##### 









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-K

|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended January 31,
    2004                                              
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-31340

The Cato Corporation

Registrant


|                                                                                                     |  |                                              
|---------------------------------------------------------------------------------------------------- |  | ---------------------------------------------
|Delaware                                                                                             |  | 56-0484485                                   
|State of Incorporation                                                                               |  | I.R.S. Employer
    Identification Number    
|                                                                                                    
|8100 Denmark Road
    Charlotte, North Carolina 28273-5975Address of Principal Executive
    Offices |  | 704/554-8510Registrants Telephone
    Number

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

Class A Common Stock


Preferred Share Purchase Rights


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

None


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 þ          No o

Indicate by check
mark, if disclosure of delinquent filers pursuant to
Item 405 of the Regulation S-K is not contained
herein, and will not be contained, to the best of the
Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.     Yes þ          No o

Indicate by check
mark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the
Act).     Yes þ          No o

The aggregate
market value of the Registrants Class A Common Stock
held by Non-affiliates of the Registrant as of August 1,
2003, the last business day of the Companys most recent
second quarter, was $450,939,578 based on the last reported sale
price per share on the New York Stock Exchange (NYSE) on
that date. As of March 29, 2004, there were 20,130,848
shares of Class A Common Stock and 470,350 shares of
Convertible Class B Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions
of the proxy statement relating to the 2004 annual meeting of
shareholders are incorporated by reference into the following
part of this annual report:

Part III  Items 10, 11, 12, 13 and 14



---






---



##### 



THE CATO CORPORATION

FORM 10-K

TABLE OF CONTENTS

|         |  |                                                                                                                      |  |      |         | 
|-------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | 
|         |  |                                                                                                                      |  | Page
|         |  |                                                                                                                      |  |     
|PART I  
|Item 1.  |  | Business                                                                                                             |  |      | 3  7   | 
|Item 2.  |  | Properties                                                                                                           |  |      | 7       | 
|Item 3.  |  | Legal Proceedings                                                                                                    |  |      | 7       | 
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                                              |  |      | 7       | 
|Item 4A. |  | Executive Officers of the Registrant                                                                                 |  |      | 7  8   | 
|        
|PART II 
|Item 5.  |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |  |      | 9       | 
|Item 6.  |  | Selected Financial Data                                                                                              |  |      | 10      | 
|Item 7.  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                            |  |      | 11  17 | 
|Item 7A. |  | Quantitative and Qualitative Disclosures about
    Market Risk                                                       |  |      | 17      | 
|Item 8.  |  | Financial Statements and Supplementary Data                                                                          |  |      | 18  40 | 
|Item 9.  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure                             |  |      | 41      | 
|Item 9A. |  | Controls and Procedures                                                                                              |  |      | 41      | 
|        
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                                                   |  |      | 41  42 | 
|Item 11. |  | Executive Compensation                                                                                               |  |      | 42      | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters                   |  |      | 42      | 
|Item 13. |  | Certain Relationships and Related Transactions                                                                       |  |      | 43      | 
|Item 14. |  | Principal Accountant Fees and Services                                                                               |  |      | 43      | 
|        
|PART IV 
|Item 15. |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                                                  |  |      | 43  52 | 

1



---



##### 



The following discussion and analysis should be
read along with the Consolidated Financial Statements, including
the accompanying Notes appearing later in this report. The
following are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of
1934, as amended: (1) statements in this Annual Report on
Form 10-K that reflect projections or expectations of our
future financial or economic performance; (2) statements
that are not historical information; (3) statements of our
beliefs, intentions, plans and objectives for future operations,
including those contained in Business,
Properties, Legal Proceedings,
Controls and Procedures and Managements
Discussion and Analysis of Financial Condition and Results of
Operations; (4) statements relating to our operations
or activities for 2004 and beyond; and (5) statements
relating to our future contingencies. Words such as
expects, anticipates,
approximates, believes,
estimates, hopes, intends,
may, plans, should and
variations of such words and similar expressions are intended to
identify such forward-looking statements. No assurance can be
given that actual results or events will not differ materially
from those projected, estimated, assumed or anticipated in any
such forward-looking statements. Forward-looking statements
included in this report are based on information available to us
as of the filing date of this report, and we assume no
obligation to update any such forward-looking information
contained in this report.

Our website is located at
www.catocorp.com. We make available free of charge,
through our website, our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on
Form 8-K, proxy statements and other reports filed or
furnished pursuant to Section 13(a) or 15(d) under the
Securities Exchange Act. These reports are available as soon as
reasonably practicable after we electronically file those
materials with the SEC. We also post on our website the charters
of our Audit, Compensation and Corporate Governance and
Nominating Committees; our Corporate Governance Guidelines, Code
of Business Conduct and Ethics; and any amendments or waivers
thereto; and any other corporate governance materials
contemplated by SEC or New York Stock Exchange
(NYSE) regulations. The documents are also available
in print to any shareholder who requests by contacting our
corporate secretary at our company offices.

2



---



##### 



PART I

Item 1.     Business:

General

The Company, founded in 1946, operated 1,102
womens fashion specialty stores at January 31, 2004,
under the names Cato, Cato Fashions,
Cato Plus and Its Fashion! in 28
states, principally in the southeastern United States. The
Company offers quality fashion apparel and accessories at low
prices, everyday in junior/missy and plus sizes. Additionally,
the Company offers clothing for girls ages 7  16 in
selected locations. The Companys stores feature a broad
assortment of apparel and accessories, including casual and
dressy sportswear, dresses, careerwear, coats, shoes, costume
jewelry and handbags. A major portion of the Companys
merchandise is sold under its private labels and is produced by
various vendors in accordance with the Companys strict
specifications. Most stores range in size from 4,000 to 6,000
square feet and are located primarily in strip shopping centers
anchored by national discounters or market-dominant grocery
stores. The Company emphasizes friendly customer service and
coordinated merchandise presentations in an appealing store
environment. The Company offers its own credit card and layaway
plan. Credit and layaway sales represented 15% of retail sales
in fiscal 2003. See Note 14 to the Consolidated Financial
Statements, Reportable Segment Information for a
discussion of segment information.

Business

The Companys primary objective is to be the
leading fashion specialty retailer for fashion conscious
low-to-middle income females in its markets. Management believes
the Companys success is dependent upon its ability to
differentiate its stores from department stores, mass
merchandise discount stores and competing womens specialty
stores. The key elements of the Companys business strategy
are:

Merchandise Assortment.The Companys stores offer a wide
assortment of apparel and accessory items in regular and plus
sizes and emphasize color, product coordination and selection.

Value Pricing.The
Company offers quality merchandise that is generally priced
below comparable merchandise offered by department stores and
mall specialty apparel chains, but is generally more fashionable
than merchandise offered by discount stores. Management believes
that the Company has positioned itself as the everyday low price
leader in its market segment.

Strip Shopping Center Locations.The Company locates its stores
principally in convenient strip centers anchored by national
discounters or market-dominant grocery stores that attract large
numbers of potential customers.

Customer Service.Store managers and sales associates
are trained to provide prompt and courteous service and to
assist customers in merchandise selection and wardrobe
coordination.

Credit and Layaway Programs.The Company offers its own credit card
and a layaway plan to make the purchase of its merchandise more
convenient.

Expansion.The
Company plans to continue to expand into northern, midwestern
and western adjacent states, as well as continuing to
fill-in existing southeastern core geography.

Merchandising

Merchandising

The Company offers a broad selection of high
quality and exceptional value apparel and accessories to suit
the various lifestyles of the fashion conscious low-to-middle
income female, ages 18 to 50. In addition, the Company offers
on-trend fashion in exciting colors with consistent fit and
quality.

The Companys merchandise lines include
dressy, career, and casual sportswear, dresses, coats, shoes,
lingerie, costume jewelry and handbags. Apparel for girls ages
7  16 is offered in selected stores. The

3



---



##### 



Company primarily offers exclusive merchandise
with fashion and quality comparable to mall specialty stores at
low prices, every day.


The collaboration of the merchandising team with
an expanded in-house product development and direct sourcing
function has enhanced merchandise offerings delivering quality
exclusive products at lower costs. The product development and
direct sourcing operations provide research on emerging fashion
and color trends, technical services and direct sourcing options.

As a part of its merchandising strategy, members
of the Companys merchandising staff frequently visit
selected stores, monitor the merchandise offerings of other
retailers, regularly communicate with store operations
associates and frequently confer with key vendors. The Company
tests most new fashion-sensitive items in selected stores to aid
it in determining their appeal before making a substantial
purchasing commitment. The Company also takes aggressive
markdowns on slow-selling merchandise and does not carry over
merchandise to the next season.

Purchasing,
Allocation and Distribution

Although the Company purchases merchandise from
approximately 1,500 suppliers, most of its merchandise is
purchased from approximately 100 primary vendors. In fiscal
2003, purchases from the Companys largest vendor accounted
for approximately 7% of the Companys total purchases. No
other vendor accounted for more than 3% of total purchases. The
Company is not dependent on its largest vendor or any other
vendor for merchandise purchases and the loss of any single
vendor or group of vendors would not have a material adverse
effect on the Companys operating results or financial
condition. A substantial portion of the Companys
merchandise is sold under its private labels and is produced by
various vendors in accordance with the Companys strict
specifications. The Company purchases most of its merchandise
from domestic importers and vendors, which typically minimizes
the time necessary to purchase and obtain shipments in order to
enable the Company to react to merchandise trends in a more
timely fashion. Although a significant portion of the
Companys merchandise is manufactured overseas, principally
in the Far East, any economic, political or social unrest in
that region is not expected to have a material adverse effect on
the Companys ability to obtain adequate supplies of
merchandise.

