----- | - |  |  | ----- | -
|                                    |  | Three Months Ended |       | Six Months Ended
|                                    |  |                    |       |                 
|                                    |  | August 2,          |       | August 3,        |  | August 2, |       | August 3,
|                                    |  | 2003               |       | 2002             |  | 2003      |       | 2002     
|                                    |  |                    |       |                  |  |           |       |          
|Total retail sales                  |  |                    | 100.0 | %                |  |           | 100.0 | %         |  |  | 100.0 | % |  |  | 100.0 | %
|Total revenues                      |  |                    | 102.0 |                  |  |           | 102.0 |           |  |  | 101.9 |   |  |  | 102.0 |  
|Cost of goods sold                  |  |                    | 70.5  |                  |  |           | 67.3  |           |  |  | 67.4  |   |  |  | 65.3  |  
|Selling, general and
administrative |  |                    | 23.7  |                  |  |           | 23.6  |           |  |  | 22.8  |   |  |  | 23.3  |  
|Depreciation                        |  |                    | 2.4   |                  |  |           | 1.7   |           |  |  | 2.3   |   |  |  | 1.6   |  
|Interest and other, net             |  |                    | (1.0  | )                |  |           | (0.9  | )         |  |  | (0.8  | ) |  |  | (0.7  | )
|Income before income taxes          |  |                    | 6.4   |                  |  |           | 10.3  |           |  |  | 10.2  |   |  |  | 12.5  |  
|Net income                          |  |                    | 4.1   |                  |  |           | 6.6   |           |  |  | 6.5   |   |  |  | 8.0   |  

Comparison of Second Quarter and First Six Months of 2003 with 2002.

Total retail sales for the second quarter were $188.2 million compared to last
years second
quarter sales of $186.9 million, a 1% increase. Same-store sales decreased 7%
in the second quarter of fiscal 2003. For the six months ended August 2, 2003,
total retail sales were $385.5 million compared to last years first six months
sales of $383.5 million, a 1% increase, and
same-store sales decreased 7% for the comparable six month period. The soft
retail sales for the first six months of 2003 resulted from continued difficult
economic conditions. The Company operated 1,051 stores at August 2, 2003
compared to 972 stores at the end of last years second quarter.

Other income for the second quarter of 2003 decreased 1% over the prior years
comparable period. The decrease in the second quarter resulted primarily from
decreased layaway fees. Other income for the first six months of 2003 was
virtually equivalent to the comparable six month period last year.

Cost of goods sold were 70.5% and 67.4% of total retail sales for the second
quarter and first six months of 2003, respectively, compared to 67.3% and 65.3%
for prior years comparable three and six month periods, respectively. The
increase in cost of goods sold as a percent of retail sales for the first six
months of 2003 resulted primarily from lower than planned sales and additional
markdowns taken to bring inventory levels in line with sales trends.

Selling, general and administrative (SG&A) expenses were $44.6 million, or
23.7% and $88.0 million, or 22.8% for the second quarter and first six months
of this year, compared to $44.1





---



##### 



Page 12

THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS  (CONTINUED):

million, or 23.6% and $89.4 million, or 23.3% of retail sales for prior years
comparable three and six month periods, respectively. SG&A expenses as a
percentage of retail sales increased 10 basis points for the second quarter of
2003 as compared to the prior year and decreased 50 basis points for the first
six months of 2003, as compared to the prior year. The overall decrease in
SG&A expenses for the first six months of 2003 results primarily from reduced
incentive based performance bonus programs.

Depreciation expense was $4.6 million, or 2.4% and $9.0 million or 2.3% of
retail sales, for the second quarter and first six months of fiscal 2003,
compared to $3.3 million, or 1.7% and $6.4 million, or 1.6% of retail sales,
for prior years comparable three and six month periods, respectively. The
increase resulted primarily from the Companys store development and
depreciation of the Companys enterprise-wide information system which was
implemented in August 2002.

CRITICAL ACCOUNTING POLICIES:

The preparation of the Companys financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions about future events that affect the amounts reported in the
financial statements and accompanying notes. Future events and their effects
cannot be determined with absolute certainty. Therefore, the determination of
estimates requires the exercise of judgement. Actual results inevitably will
differ from those estimates, and such differences may be material to the
financial statements. The most significant accounting estimates inherent in
the preparation of the Companys financial statements include the allowance for
doubtful accounts receivable, reserves relating to workers compensation,
general and auto insurance liabilities and reserves for inventory markdowns.