An important component of the Companys
strategy is the allocation of merchandise to individual stores
based on an analysis of sales trends by merchandise category,
customer profiles and climatic conditions. A merchandise control
system provides current information on the sales activity of
each merchandise style in each of the Companys stores.
Point-of-sale terminals in the stores collect and transmit sales
and inventory information to the Companys central
database, permitting timely response to sales trends on a
store-by-store basis.

All merchandise is shipped directly to the
Companys distribution center in Charlotte, North Carolina,
where it is inspected then allocated by the merchandise
distribution staff for shipment to individual stores. The flow
of merchandise from receipt at the distribution center to
shipment to stores is controlled by an on-line system. Shipments
are made by common carrier, and each store receives at least one
shipment per week.

Advertising

The Company uses radio, graphics and a website as
its primary advertising media. The Company uses radio
advertising in selected trade areas. The Companys total
advertising expenditures were approximately .8% of retail sales
in fiscal 2003.

Store Operations

The Companys store operations management
team consists of 2 directors of stores, 3 territorial managers,
16 regional managers and 111 district managers. Regional
managers receive a salary plus a bonus based on achieving
targeted goals for sales, payroll, shrinkage control and store
profitability. District managers receive a salary plus a bonus
based on achieving targeted objectives for district sales
increases and shrinkage control. Stores are staffed with a
manager, two assistant managers and additional part-time sales
associates

4



---



##### 



depending on the size of the store and seasonal
personnel needs. Store managers receive a salary and all other
store personnel are paid on an hourly basis. Store managers,
assistant managers and sales associates are eligible for monthly
and semi-annual bonuses based on achieving targeted goals for
their stores sales increases and shrinkage control.


The Company is constantly improving its training
programs to develop associates. Nearly 80% of store and field
management are promoted from within, allowing the Company to
internally staff an expanding store base. The Company has
training programs at each level of store operations. New store
managers are trained in training stores managed by experienced
associates who have achieved superior results in meeting the
Companys goals for store sales, payroll expense and
shrinkage control. The type and extent of district manager
training varies depending on whether the district manager is
promoted from within or recruited from outside the Company. All
district managers receive at a minimum a one-week orientation
program at the Companys corporate office.

Store Locations

Most of the Companys stores are located in
the southeastern United States in a variety of markets ranging
from small towns to large metropolitan areas with trade area
populations of 20,000 or more. Stores range in size from 4,000
to 6,000 square feet and average approximately 4,000 square feet.

All of the Companys stores are leased.
Approximately 93% are located in strip shopping centers and 7%
in enclosed shopping malls. The Company locates stores in strip
shopping centers anchored by a national discounter, primarily
Wal-Mart Supercenters, or market-dominant grocery stores. The
Companys strip center locations provide ample parking and
shopping convenience for its customers.

The Companys store development activities
consist of opening new stores in new and existing markets, and
relocating selected existing stores to more desirable locations
in the same market area. The following table sets forth
information with respect to the Companys development
activities since fiscal 1999.

Store Development

|            |  |                  |       |        |  |        |    |                  |  |  |    |  |  |  |       | 
|----------- |  | ---------------- | ----- | ------ |  | ------ | -- | ---------------- |  |  | -- |  |  |  | ----- | 
|            |  | Number of Stores |       |        |  |        |    |                 
|            |  | Beginning of     |       | Number |  | Number |    | Number of Stores
|Fiscal Year |  | Year             |       | Opened |  | Closed |    | End of Year     
|            |  |                  |       |        |  |        |    |                 
|1999        |  |                  | 732   |        |  |        | 83 |                  |  |  | 6  |  |  |  | 809   | 
|2000        |  |                  | 809   |        |  |        | 65 |                  |  |  | 15 |  |  |  | 859   | 
|2001        |  |                  | 859   |        |  |        | 85 |                  |  |  | 7  |  |  |  | 937   | 
|2002        |  |                  | 937   |        |  |        | 90 |                  |  |  | 5  |  |  |  | 1,022 | 
|2003        |  |                  | 1,022 |        |  |        | 87 |                  |  |  | 7  |  |  |  | 1,102 | 

In Fiscal 2003 the Company relocated 28 stores,
downsized one store and remodeled 15 stores.

In Fiscal 2004 the Company plans to open
approximately 90 new stores, relocate 27 stores, close 10
stores, and remodel 15 stores.

The Company periodically reviews its store base
to determine whether any particular store should be closed based
on its sales trends and profitability. The Company intends to
continue this review process to close underperforming stores.
The seven closed in 2003 were not material to the Companys
results of operations.

Credit and Layaway

Credit Card
Program

The Company offers its own credit card, which
accounted for approximately 10% of retail sales in fiscal 2003.
The Companys net bad debt expense in fiscal 2003 was 7.8%
of credit sales.

Customers applying for the Companys credit
card are approved for credit if they have a satisfactory credit
record and meet minimum income criteria. Customers are required
to make minimum monthly

5



---



##### 



payments based on their account balances. If the
balance is not paid in full each month, the Company assesses the
customer a finance charge. If payments are not received on time,
the customer is assessed a late fee.


Layaway
Plan

Under the Companys layaway plan,
merchandise is set aside for customers who agree to make
periodic payments. The Company adds a nonrefundable
administrative fee to each layaway sale. If no payment is made
for four weeks, the customer is considered to have defaulted,
and the merchandise is returned to the selling floor and again
offered for sale, often at a reduced price. All payments made by
customers who subsequently default on their layaway purchase are
returned to the customer upon request, less the administrative
fee and a restocking fee. The Company defers recognition of
layaway sales and its related fees to the accounting period when
the customer picks up layaway merchandise. Layaway sales
represented approximately 5% of retail sales in fiscal 2003,
2002 and 2001.

Management Information Systems

The Companys systems provide daily
financial and merchandising information that is used by
management to enhance the timeliness and effectiveness of
purchasing and pricing decisions. Management uses a daily report
comparing actual sales with planned sales and a weekly ranking
report to monitor and control purchasing decisions. Weekly
reports are also produced which reflect sales, weeks of supply
of inventory and other critical data by product categories, by
store and by various levels of responsibility reporting.
Purchases are made based on projected sales but can be modified
to accommodate unexpected increases or decreases in demand for a
particular item.

Sales information is projected by merchandise
category and, in some cases, is further projected and actual
performance measured by stock keeping unit (SKU). Merchandise
allocation models are used to distribute merchandise to
individual stores based upon historical sales trends, climatic
differences, customer demographic differences and targeted
inventory turnover rates.

Competition

The womens retail apparel industry is
highly competitive. The Company believes that the principal
competitive factors in its industry include merchandise
assortment and presentation, fashion, price, store location and
customer service. The Company competes with retail chains that
operate similar womens apparel specialty stores. In
addition, the Company competes with local apparel specialty
stores, mass merchandise chains, discount store chains and major
department stores. To the extent that the Company opens stores
in larger cities and metropolitan areas, competition is expected
to be more intense in those markets.

Regulation

A variety of laws affect the revolving credit
program offered by the Company. The Federal Consumer Credit
Protection Act (Truth-in Lending) and Regulation Z
promulgated thereunder require written disclosure of information
relating to such financing, including the amount of the annual
percentage rate and the finance charge. The Federal Fair Credit
Reporting Act also requires certain disclosures to potential
customers concerning credit information used as a basis to deny
credit. The Federal Equal Credit Opportunity Act and
Regulation B promulgated thereunder prohibit discrimination
against any credit applicant based on certain specified grounds.
The Federal Trade Commission has adopted or proposed various
trade regulation rules dealing with unfair credit and collection
practices and the preservation of consumers claims and
defenses. The Company is also subject to the provisions of the
Fair Debt Collection Practices Act that regulates the manner in
which the Company collects payments on revolving credit
accounts. Additionally, the Gramm-Leach-Bliley Act requires the
Company to disclose, initially and annually, to its customers,
the Companys privacy policy as it relates to a
customers non-public personal information.

6



---



##### 



Associates

As of January 31, 2004, the Company employed
approximately 9,100 full-time and part-time associates. The
Company also employs additional part-time associates during the
peak retailing seasons. The Company is not a party to any
collective bargaining agreements and considers that its
associate relations are good.

Item 2.     Properties:

The Companys distribution center and
general offices are located in a Company-owned building of
approximately 492,000 square feet located on a 15-acre tract in
Charlotte, North Carolina. The Companys automated
merchandise handling and distribution activities occupy
approximately 418,000 square feet of this building and its
general offices and corporate training center are located in the
remaining 74,000 square feet. A building of approximately 24,000
square feet located on a 2-acre tract adjacent to the
Companys existing location is used for receiving and
staging shipments prior to processing.

Substantially all of the Companys retail
stores are leased from unaffiliated parties. Most of the leases
have an initial term of five years, with two to three five-year
renewal options. Substantially all of the leases provide for
fixed rentals plus a percentage of sales in excess of a
specified volume.

Item 3.     Legal
Proceedings:

There are no material pending legal proceedings
to which the Company and its subsidiaries is a party, or to
which any of the Companys property is subject.

Item 4.     Submission
of Matters to a Vote of Security Holders:

None.

Item 4A.     Executive
Officers of the Registrant:

The executive officers of the Company and their
ages as of March 31, 2004 are as follows:

|                    |  |     |    |          |  |                                                                                              
|------------------- |  | --- | -- | -------- |  | ---------------------------------------------------------------------------------------------
|Name                |  | Age |    | Position
|                    |  |     |    |         
|John P. Derham Cato |  |     | 53 |          |  | Chairman, President and
    Chief Executive Officer                                          
|Michael O. Moore    |  |     | 53 |          |  | Executive Vice President,
    Chief Financial Officer and Secretary                          
|B. Allen Weinstein  |  |     | 57 |          |  | Executive Vice President, Chief Merchandising
    Officer
    of the Cato Division           
|C. David Birdwell   |  |     | 64 |          |  | Executive Vice President, President and General
    Manager
    of the Its Fashion! Division
|Howard A. Severson  |  |     | 56 |          |  | Executive Vice President, Chief Real Estate
    and
    Store Development Officer            
|Michael T. Greer    |  |     | 41 |          |  | Senior Vice President, Director of Stores
    of the Cato Division                           
|Robert C. Brummer   |  |     | 59 |          |  | Senior Vice President,
    Human Resources                                                   

John P. Derham Catohas been employed as an officer of the
Company since 1981 and has been a director of the Company since
1986. Since January 2004, he has served as Chairman, President
and Chief Executive Officer. From May 1999 to January 2004, he
served as President, Vice Chairman of the Board and Chief
Executive Officer. From June 1997 to May 1999, he served as
President, Vice Chairman of the Board and Chief Operating
Officer. From August 1996 to June 1997, he served as Vice
Chairman of the Board and Chief Operating Officer. From 1989 to
1996, he managed the Companys off-price division, serving
as Executive Vice President and as President and General Manager
of the Its Fashion! Division from 1993 to August 1996.
Mr. John Cato is currently a director of Ruddick
Corporation.

7



---



##### 



Michael O. Moorehas
been employed by the Company as Executive Vice President, Chief
Financial Officer and Secretary since July 1998 and has been a
director of the Company since 2002. Mr. Moore served as
Vice President, Chief Financial Officer for Party Experience
from 1997 to 1998, Executive Vice President, Chief Financial
Officer of Davids Bridal from 1994 to 1997, and was
employed by Bloomingdales from 1984 to 1994 serving as Senior
Vice President, Chief Financial Officer from 1990 to 1994.

B. Allen Weinsteinjoined the Company as Executive Vice
President, Chief Merchandising Officer of the Cato Division in
August 1997. From 1995 to 1997, he was Senior Vice
President  Merchandising of Catherines Stores
Corporation. From 1981 to 1995, he served as Senior Vice
President of Merchandising for Bealls, Inc.

C. David Birdwelljoined the Company as Executive Vice
President, President and General Manager of the Its
Fashion! Division in October 1996. From 1994 to 1996, he was
employed as President/ General Merchandise Manager of Allied
Stores, a family apparel chain headquartered in Savannah,
Georgia. In 1993, he was Executive Vice President/ General
Merchandise Manager of Ambers, Inc., based in Dallas, Texas.
From 1989 to 1992, he was employed as a Chartered Financial
Consultant with Jefferson Pilot, based in Greensboro, North
Carolina. From 1985 to 1989, he was President/ CEO of Maxway
Stores, a discount chain headquartered in Sanford, North
Carolina.

Howard A. Seversonhas been employed by the Company since
1985. Since January 1993, he has served as Executive Vice
President, Chief Real Estate and Store Development Officer and
Assistant Secretary. From 1993 to 2001 Mr. Severson also
served as a director. From August 1989 through January 1993,
Mr. Severson served as Senior Vice President 
Chief Real Estate Officer.

Michael T. Greerhas
been employed by the Company since 1985. Since February 2004, he
has served as Senior Vice President, Director of Stores of the
Cato Division. From 2002 to 2003 Mr. Greer served as Vice
President, Director of Stores of the Its Fashion!
Division. From 1999 to 2001 he served as Territorial Vice
President of Stores of the Cato Division and from 1996 to 1999
he served as Regional Vice President of Stores of the Cato
Division. From 1985 to 1995, Mr. Greer held various store
operational positions in the Cato Division.

Robert C. Brummerjoined the Company as Senior Vice
President, Human Resources and Assistant Secretary in January
2001. From 1999 through 2000, he was employed by Sleepys,
a beddings specialty retailer as Vice President, Human Resources
and Payroll. From 1997 through 1998, he was Vice President,
Human Resources and Loss Prevention for The Party Experience, a
party supplies specialty retailer. From 1995 until 1997, he was
Vice President, Human Resources and Loss Prevention for No Body
Beats The Wiz, an electronics specialty store chain.

8



---



##### 



PART II



|        |                                                                                                                      
|------- | ---------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities:

Market & Dividend
Information

The Companys Class A Common Stock
trades on the New York Stock Exchange (NYSE) under the
symbol CTR. Below is the market range and dividend information
for the four quarters of fiscal 2003 and 2002.

|               |  |       |       |     |  |          |       |  |  |   |     | 
|-------------- |  | ----- | ----- | --- |  | -------- | ----- |  |  | - | --- | 
|               |  |       |       |    
|               |  | Price |       |    
|               |  |       |       |    
|2003           |  | High  |       | Low |  | Dividend
|               |  |       |       |     |  |         
|First quarter  |  | $     | 20.50 |     |  | $        | 16.28 |  |  | $ | .15 | 
|Second quarter |  |       | 24.10 |     |  |          | 18.20 |  |  |   | .16 | 
|Third quarter  |  |       | 25.11 |     |  |          | 19.95 |  |  |   | .16 | 
|Fourth quarter |  |       | 21.57 |     |  |          | 18.84 |  |  |   | .16 | 

|               |  |       |       |     |  |          |       |  |  |   |     |  
|-------------- |  | ----- | ----- | --- |  | -------- | ----- |  |  | - | --- | -
|               |  |       |       |    
|               |  | Price |       |    
|               |  |       |       |    
|2002           |  | High  |       | Low |  | Dividend
|               |  |       |       |     |  |         
|First quarter  |  | $     | 27.21 |     |  | $        | 19.91 |  |  | $ | .13 | 5
|Second quarter |  |       | 27.44 |     |  |          | 18.00 |  |  |   | .15 |  
|Third quarter  |  |       | 19.95 |     |  |          | 14.18 |  |  |   | .15 |  
|Fourth quarter |  |       | 21.80 |     |  |          | 17.33 |  |  |   | .15 |  

As of March 29, 2004 the approximate number
of record holders of the Companys Class A Common
Stock was 1,227 and there were 4 record holders of the
Companys Class B Common Stock.

9



---



##### 





|        |                         
|------- | ------------------------
|Item 6. | Selected Financial Data:

Certain selected financial data for the five
fiscal years ended January 31, 2004 have been derived from
audited financial statements. The financial statements for the
fiscal year ended January 31, 2004 were audited by
PricewaterhouseCoopers, LLP. The financial statements for each
of the four fiscal years ended February 1, 2003 were
audited by Deloitte & Touche LLP. The financial
statements and independent auditors reports for the three
most recent fiscal years are contained elsewhere in this report.
All data set forth below are qualified by reference to, and
should be read in conjunction with, the Companys
Consolidated Financial Statements (including the Notes thereto)
and Managements Discussion and Analysis of Financial
Condition and Results of Operations appearing elsewhere in
this annual report.