The Company evaluates the collectibility of accounts receivable and records
allowances for doubtful accounts based on estimates of actual write-offs and
the relative age of accounts. The Companys self-insurance liabilities related
to workers compensation, general and auto insurance liabilities are based on
estimated costs of claims filed and claims incurred but not reported and data
provided by outside actuaries. Merchandise inventories are stated at the lower
of cost (first-in, first-out method) or market as determined by the retail
method. Management makes estimates regarding markdowns based on customer
demand which can impact inventory valuations. Historically, actual results
have not significantly deviated from those determined using the estimates
described above.

STOCK OPTIONS:

The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock option
plans. Accordingly, no compensation expense has been recognized for
stock-based compensation where the option price of the stock approximated the
fair market value of the stock on the date of grant. Had compensation expense
for





---



##### 

\

Page 13

THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

STOCK OPTIONS (CONTINUED):

the stock options granted been determined consistent with SFAS No. 123,
Accounting for Stock-Based Compensation, the Companys net income and basic
and diluted earnings per share amounts for the three months ended August 2,
2003 and August 3, 2002 and for the six months ended August 2, 2003 and August
3, 2002 would approximate the following proforma amounts (dollars in thousands,
except per share data):

|  |                                         |                            |   |                    |     |                  |   |                |     |                |   |        |     |  |   |        |      | 
|- | --------------------------------------- | -------------------------- | - | ------------------ | --- | ---------------- | - | -------------- | --- | -------------- | - | ------ | --- |  | - | ------ | ---- | 
|  |                                         |                            |   | Three Months Ended |     | Six Months Ended
|  |                                         |                            |   |                    |     |                 
|  |                                         |                            |   | August 2, 2003     |     | August 3, 2002   |   | August 2, 2003 |     | August 3, 2002
|  |                                         |                            |   |                    |     |                  |   |                |     |               
|  | Net income  as reported                |                            | $ | 7,731              |     |                  | $ | 12,258         |     |                | $ | 25,212 |     |  | $ | 30,558 |     
|* | Pro forma stock-based compensation cost |                            |   | (131               | )   |                  |   | (179           | )   |                |   | (266   | )   |  |   | (391   | )   
|  |                                         |                            |   |                    |     |                  |   |                |     |                |   |        |     |  |   |        |     
|  | Net income  pro forma                  |                            | $ | 7,600              |     |                  | $ | 12,079         |     |                | $ | 24,946 |     |  | $ | 30,167 |     
|  | Net income per share as reported:       |                            |   |                    |     |                  |   |                |     |                |   |        |     |  |   |        |     
|  |                                         | Basic earnings per share   |   | $                  | .30 |                  |   | $              | .48 |                |   | $      | .99 |  |   | $      | 1.20 | 
|  |                                         | Diluted earnings per share |   | $                  | .30 |                  |   | $              | .47 |                |   | $      | .98 |  |   | $      | 1.18 | 
|  | Net income per share-pro forma          |                            |   |                    |     |                  |   |                |     |                |   |        |     |  |   |        |     
|  |                                         | Basic earnings per share   |   | $                  | .30 |                  |   | $              | .47 |                |   | $      | .98 |  |   | $      | 1.18 | 
|  |                                         | Diluted earnings per share |   | $                  | .29 |                  |   | $              | .46 |                |   | $      | .97 |  |   | $      | 1.16 | 

* determined using fair value method

LIQUIDITY AND CAPITAL RESOURCES:

At August 2, 2003, the Company had working capital of $178.3 million, compared
to $155.1 million at August 3, 2002 and $162.6 million at February 1, 2003.
Cash provided by operating activities was $38.0 million for the six months
ended August 2, 2003, compared to $47.7 million for last years comparable six
month period. The decrease in net cash provided by operating activities
resulted primarily from a decrease in net income, payments related to accounts
payable and other liabilities made prior to the end of second quarter of 2003
versus after the end of second quarter 2002 partially offset by a decrease in
inventories. At August 2, 2003, the Company had cash, cash equivalents, and
short-term investments of $126.1 million, compared to $111.0 million at August
3, 2002 and $106.9 million at February 1, 2003.

Net cash used in investing activities totaled $.7 million for the first six
months of 2003 compared to $9.1 million for the comparable period of 2002.
Cash was used to fund capital expenditures for
new, relocated and remodeled stores and for investments in technology.
Additionally, the decrease in cash used was in part related to an increase in
purchases of short-term investments offset by a





---



##### 



Page 14

THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES (CONTINUED):

decrease in capital expenditures and an increase in the sale of short-term
investments in fiscal 2003 as compared to fiscal 2002.