|                                                                          |  |                                              |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------- |  | -------------------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|Fiscal Year                                                               |  | 2003                                         |         | 2002 |  | 2001 |         | 2000 |  | 1999
|                                                                          |  |                                              |         |      |  |      |         |      |  |     
|                                                                          |  |                                             
|                                                                          |  | (Dollars in thousands, except per share data
|                                                                          |  | and selected operating data)                
|STATEMENT OF OPERATIONS DATA:                                             |  |                                              |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Retail sales                                                              |  | $                                            | 731,770 |      |  | $    | 732,742 |      |  | $    | 685,653 |   |  | $ | 648,482 |   |  | $ | 585,085 |  
|Other income                                                              |  |                                              | 15,497  |      |  |      | 15,589  |      |  |      | 13,668  |   |  |   | 14,055  |   |  |   | 13,155  |  
|Total revenues                                                            |  |                                              | 747,267 |      |  |      | 748,331 |      |  |      | 699,321 |   |  |   | 662,537 |   |  |   | 598,240 |  
|Cost of goods sold                                                        |  |                                              | 508,401 |      |  |      | 496,345 |      |  |      | 466,366 |   |  |   | 445,407 |   |  |   | 403,655 |  
|Gross margin                                                              |  |                                              | 223,369 |      |  |      | 236,397 |      |  |      | 219,287 |   |  |   | 203,075 |   |  |   | 181,430 |  
|Gross margin percent                                                      |  |                                              | 30.5    | %    |  |      | 32.3    | %    |  |      | 32.0    | % |  |   | 31.3    | % |  |   | 31.0    | %
|Selling, general and administrative                                       |  |                                              | 174,202 |      |  |      | 168,914 |      |  |      | 162,082 |   |  |   | 154,150 |   |  |   | 140,741 |  
|Selling, general and administrative percent of
    retail sales           |  |                                              | 23.8    | %    |  |      | 23.1    | %    |  |      | 23.6    | % |  |   | 23.8    | % |  |   | 24.0    | %
|Depreciation                                                              |  |                                              | 18,695  |      |  |      | 14,913  |      |  |      | 10,886  |   |  |   | 9,492   |   |  |   | 8,639   |  
|Interest and other income, net                                            |  |                                              | (3,308  | )    |  |      | (3,680  | )    |  |      | (6,299  | ) |  |   | (6,554  | ) |  |   | (6,770  | )
|Income before income taxes and cumulative effect
    of accounting change |  |                                              | 49,277  |      |  |      | 71,839  |      |  |      | 66,286  |   |  |   | 60,042  |   |  |   | 51,975  |  
|Income tax expense                                                        |  |                                              | 17,888  |      |  |      | 26,006  |      |  |      | 23,200  |   |  |   | 21,015  |   |  |   | 18,191  |  
|Income before cumulative effect of accounting
    change                  |  |                                              | 31,389  |      |  |      | 45,833  |      |  |      | 43,086  |   |  |   | 39,027  |   |  |   | 33,784  |  
|Cumulative effect of accounting change, net of
    taxes                  |  |                                              |        |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   | 147     |  
|Net income                                                                |  | $                                            | 31,389  |      |  | $    | 45,833  |      |  | $    | 43,086  |   |  | $ | 39,027  |   |  | $ | 33,931  |  
|Basic earnings per share                                                  |  | $                                            | 1.36    |      |  | $    | 1.80    |      |  | $    | 1.71    |   |  | $ | 1.56    |   |  | $ | 1.28    |  
|Diluted earnings per share                                                |  | $                                            | 1.33    |      |  | $    | 1.77    |      |  | $    | 1.66    |   |  | $ | 1.53    |   |  | $ | 1.26    |  
|Cash dividends paid per share                                             |  | $                                            | .63     |      |  | $    | .585    |      |  | $    | .53     |   |  | $ | .425    |   |  | $ | .28     |  
|SELECTED OPERATING DATA:                                                  |  |                                              |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Stores open at end of year                                                |  |                                              | 1,102   |      |  |      | 1,022   |      |  |      | 937     |   |  |   | 859     |   |  |   | 809     |  
|Average sales per store(1)                                                |  | $                                            | 692,000 |      |  | $    | 753,000 |      |  | $    | 767,000 |   |  | $ | 781,000 |   |  | $ | 756,000 |  
|Average sales per square foot of selling space                            |  | $                                            | 171     |      |  | $    | 184     |      |  | $    | 186     |   |  | $ | 187     |   |  | $ | 177     |  
|Comparable store sales increase (decrease)                                |  |                                              | (7      | )%   |  |      | 0       | %    |  |      | 1       | % |  |   | 3       | % |  |   | 4       | %
|BALANCE SHEET DATA:                                                       |  |                                              |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Cash, cash equivalents and short-term investments                         |  | $                                            | 71,402  |      |  | $    | 106,936 |      |  | $    | 84,695  |   |  | $ | 83,112  |   |  | $ | 87,275  |  
|Working capital                                                           |  |                                              | 112,908 |      |  |      | 162,609 |      |  |      | 139,633 |   |  |   | 125,724 |   |  |   | 124,988 |  
|Total assets                                                              |  |                                              | 351,573 |      |  |      | 383,410 |      |  |      | 332,041 |   |  |   | 310,742 |   |  |   | 285,789 |  
|Total stockholders equity                                                |  |                                              | 194,111 |      |  |      | 270,164 |      |  |      | 234,698 |   |  |   | 207,757 |   |  |   | 188,780 |  



---



|    |                                                                      
|--- | ---------------------------------------------------------------------
|(1) | Calculated using an estimated annual sales volume
    for new stores.

10



---



##### 





|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations:

Results of Operations

The table below sets forth certain financial data
of the Company expressed as a percentage of retail sales for the
years indicated:

|                                    |  |             |       |             |  |             |       |   |  |  |       |  
|----------------------------------- |  | ----------- | ----- | ----------- |  | ----------- | ----- | - |  |  | ----- | -
|                                    |  | January 31, |       | February 1, |  | February 2,
|Fiscal Year Ended                   |  | 2004        |       | 2003        |  | 2002       
|                                    |  |             |       |             |  |            
|Retail sales                        |  |             | 100.0 | %           |  |             | 100.0 | % |  |  | 100.0 | %
|Other income                        |  |             | 2.1   |             |  |             | 2.1   |   |  |  | 2.0   |  
|Total revenues                      |  |             | 102.1 |             |  |             | 102.1 |   |  |  | 102.0 |  
|Cost of goods sold                  |  |             | 69.5  |             |  |             | 67.7  |   |  |  | 68.0  |  
|Selling, general and administrative |  |             | 23.8  |             |  |             | 23.1  |   |  |  | 23.6  |  
|Depreciation                        |  |             | 2.6   |             |  |             | 2.0   |   |  |  | 1.6   |  
|Interest and other income, net      |  |             | (0.5  | )           |  |             | (0.5  | ) |  |  | (0.9  | )
|Income before income taxes          |  |             | 6.7   |             |  |             | 9.8   |   |  |  | 9.7   |  
|Net income                          |  |             | 4.3   | %           |  |             | 6.3   | % |  |  | 6.3   | %

Fiscal 2003 Compared to Fiscal 2002

Retail sales were essentially flat to last year
at $731.8 million in fiscal 2003 compared to
$732.7 million in fiscal 2002. Total revenues, comprised of
retail sales and other income (principally finance charges and
late fees on customer accounts receivable and layaway fees),
were also flat to last year at $747.3 million in fiscal
2003 compared to $748.3 million in fiscal 2002. The Company
operated 1,102 stores at January 31, 2004 compared to 1,022
stores operated at February 1, 2003.

The flat retail sales in fiscal 2003 were
attributable to the soft economy. In fiscal 2003, the Company
opened 87 new stores, relocated 28 stores, remodeled 15 stores
and closed 7 stores.

Credit revenue of $14.5 million, represented
1.9% of total revenue in fiscal 2003. This is comparable to 2002
credit revenue of $14.0 million or 1.9% of total revenue.
Credit revenue is comprised of interest earned on the
Companys private label credit card portfolio and related
fee income. Related expenses include principally bad debt
expense, payroll, postage and other administrative expenses and
totaled $9.7 million in fiscal 2003 compared to
$8.5 million in fiscal 2002. The increase in costs was
principally due to higher bad debt expense in fiscal 2003. See
Note 14 of the Consolidated Financial Statements for a schedule
of credit related expenses. Total credit income before taxes
decreased $0.8 million from $5.5 million in 2002 to
$4.7 million in 2003 due to the increased costs partially
offset by increased credit revenue. Total credit income in 2003
represented 9.6% of income before taxes of $49.3 million

Other income in total, as included in total
revenues in fiscal 2003, decreased slightly to
$15.5 million from $15.6 million in fiscal 2002. The
decrease resulted primarily from a decline in layaway fees.

Cost of goods sold was $508.4 million, or
69.5% of retail sales, in fiscal 2003 compared to
$496.3 million, or 67.7% of retail sales, in fiscal 2002.
The increase in cost of goods sold as a percent of retail sales
resulted primarily from lower than planned sales and additional
markdowns to bring inventory in line with sales trends. Cost of
goods sold includes merchandise costs, net of discounts and
allowances, buying costs, distribution costs, occupancy costs,
freight and inventory shrinkage. Net merchandise costs and
in-bound freight are capitalized as inventory costs. Buying and
distribution costs include payroll, payroll-related costs and
operating expenses for the buying departments and distribution
center. Occupancy expenses include rent, real estate taxes,
insurance, common area maintenance, utilities and maintenance
for stores and distribution facilities. Pursuant to Emerging
Task Force Issue No. 02-16, as described in Recent
Accounting Pronouncements below, certain vendor allowances
have been classified in cost of goods sold totaling
$1.2 million in fiscal 2003, previously recorded as a
reduction in selling, general and administrative expenses. Total
gross margin dollars (retail sales less cost of goods sold)
decreased by 6% to $223.4 million in fiscal 2003 from
$236.4 million in fiscal 2002. Gross margin as presented
may not be comparable to those of other entities as they may
include

11



---



##### 



internal transfer costs in selling, general and
administrative expenses while the Company classifies them as
cost of goods sold.


Selling, general and administrative expenses
(SG&A) primarily include corporate and store payroll,
related payroll taxes and benefits, insurance, supplies,
advertising, bank and credit card processing fees and bad debts
and were $174.2 million in fiscal 2003 compared to
$168.9 million in fiscal 2002, an increase of 3%. As a
percent of retail sales, SG&A was 23.8% compared to 23.1% in
the prior year. The overall increase in SG&A resulted
primarily from increased selling-related expenses and increased
infrastructure expenses attributable to the Companys store
development activities.

Depreciation expense was $18.7 million in
fiscal 2003 compared to $14.9 million in fiscal 2002. The
25% increase in fiscal 2003 resulted primarily from the
Companys store development and the enterprise-wide
information system which was implemented in August 2002.

Interest and other income, net was
$3.3 million in fiscal 2003 compared to $3.7 million
in fiscal 2002. The 11% decrease in fiscal 2003 resulted
primarily from the Companys lower cash and short-term
investment position following the repurchase of
$98.3 million of Company stock in fiscal 2003.

Income tax expense was $17.9 million, or
2.4% of retail sales in fiscal 2003 compared to $26.0, or 3.5%
of retail sales in fiscal 2002. The decrease resulted from lower
pre-tax income. The effective tax rate was 36.3% in fiscal 2003
compared to 36.2% in fiscal 2002. The Company expects the
effective rate in 2004 to be in the range of 35% to 37%.

Fiscal 2002 Compared to Fiscal 2001

Retail sales increased by 7% to
$732.7 million in fiscal 2002 from $685.7 million in
fiscal 2001. Total revenues increased by 7% to
$748.3 million in fiscal 2002 from $699.3 million in
fiscal 2001. The Company operated 1,022 stores at
February 1, 2003 compared to 937 stores operated at
February 2, 2002.

The increase in retail sales in fiscal 2002
resulted from the Companys continuation of an everyday low
pricing strategy, improved merchandise offerings, and an
increase in store development activity. In fiscal 2002, the
Company increased its number of stores 9% by opening 90 new
stores, relocating 26 stores, remodeling 24 stores and closing 5
stores.

Credit revenues increased $0.8 million from
$13.2 million in 2001 to $14.0 million in 2002 mainly
due to increased credit sales volume. Credit revenues
represented 1.9% of total revenues in both 2002 and 2001.
Related expenses totaled $8.5 million in 2002 compared to
$9.7 million in 2001 principally due to lower bad debt
expenses in 2002. Total credit income before taxes increased
$2.0 million from $3.5 million in 2001 to
$5.5 million in 2002 as a result of the increase in credit
revenues and reduction in costs described above. Total credit
income in 2002 represents 7.6% of income before taxes of
$71.8 million.

Other income in total, as included in total
revenues in fiscal 2002, increased $1.9 million or 14% over
fiscal 2001. The increase resulted primarily from increased
finance and layaway charges.

Cost of goods sold was $496.3 million, or
67.7% of retail sales, in fiscal 2002 compared to
$466.4 million, or 68.0% of retail sales, in fiscal 2001.
The decrease in cost of goods sold as a percent of retail sales
resulted primarily from maintaining timely and aggressive
markdowns on slow moving merchandise and improving inventory
flow and sourcing. Total gross margin dollars increased by 8% to
$236.4 million in fiscal 2002 from $219.3 million in
fiscal 2001.

SG&A expenses were $168.9 million in
fiscal 2002 compared to $162.1 million in fiscal 2001, an
increase of 4%. As a percent of retail sales, SG&A was 23.1%
compared to 23.6% in the prior year. The overall increase in
SG&A resulted primarily from increased selling-related
expenses and increased infrastructure expenses attributable to
the Companys store development activities.

Depreciation expense was $14.9 million in
fiscal 2002 compared to $10.9 million in fiscal 2001. The
37% increase in fiscal 2002 resulted primarily from the
Companys store development and the implementation of an
enterprise-wide information system.

12



---



##### 



Interest and other income, net was
$3.7 million in fiscal 2002 compared to $6.3 million
in fiscal 2001. The 41% decrease in fiscal 2002 resulted
primarily from the Companys write-down of a
$1.8 million decline in market value on investments deemed
to be other than temporary.

Income tax expense was $26.0 million, or
3.5% of retail sales in fiscal 2002 compared to
$23.2 million, or 3.4% of retail sales in fiscal 2001. The
increase resulted from higher pre-tax income.

Off Balance Sheet Arrangements

The Company is not a party to any off-balance
sheet arrangements that have, or are reasonably likely to have,
a current or future material effect on the Companys
financial condition, revenues, expenses, results of operations,
liquidity, capital expenditures or capital resources.

Critical Accounting Policies

The Companys accounting policies are more
fully described in Note 1 to the Consolidated Financial
Statements. As disclosed in Note 1 of Notes to Consolidated
Financial Statements, 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 judgment. 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, reserves for inventory
markdowns, calculation of asset impairment, shrink accrual and
tax contingency reserves.

The Companys critical accounting estimates
are discussed with the Audit Committee.

Allowance for
Doubtful Accounts

The Company evaluates the collectibility of
accounts receivable and records an allowance for doubtful
accounts based on estimates of actual write-offs and the
accounts receivable aging roll rates over the prior five months.
The allowance is reviewed for adequacy and adjusted, as
necessary, on a monthly basis. The Company also provides for
estimated uncollectible late fees charged based on historical
write-offs. The Companys financial results can be
significantly impacted by changes in bad debt write-off
experience and the aging of the accounts receivable portfolio.

Insurance
Liabilities

The Company is primarily self-insured for health
care, property loss, workers compensation and general
liability costs. These costs are significant primarily due to
the large number of the Companys retail locations and
employees. The Companys self-insurance liabilities are
based on the total estimated costs of claims filed and estimates
of claims incurred but not reported, less amounts paid against
such claims, and are not discounted. Management reviews current
and historical claims data in developing its estimates. The
Company also uses information provided by outside actuaries with
respect to workers compensation and general liability
claims. If the underlying facts and circumstances of the claims
change or the historical experience upon which insurance
provisions are recorded is not indicative of future trends, then
the Company may be required to adjust the provision for
insurance costs which could be material to the Companys
reported financial condition and results of operations.
Historically, actual results have not significantly deviated
from estimates.

Revenue
Recognition

While the Companys recognition of revenue
is predominantly derived from routine retail transactions and
does not involve significant judgement, revenue recognition
represents an important accounting policy of the Company. As
discussed in Note 1 to the Consolidated Financial
Statements, the Company recognizes

13



---



##### 



sales at the point of purchase when the customer
takes possession of the merchandise and pays for the purchase,
generally with cash or credit. Sales from purchases made with
Cato credit, gift cards and layaway sales are also recorded when
the customer takes possession of the merchandise. Gift cards,
layaway deposits and merchandise credits granted to customers
are recorded as deferred revenue until they are redeemed or
forfeited. A provision is made for estimated product returns
based on sales volumes and the Companys experience; actual
returns have not varied materially from amounts provided
historically.


Credit revenue on the Companys private
label credit card portfolio is recognized as earned under the
interest method. Late fees are recognized as earned, less
provisions for estimated uncollectible fees.

Impairment of
Long-Lived Assets

The Company primarily invests in property and
equipment in connection with the opening and remodeling of
stores and in computer software and hardware. Most of the
Companys store leases give the Company the option to
terminate the lease if certain specified sales volumes are not
achieved during the first few years of the lease. The Company
periodically reviews its store locations and estimates the
recoverability of its assets, recording an impairment charge, if
necessary, when the Company decides to close the store or
otherwise determines that future undiscounted cash flows
associated with those assets will not be sufficient to recover
the carrying value. This determination is based on a number of
factors, including the stores historical operating results
and cash flows, estimated future sales growth, real estate
development in the area and perceived local market conditions
that can be difficult to predict and may be subject to change.
In addition, the Company regularly evaluates its
computer-related and other long-lived assets and may accelerate
depreciation over the revised useful life if the asset is
expected to be replaced or has limited future value. When assets
are retired or otherwise disposed of, the cost and related
accumulated depreciation or amortization are removed from the
accounts, and any resulting gain or loss is reflected in income
for that period.

Tax
Reserves

The Company provides for estimated liabilities
for potential income and other tax assessments for which actual
settlement may differ materially from amounts provided.

Merchandise
Inventories

The Companys inventory is valued using the
retail method of accounting and is stated at the lower of cost
(first-in, first-out method) or market. Under the retail
inventory method, the valuation of inventory at cost and
resulting gross margin are calculated by applying an average
cost to retail ratio to the retail value of inventory. The
retail inventory method is an averaging method that has been
widely used in the retail industry. Inherent in the retail
method are certain significant estimates including initial
merchandise markup, markdowns and shrinkage, which significantly
impact the ending inventory valuation at cost and the resulting
gross margins. Physical inventories are conducted throughout the
year to calculate actual shrinkage and inventory on hand.
Estimates based on actual shrinkage results are used to estimate
inventory shrinkage which is accrued for the period between the
last inventory and the financial reporting date. The Company
continuously reviews its inventory levels to identify slow
moving merchandise and uses markdowns to clear slow moving
inventory. General economic environment for retail apparel sales
could result in an increase in the level of markdowns, which
would result in lower inventory values and increases to cost of
goods sold as a percentage of net sales in future periods.
Management makes estimates regarding markdowns based on
inventory levels on hand and customer demand, which may impact
inventory valuations. Markdown exposure with respect to
inventories on hand is limited due to the fact that seasonal
merchandise is not carried forward. Historically, actual results
have not significantly deviated from those determined using the
estimates described above.

14



---



##### 



Liquidity, Capital Resources and Market
Risk

The Company believes that its cash, cash
equivalents and short-term investments, together with cash flows
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
over the next twelve months.

The Company has consistently maintained a strong
liquidity position. Cash provided by operating activities during
fiscal 2003 was $65.7 million as compared to
$63.7 million in fiscal 2002. These amounts have enabled
the Company to fund its regular operating needs, capital
expenditure program, cash dividend payments and any repurchase
of the Companys Common Stock. In addition, the Company
maintains $35 million of unsecured revolving credit
facilities for short-term financing of seasonal cash needs.