Expenditures for property and equipment totaled $9.1 million for the six months
ended August 2, 2003, compared to $14.2 million of expenditures in last years
first six months. The Company expects total capital expenditures to be
approximately $31 million for the current fiscal year. The Company intends to
open approximately 90 new stores, close 10 stores and to relocate 25 stores
during the current fiscal year. For the six months ended August 2, 2003, the
Company had opened 29 new stores and relocated 12 stores.

Net cash used in financing activities totaled $9.5 million for the first six
months of 2003 compared to $6.8 million for the comparable period of 2002. The
increase was due primarily to an increase in its share buyback program,
increase in dividends paid and a reduction in proceeds from stock options
exercised in fiscal 2003 as compared to fiscal 2002.

In May 2003, the Board of Directors increased the quarterly dividend by 7% from
$.15 per share to $.16 per share.

On August 22, 2003, the Company entered into a new $30 million five-year term
loan facility, the proceeds of which were used to purchase Class B Common Stock
from the Companys founders. Payments are due in monthly installments of
$500,000 plus accrued interest. Interest is based on LIBOR.

On August 22, 2003, the Company entered into a new revolving credit agreement
which provides for borrowings of up to $35 million. The revolving credit
agreement is committed until August 22, 2006, unless extended. This agreement
replaces a prior revolving credit agreement which was due to expire on October
31, 2004. The credit agreement contains various financial covenants and
limitations, including the maintenance of specific financial ratios with which
the Company was in compliance. There were no borrowings outstanding during the
six months ended August 2, 2003 or the fiscal year ended February 1, 2003.

The Company does not use derivative financial instruments. At August 2, 2003,
August 3, 2002, and February 1, 2003, the Companys investment portfolio was
primarily invested in governmental debt securities with maturities of up to 36
months. These securities are classified as available-for-sale, and are
recorded on the balance sheet at fair value with unrealized gains and losses
reported as accumulated other comprehensive gains or losses.

The Company believes that its cash, cash equivalents and short-term
investments, together with cash flow from operations and borrowings available
under its revolving credit agreement, will be adequate to fund the Companys
proposed capital expenditures and other operating requirements during fiscal
2003.





---



##### 



Page 15

THE CATO CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

FORWARD LOOKING STATEMENTS:

Form 10-Q includes forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. All statements
other than statements of historical facts included in the Form 10-Q and located
elsewhere herein regarding the Companys financial position and business
strategy may constitute forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to be
correct.





---



##### 



Page 16

THE CATO CORPORATION
CONTROL AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES:

The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed by the Company is recorded,
processed, summarized, and reported within the time periods specified in the
appropriate rules and forms of the Securities and Exchange Commission and that
such information is accumulated and communicated to the Companys management,
including its Chief Executive Officer and Chief Financial Officer. The
Companys Chief Executive Officer and Chief Financial Officer have evaluated
the Companys disclosure controls and procedures as of August 2, 2003. Each
has concluded that these controls and procedures are effective.

CHANGES IN INTERNAL CONTROLS:

The Companys Chief Executive Officer and Chief Financial Officer (its
principal executive officer and principal financial officer, respectively) have
concluded, based on their evaluation as of a date within 90 days prior to the
filing date of this report, that the Companys disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports filed or submitted by it under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commissions rules and forms, and include controls and procedures designed to
ensure that information required to be disclosed by the Company in such reports
is accumulated and communicated to the Companys management, including the
Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.

During 2002 and the first quarter of 2003, the Company made payments for the
benefit of entities in which Mr. Wayland H. Cato, Jr., Chairman of the Board,
and Mr. Edgar T. Cato, Former Vice Chairman of the Board and Co-founder and
Director, have a material interest. The Company subsequently determined these
payments were unrelated to the business of the Company. Amounts, including
interest, have been repaid. In the course of the evaluation by the Chief
Executive Officer and the Chief Financial Officer described above, the Company
implemented a change in it internal controls to prevent the payment of similar
expenses in the future. As a result of this change, all future payment
requests for or on behalf of related parties will require the prior review by
and approval of the Chief Financial Officer.

There have been no other significant changes in the Companys internal controls
or in other factors that could significantly affect these controls subsequent
to the date of such evaluation.





---



##### 



Page 17

PART II OTHER INFORMATION

THE CATO CORPORATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable

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

Following are the results of the matters voted upon at the Companys
Annual Meeting which was held on May 22, 2003.