At January 31, 2004, the Company had working
capital of $112.9 million compared to $162.6 million
at February 1, 2003. The increase in net cash provided by
operating activities in fiscal 2003 is primarily the result of
an increase in depreciation expense of $3.8 million due to
store expansion and an enterprise-wide merchandise and finance
system; an increase of deferred income taxes of
$4.9 million; a reduction in accounts receivable from weak
sales and strong collection efforts of $1.9 million; and a
reduction of merchandise inventories of $9.2 million.
Offsetting these increases in net cash provided by operating
activities was a decrease in net income of $14.4 million
and decrease of $1.3 million in accounts payable, accrued
expenses and other liabilities.

Additionally, the Company had $1.6 million
invested in privately managed investment funds at
January 31, 2004, which are reported under other assets of
the consolidated balance sheets.

At January 31, 2004, the Company had an
unsecured revolving credit agreement, which provided for
borrowings of up to $35 million. The revolving credit
agreement is committed until August 2006. This agreement
replaced a prior revolving credit agreement which was due to
expire in October 2004. The credit agreement contains various
financial covenants and limitations, including the maintenance
of specific financial ratios with which the Company was in
compliance as of January 31, 2004. There were no borrowings
outstanding under these credit facilities during the fiscal year
ended January 31, 2004 or February 1, 2003.

The Company had approximately $5.4 million
and $6.5 million at January 31, 2004 and
February 1, 2003, respectively, of outstanding irrevocable
letters of credit relating to purchase commitments.

Expenditures for property and equipment totaled
$20.6 million, $29.0 million and $25.7 million in
fiscal 2003, 2002 and 2001, respectively. The expenditures for
fiscal 2003 were primarily for store development, store remodels
and investments in new technology. In fiscal 2004, the Company
is planning to invest approximately $33 million for capital
expenditures. This includes expenditures to open 90 new stores,
relocate 27 stores and close 10 stores. In addition, the Company
plans to remodel 15 stores and has planned for additional
investments in technology scheduled to be implemented over the
next 12 months.

During 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 for a total cost of $95,043,454. Including
related expenses of $520,000 for investment banking and related
professional fees, the total cost was $95,563,454 or an average
purchase price of $18.60 per share. The repurchase 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. The LIBOR rate at
January 31, 2004 was 1.10%. Additionally, during 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.

During 2002, the Company repurchased 66,000
shares of Class A Common Stock for $1,186,687, or an
average purchase price of $17.98 per share. Additionally, in
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 $23.51 per
share, the average fair market value on the date of exchange.

15



---



##### 



During 2003, the Company entered into retirement
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 provided for the
retirement of Mr. Wayland Cato and Mr. Edgar Cato from
the Company and the Board of Directors effective
January 31, 2004. The Company recognized an expense of
$2.8 million representing the present value of certain
payments and benefits under the terms of the agreements. The
after-tax charge was $1.8 million or $.08 per diluted share
in fiscal 2003.

During fiscal 2003, the Company increased its
quarterly dividend by 7% from $.15 per share to $.16 per share.
Over the course of 2002, the Board of Directors increased the
quarterly dividend by 11% from $.135 per share to $.15 per share.

The Company does not use derivative financial
instruments. At January 31, 2004, the Companys
investment portfolio was invested in governmental and other 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
temporary losses reported net of taxes as accumulated other
comprehensive income. Other than temporary declines in fair
value of investments are recorded as a reduction in the cost of
investments in the accompanying Consolidated Balance Sheets and
a reduction of interest and other income, net in the
accompanying Statements of Consolidated Income.

The following table shows the Companys
obligations and commitments as of January 31, 2004, to make
future payments under contractual obligations (in thousands):

|                              |  |                                                   |         |      |  |      |        |      |  |      |        |      |  |   |        |  |  |   |        |  |  |   |        | 
|----------------------------- |  | ------------------------------------------------- | ------- | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                              |  |                                                  
|                              |  | Payments Due During One Year Fiscal Period Ending
|                              |  |                                                  
|Contractual Obligations       |  | Total                                             |         | 2004 |  | 2005 |        | 2006 |  | 2007 |        | 2008
|                              |  |                                                   |         |      |  |      |        |      |  |      |        |     
|Merchandise letters of credit |  | $                                                 | 5,365   |      |  | $    | 5,365  |      |  | $    |       |      |  | $ |       |  |  | $ |       |  |  | $ |       | 
|Operating leases              |  |                                                   | 121,126 |      |  |      | 40,482 |      |  |      | 32,488 |      |  |   | 25,167 |  |  |   | 16,249 |  |  |   | 6,740  | 
|Loan payment                  |  |                                                   | 27,500  |      |  |      | 6,000  |      |  |      | 6,000  |      |  |   | 6,000  |  |  |   | 6,000  |  |  |   | 3,500  | 
|                              |  |                                                   |         |      |  |      |        |      |  |      |        |      |  |   |        |  |  |   |        |  |  |   |        | 
|Total Contractual Obligations |  | $                                                 | 153,991 |      |  | $    | 51,847 |      |  | $    | 38,488 |      |  | $ | 31,167 |  |  | $ | 22,249 |  |  | $ | 10,240 | 
|                              |  |                                                   |         |      |  |      |        |      |  |      |        |      |  |   |        |  |  |   |        |  |  |   |        | 

Recent Accounting Pronouncements

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 annual disclosure requirements of SFAS
No. 123 are effective for fiscal years ending after
December 15, 2002. The implementation of this Statement did
not affect the Companys financial position or results of
operations.

In March 2003, the Emerging Issues Task Force
(EITF) reached a consensus on Issue No. 02-16,
Accounting by a Customer (Including a Reseller) for Cash
Considerations Received from a Vendor. EITF Issue
No. 02-16 provides guidance on how cash considerations
received by a customer or reseller should be classified in the
customers statement of earnings. EITF Issue No. 02-16
is effective for all transactions with vendors after
December 31, 2002. The adoption of EITF Issue
No. 02-16 did not have a material impact on the
Companys consolidated financial position or results of
operations.

This Annual Report 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

16



---



##### 



included in this Annual Report, including, but
not limited to, statements regarding the Companys planned
capital expenditures, store openings, closures, relocations and
remodelings and the expected adequacy of the Companys
liquidity, 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 prove to be correct.
Forward-looking statements involve risks and uncertainties that
could cause the Companys actual results to differ
materially depending on a variety of important factors,
including, but not limited to, general economic conditions,
competitive factors and pricing pressures. The Company does not
undertake any obligation to update any forward-looking
statements.




|         |                                                                
|-------- | ---------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk:

The Company is subject to market rate risk from
exposure to changes in interest rates based on its financing,
investing and cash management.

17



---



##### 





|        |                                                 
|------- | ------------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data:

INDEX TO FINANCIAL STATEMENTS AND
SCHEDULE

|                                                                                                                                                            |  |      |     | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                                                                            |  | Page
|                                                                                                                                                            |  |     
|Report of Independent Auditors                                                                                                                              |  |      | 19  | 
|Report of Predecessor Auditor
    (Deloitte & Touche LLP)                                                                                                   |  |      | 20  | 
|Consolidated Statements of Income for the fiscal
    years ended January 31, 2004, February 1, 2003 and
    February 2, 2002                                |  |      | 21  | 
|Consolidated Balance Sheets at January 31,
    2004 and February 1, 2003                                                                                    |  |      | 22  | 
|Consolidated Statements of Cash Flows for the
    fiscal years ended January 31, 2004, February 1, 2003
    and February 2, 2002                            |  |      | 23  | 
|Consolidated Statements of Stockholders
    Equity for the fiscal years ended January 31, 2004,
    February 1, 2003 and February 2, 2002                  |  |      | 24  | 
|Notes to Consolidated Financial Statements                                                                                                                  |  |      | 25  | 
|Schedule I  Report of Predecessor
    Public Accountant (Deloitte & Touche LLP) on Financial
    Statement Schedule                                        |  |      | S-1 | 
|Schedule II  Valuation and
    Qualifying Accounts and Reserves for the fiscal years ended
    January 31, 2004, February 1, 2003 and
    February 2, 2002 |  |      | S-2 | 

18



---



##### 



REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders
of

The Cato Corporation


In our opinion, the accompanying consolidated
balance sheet and the related consolidated statements of income,
of stockholders equity, and of cash flows present fairly,
in all material respects, the financial position of The Cato
Corporation and its Subsidiaries at January 31, 2004, and
the results of their operations and their cash flows for the
year then ended in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule for the year
ended January 31, 2004 listed in the index at Item 15
presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related
consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the
Companys management; our responsibility is to express an
opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable
basis for our opinion. The financial statements of the Company
as of February 1, 2003 and for each of the two years in the
period ended February 1, 2003 were audited by other
auditors whose report dated April 21, 2003 expressed an
unqualified opinion on those statements.

/s/ PricewaterhouseCoopers LLP

Charlotte, North Carolina

March 31, 2004


19



---



##### 



PREDECESSOR AUDITOR (DELOITTE &
TOUCHE LLP)

To the Board of Directors and Stockholders
of

The Cato Corporation


We have audited the accompanying consolidated
balance sheet of The Cato Corporation and subsidiaries (the
Company) as of February 1, 2003, and the related
consolidated statements of income, stockholders equity,
and cash flows for each of the two years in the period ended
February 1, 2003. Our audits also included the financial
statement schedule listed in the index at Item 15(a) for
each of the two-years in the period ended February 1, 2003.
These financial statements and the financial statement schedule
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our
audits.

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

In our opinion, such consolidated financial
statements present fairly, in all material respects, the
financial position of the Company at February 1, 2003, and
the results of its operations and its cash flows for each of the
two years in the period ended February 1, 2003, in
conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents
fairly in all material respects the information set forth herein.

/s/ Deloitte & Touche LLP

Charlotte, North Carolina

April 21, 2003


20



---



##### 



THE CATO CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

|                                                                              |  |                                               |            |             |  |             |            |   |  |   |            |  
|----------------------------------------------------------------------------- |  | --------------------------------------------- | ---------- | ----------- |  | ----------- | ---------- | - |  | - | ---------- | -
|                                                                              |  |                                              
|                                                                              |  | Fiscal Year Ended                            
|                                                                              |  |                                              
|                                                                              |  | January 31,                                   |            | February 1, |  | February 2,
|                                                                              |  | 2004                                          |            | 2003        |  | 2002       
|                                                                              |  |                                               |            |             |  |            
|                                                                              |  |                                              
|                                                                              |  | (Dollars in thousands, except per share data)
|REVENUES                                                                      |  |                                               |            |             |  |             |            |   |  |   |            |  
|Retail sales                                                                  |  | $                                             | 731,770    |             |  | $           | 732,742    |   |  | $ | 685,653    |  
|Other income (principally finance charges, late
    fees and layaway charges) |  |                                               | 15,497     |             |  |             | 15,589     |   |  |   | 13,668     |  
|                                                                              |  |                                               |            |             |  |             |            |   |  |   |            |  
|Total revenues                                                                |  |                                               | 747,267    |             |  |             | 748,331    |   |  |   | 699,321    |  
|                                                                              |  |                                               |            |             |  |             |            |   |  |   |            |  
|COSTS AND EXPENSES, NET                                                       |  |                                               |            |             |  |             |            |   |  |   |            |  
|Cost of goods sold                                                            |  |                                               | 508,401    |             |  |             | 496,345    |   |  |   | 466,366    |  
|Selling, general and administrative                                           |  |                                               | 174,202    |             |  |             | 168,914    |   |  |   | 162,082    |  
|Depreciation                                                                  |  |                                               | 18,695     |             |  |             | 14,913     |   |  |   | 10,886     |  
|Interest and other income, net                                                |  |                                               | (3,308     | )           |  |             | (3,680     | ) |  |   | (6,299     | )
|                                                                              |  |                                               |            |             |  |             |            |   |  |   |            |  
|                                                                              |  |                                               | 697,990    |             |  |             | 676,492    |   |  |   | 633,035    |  
|                                                                              |  |                                               |            |             |  |             |            |   |  |   |            |  
|Income before income taxes                                                    |  |                                               | 49,277     |             |  |             | 71,839     |   |  |   | 66,286     |  
|Income tax expense                                                            |  |                                               | 17,888     |             |  |             | 26,006     |   |  |   | 23,200     |  
|                                                                              |  |                                               |            |             |  |             |            |   |  |   |            |  
|Net income                                                                    |  | $                                             | 31,389     |             |  | $           | 45,833     |   |  | $ | 43,086     |  
|                                                                              |  |                                               |            |             |  |             |            |   |  |   |            |  
|Basic earnings per share                                                      |  | $                                             | 1.36       |             |  | $           | 1.80       |   |  | $ | 1.71       |  
|                                                                              |  |                                               |            |             |  |             |            |   |  |   |            |  
|Basic weighted average shares                                                 |  |                                               | 23,140,581 |             |  |             | 25,465,543 |   |  |   | 25,193,610 |  
|                                                                              |  |                                               |            |             |  |             |            |   |  |   |            |  
|Diluted earnings per share                                                    |  | $                                             | 1.33       |             |  | $           | 1.77       |   |  | $ | 1.66       |  
|                                                                              |  |                                               |            |             |  |             |            |   |  |   |            |  
|Diluted weighted average shares                                               |  |                                               | 23,559,541 |             |  |             | 25,947,457 |   |  |   | 25,888,636 |  
|                                                                              |  |                                               |            |             |  |             |            |   |  |   |            |  
|Dividends per share                                                           |  | $                                             | .63        |             |  | $           | .585       |   |  | $ | .53        |  
|                                                                              |  |                                               |            |             |  |             |            |   |  |   |            |  

See notes to consolidated financial statements.

21



---



##### 



THE CATO CORPORATION

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                                                                             |                           |                                            |          |             |         |   |         |         |         | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ------------------------------------------ | -------- | ----------- | ------- | - | ------- | ------- | ------- | 
|                                                                                                                                                                                                                             |                           | January 31,                                |          | February 1,
|                                                                                                                                                                                                                             |                           | 2004                                       |          | 2003       
|                                                                                                                                                                                                                             |                           |                                            |          |            
|                                                                                                                                                                                                                             |                           |                                           
|                                                                                                                                                                                                                             |                           | (Dollars in thousands)                    
|ASSETS                                                                                                                                                                                                                      
|Current Assets:                                                                                                                                                                                                              |                           |                                            |          |             |         |   |         |        
|Cash and cash equivalents                                                                                                                                                                                                    |                           | $                                          | 23,857   |             |         | $ | 32,065  |        
|Short-term investments                                                                                                                                                                                                       |                           |                                            | 47,545   |             |         |   | 74,871  |        
|Accounts receivable, net of allowance for
    doubtful accounts of $6,335 at January 31, 2004 and $6,099
    at February 1, 2003.                                                                                            |                           |                                            | 52,714   |             |         |   | 54,116  |        
|Merchandise inventories                                                                                                                                                                                                      |                           |                                            | 97,292   |             |         |   | 93,457  |        
|Deferred income taxes                                                                                                                                                                                                        |                           |                                            | 284      |             |         |   | 1,392   |        
|Prepaid expenses                                                                                                                                                                                                             |                           |                                            | 5,708    |             |         |   | 4,990   |        
|                                                                                                                                                                                                                             |                           |                                            |          |             |         |   |         |        
|                                                                                                                                                                                                                             | Total Current Assets      |                                            |          | 227,400     |         |   |         | 260,891 |        
|Property and equipment  net                                                                                                                                                                                                 |                           |                                            | 114,367  |             |         |   | 113,307 |        
|Other assets                                                                                                                                                                                                                 |                           |                                            | 9,806    |             |         |   | 9,212   |        
|                                                                                                                                                                                                                             |                           |                                            |          |             |         |   |         |        
|                                                                                                                                                                                                                             | Total Assets              |                                            | $        | 351,573     |         |   | $       | 383,410 |        
|                                                                                                                                                                                                                             |                           |                                            |          |             |         |   |         |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                                                                                                                    
|Current Liabilities:                                                                                                                                                                                                         |                           |                                            |          |             |         |   |         |        
|Accounts payable                                                                                                                                                                                                             |                           | $                                          | 76,387   |             |         | $ | 66,620  |        
|Accrued expenses                                                                                                                                                                                                             |                           |                                            | 27,815   |             |         |   | 28,776  |        
|Accrued income taxes                                                                                                                                                                                                         |                           |                                            | 4,290    |             |         |   | 2,886   |        
|Current portion of long-term debt                                                                                                                                                                                            |                           |                                            | 6,000    |             |         |   |        |        
|                                                                                                                                                                                                                             |                           |                                            |          |             |         |   |         |        
|                                                                                                                                                                                                                             | Total Current Liabilities |                                            |          | 114,492     |         |   |         | 98,282  |        
|Deferred income taxes                                                                                                                                                                                                        |                           |                                            | 10,203   |             |         |   | 6,310   |        
|Long-term debt                                                                                                                                                                                                               |                           |                                            | 21,500   |             |         |   |        |        
|Other noncurrent liabilities (primarily deferred
    rent)                                                                                                                                                                   |                           |                                            | 11,267   |             |         |   | 8,654   |        
|                                                                                                                                                                                                                            
|Commitments and contingencies                                                                                                                                                                                                |                           |                                            |          |             |         |   |         |        
|                                                                                                                                                                                                                            
|Stockholders 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; 26,015,868 and 25,218,678
    shares issued at January 31, 2004 and February 1,
    2003, respectively                                    |                           |                                            | 867      |             |         |   | 840     |        
|Convertible Class B common stock, $.033 par
    value per share, 15,000,000 shares authorized; 5,607,834 and
    6,085,149 shares issued at January 31, 2004 and
    February 1, 2003, respectively                          |                           |                                            | 187      |             |         |   | 203     |        
|Additional paid-in capital                                                                                                                                                                                                   |                           |                                            | 99,676   |             |         |   | 94,947  |        
|Retained earnings                                                                                                                                                                                                            |                           |                                            | 252,828  |             |         |   | 235,904 |        
|Accumulated other comprehensive gains                                                                                                                                                                                        |                           |                                            | 58       |             |         |   | 253     |        
|Unearned compensation  restricted
    stock awards                                                                                                                                                                          |                           |                                            | (1,593   | )           |         |   | (2,375  | )      
|                                                                                                                                                                                                                             |                           |                                            |          |             |         |   |         |        
|                                                                                                                                                                                                                             |                           |                                            | 352,023  |             |         |   | 329,772 |        
|Less Class A and Class B common stock
    in treasury, at cost (5,906,179 Class A and 5,137,484
    Class B shares at January 31, 2004 and 5,741,179
    Class A and 0 Class B shares at February 1, 2003,
    respectively) |                           |                                            | (157,912 | )           |         |   | (59,608 | )      
|                                                                                                                                                                                                                             |                           |                                            |          |             |         |   |         |        
|                                                                                                                                                                                                                             |                           | Total Stockholders Equity                 |          |             | 194,111 |   |         |         | 270,164 | 
|                                                                                                                                                                                                                             |                           |                                            |          |             |         |   |         |        
|                                                                                                                                                                                                                             |                           | Total Liabilities and Stockholders Equity |          | $           | 351,573 |   |         | $       | 383,410 | 
|                                                                                                                                                                                                                             |                           |                                            |          |             |         |   |         |        

See notes to consolidated financial statements.