Election of Directors:

|                          |  |  |   |  |  |                     |  |  |  |  |  |            |  |  |           |  |  |  |  | 
|------------------------- |  |  | - |  |  | ------------------- |  |  |  |  |  | ---------- |  |  | --------- |  |  |  |  | 
|Mr. John P. Derham Cato   |  |  |  |  |  | For 72,509,261    ; |  |  |  |  |  | Abstaining |  |  | 3,854,345 | 
|Ms. Clarice Cato Goodyear |  |  |  |  |  | For
72,445,256   ;  |  |  |  |  |  | Abstaining |  |  | 3,918,350 | 
|Mr. James H. Shaw         |  |  |  |  |  | For 75,597,838    ; |  |  |  |  |  | Abstaining |  |  | 765,768   | 

Adoption of The Cato Corporation 2003 Employee Stock Purchase Plan

|                       |  |                                |  |                   |  |  |  | 
|---------------------- |  | ------------------------------ |  | ----------------- |  |  |  | 
|For  
74,160,620     ; |  | Abstaining
  
2,097,861      ; |  | Against   105,125

ITEM 5. OTHER INFORMATION

The Registrant announced on September 3, 2003 that it had entered into
separate agreements, each dated as of August 29, 2003, with Mr. Wayland H.
Cato, Jr., a founder of the Registrant and Chairman of the Board, and Mr. Edgar
T. Cato, a founder of the Registrant and member of the Board of Directors. The
agreements provide for the retirement of Mr. Wayland Cato and Mr. Edgar Cato
from the Registrant and the Board of Directors effective January 31, 2004. Mr.
Wayland Cato will be available to the Registrant for consulting services
following his retirement.

The Registrant further announced that it expects to take a charge of
approximately $2.8 million in its third quarter ending November 1, 2003,
representing the present value of certain payments and benefits to Mr. Wayland
Cato and Mr. Edgar Cato under the terms of the agreements. The charge will be
approximately $1.8 million on an after-tax basis, or $.08 per diluted share for
the third quarter ending November 1, 2003, and the fiscal year ending January
31, 2004.





---



##### 



Page 18

PART II OTHER INFORMATION
(CONTINUED):

THE CATO CORPORATION

Copies of the agreements are filed with this Quarterly Report on Form 10-Q
as Exhibits 10.1 and 10.2, respectively. A copy of the press release
announcing the agreements is filed as Exhibit 99.1.

ITEM 6. EXHIBITS AND REPORT ON FORM 8-K



| | (A) |  | 
| | --- |  | 

|            |  |                                                                                                                                                                                                                                                        
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | ITEM                                                                                                                                                                                                                                                   
|            |  |                                                                                                                                                                                                                                                        
|4.1         |  | Loan Agreement, dated as of August 22, 2003, between the
Registrant and Branch Banking and Trust Company (Not filed
herewith. The Registrant hereby agrees to furnish a copy of
this agreement to the Securities and Exchange Commission upon
request.)
|            |  |                                                                                                                                                                                                                                                        
|10.1        |  | Agreement, dated as of August 29, 2003, between the Registrant
and Wayland H. Cato, Jr.                                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                        
|10.2        |  | Agreement, dated as of August 29, 2003, between the Registrant
and Edgar T. Cato                                                                                                                                                                       
|            |  |                                                                                                                                                                                                                                                        
|99.1        |  | Press Release issued September 3, 2003                                                                                                                                                                                                                 



| | (B) |  | Form 8-K was filed on July 23, 2003 disclosing the July 22,
2003 Press Release whereby the Company entered into an agreement to
purchase the entire holdings of Class B Common Stock from the
Companys Co-Founders.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

SIGNATURES PAGE AND CERTIFICATES





---



##### 



Page 36

PART II OTHER INFORMATION (CONTINUED):

THE CATO CORPORATION

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.

| |  |                    |  |                                       | 
| |  | ------------------ |  | ------------------------------------- | 
| |  |                    |  | THE CATO CORPORATION                  | 
| |  |                    |  |                                       | 
| |  | September 12, 2003 |  | /s/ John P. Derham Cato               | 
| |  |                    |  |                                       | 
| |  | Date               |  | John P. Derham Cato                   | 
| |  |                    |  | President, Vice Chairman of the Board | 
| |  |                    |  | and Chief Executive Officer           | 
| |  |                    |  |                                       | 
| |  | September 12, 2003 |  | /s/ Michael O. Moore                  | 
| |  |                    |  |                                       | 
| |  | Date               |  | Michael O. Moore                      | 
| |  |                    |  | Executive Vice President              | 
| |  |                    |  | Chief Financial Officer and Secretary | 
| |  |                    |  |                                       | 
| |  | September 12, 2003 |  | /s/ Robert M. Sandler                 | 
| |  |                    |  |                                       | 
| |  | Date               |  | Robert M. Sandler                     | 
| |  |                    |  | Senior Vice President                 | 
| |  |                    |  | Controller                            |