22



---



##### 



THE CATO CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                      |                                                                             |                                                              |         |             |        |             |         |        |         |   |         |        |         |  
|------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------------------------ | ------- | ----------- | ------ | ----------- | ------- | ------ | ------- | - | ------- | ------ | ------- | -
|                                                                                      |                                                                             |                                                             
|                                                                                      |                                                                             | Fiscal Year Ended                                           
|                                                                                      |                                                                             |                                                             
|                                                                                      |                                                                             | January 31,                                                  |         | February 1, |        | February 2,
|                                                                                      |                                                                             | 2004                                                         |         | 2003        |        | 2002       
|                                                                                      |                                                                             |                                                              |         |             |        |            
|                                                                                      |                                                                             |                                                             
|                                                                                      |                                                                             | (Dollars in thousands)                                      
|OPERATING ACTIVITIES                                                                  |                                                                             |                                                              |         |             |        |             |         |        |         |   |         |       
|Net income                                                                            |                                                                             | $                                                            | 31,389  |             |        | $           | 45,833  |        |         | $ | 43,086  |       
|Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                             |                                                              |         |             |        |             |         |        |         |   |         |       
|                                                                                      | Depreciation                                                                |                                                              |         | 18,695      |        |             |         | 14,913 |         |   |         | 10,886 |        
|                                                                                      | Amortization of investment premiums                                         |                                                              |         | 4           |        |             |         | 66     |         |   |         | 160    |        
|                                                                                      | Provision for doubtful accounts                                             |                                                              |         | 6,098       |        |             |         | 4,764  |         |   |         | 5,913  |        
|                                                                                      | Write-down of investments                                                   |                                                              |         |            |        |             |         | 1,800  |         |   |         |       |        
|                                                                                      | Deferred income taxes                                                       |                                                              |         | 5,001       |        |             |         | 70     |         |   |         | 422    |        
|                                                                                      | Compensation expense related to restricted stock
    awards                 |                                                              |         | 782         |        |             |         | 750    |         |   |         | 295    |        
|                                                                                      | Loss on disposal of property and equipment                                  |                                                              |         | 798         |        |             |         | 870    |         |   |         | 480    |        
|                                                                                      | Changes in operating assets and liabilities which
    provided (used) cash: |                                                              |         |             |        |             |         |        |         |   |         |        |        
|                                                                                      |                                                                             | Accounts receivable                                          |         |             | (4,696 | )           |         |        | (6,587  | ) |         |        | (11,234 | )
|                                                                                      |                                                                             | Merchandise inventories                                      |         |             | (3,835 | )           |         |        | (13,050 | ) |         |        | (1,246  | )
|                                                                                      |                                                                             | Prepaid and other assets                                     |         |             | (1,312 | )           |         |        | (470    | ) |         |        | 367     |  
|                                                                                      |                                                                             | Accrued income taxes                                         |         |             | 1,404  |             |         |        | 2,066   |   |         |        | (1,525  | )
|                                                                                      |                                                                             | Accounts payable, accrued expenses and other
    liabilities |         |             | 11,419 |             |         |        | 12,704  |   |         |        | (547    | )
|                                                                                      |                                                                             |                                                              |         |             |        |             |         |        |         |   |         |       
|Net cash provided by operating activities                                             |                                                                             |                                                              | 65,747  |             |        |             | 63,729  |        |         |   | 47,057  |       
|                                                                                      |                                                                             |                                                              |         |             |        |             |         |        |         |   |         |       
|INVESTING ACTIVITIES                                                                  |                                                                             |                                                              |         |             |        |             |         |        |         |   |         |       
|Expenditures for property and equipment                                               |                                                                             |                                                              | (20,553 | )           |        |             | (28,953 | )      |         |   | (25,684 | )     
|Purchases of short-term investments                                                   |                                                                             |                                                              | (18,462 | )           |        |             | (46,281 | )      |         |   | (35,878 | )     
|Sales of short-term investments                                                       |                                                                             |                                                              | 45,589  |             |        |             | 13,735  |        |         |   | 51,194  |       
|                                                                                      |                                                                             |                                                              |         |             |        |             |         |        |         |   |         |       
|Net cash provided (used) in investing
    activities                                  |                                                                             |                                                              | 6,574   |             |        |             | (61,499 | )      |         |   | (10,368 | )     
|                                                                                      |                                                                             |                                                              |         |             |        |             |         |        |         |   |         |       
|FINANCING ACTIVITIES                                                                  |                                                                             |                                                              |         |             |        |             |         |        |         |   |         |       
|Dividends paid                                                                        |                                                                             |                                                              | (14,465 | )           |        |             | (14,890 | )      |         |   | (13,400 | )     
|Purchases of treasury stock                                                           |                                                                             |                                                              | (98,304 | )           |        |             | (1,187  | )      |         |   | (11,729 | )     
|Proceeds of long term debt                                                            |                                                                             |                                                              | 30,000  |             |        |             |        |        |         |   |        |       
|Payments to settle long term debt                                                     |                                                                             |                                                              | (2,500  | )           |        |             |        |        |         |   |        |       
|Proceeds from employee stock purchase plan                                            |                                                                             |                                                              | 507     |             |        |             | 509     |        |         |   | 443     |       
|Proceeds from stock options exercised                                                 |                                                                             |                                                              | 4,233   |             |        |             | 3,631   |        |         |   | 4,568   |       
|                                                                                      |                                                                             |                                                              |         |             |        |             |         |        |         |   |         |       
|Net cash used in financing activities                                                 |                                                                             |                                                              | (80,529 | )           |        |             | (11,937 | )      |         |   | (20,118 | )     
|                                                                                      |                                                                             |                                                              |         |             |        |             |         |        |         |   |         |       
|Net increase (decrease) in cash and cash
    equivalents                              |                                                                             |                                                              | (8,208  | )           |        |             | (9,707  | )      |         |   | 16,571  |       
|Cash and cash equivalents at beginning of year                                        |                                                                             |                                                              | 32,065  |             |        |             | 41,772  |        |         |   | 25,201  |       
|                                                                                      |                                                                             |                                                              |         |             |        |             |         |        |         |   |         |       
|Cash and cash equivalents at end of year                                              |                                                                             | $                                                            | 23,857  |             |        | $           | 32,065  |        |         | $ | 41,772  |       
|                                                                                      |                                                                             |                                                              |         |             |        |             |         |        |         |   |         |       

See notes to consolidated financial statements.

23



---



##### 



THE CATO CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                                                                   |                                                                                                     |                        |     |             |  |            |     |          |  |               |        |              |  |          |         |               |  |   |      |      |   |   |        |   |  |   |          |   |  |   |         |        |  
|---------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------- | ---------------------- | --- | ----------- |  | ---------- | --- | -------- |  | ------------- | ------ | ------------ |  | -------- | ------- | ------------- |  | - | ---- | ---- | - | - | ------ | - |  | - | -------- | - |  | - | ------- | ------ | -
|                                                                                   |                                                                                                     |                        |     | Convertible |  |            |     |          |  | Accumulated   |        | Unearned     |  |          |         |              
|                                                                                   |                                                                                                     | Class A                |     | Class B     |  | Additional |     |          |  | Other         |        | Compensation |  |          |         | Total        
|                                                                                   |                                                                                                     | Common                 |     | Common      |  | Paid-in    |     | Retained |  | Comprehensive |        | Restricted   |  | Treasury |         | Stockholders
|                                                                                   |                                                                                                     | Stock                  |     | Stock       |  | Capital    |     | Earnings |  | Income (Loss) |        | Stock Awards |  | Stock    |         | Equity       
|                                                                                   |                                                                                                     |                        |     |             |  |            |     |          |  |               |        |              |  |          |         |              
|                                                                                   |                                                                                                     |                       
|                                                                                   |                                                                                                     | (Dollars in thousands)
|Balance  February 3,
    2001                                                     |                                                                                                     | $                      | 821 |             |  | $          | 179 |          |  | $             | 76,778 |              |  | $        | 175,275 |               |  | $ | (884 | )    |   | $ | (689   | ) |  | $ | (43,723  | ) |  | $ | 207,757 |       
|*Comprehensive income:                                                             |                                                                                                     |                        |     |             |  |            |     |          |  |               |        |              |  |          |         |               |  |   |      |      |   |   |        |   |  |   |          |   |  |   |         |       
|                                                                                   | Net income                                                                                          |                        |     |             |  |            |     |          |  |               |        |              |  |          |         | 43,086        |  |   |      |      |   |   |        |   |  |   |          |   |  |   |         | 43,086 |  
|                                                                                   | Unrealized gains on available-for-sale
    securities, net of deferred income taxes of $171.        |                        |     |             |  |            |     |          |  |               |        |              |  |          |         |               |  |   |      | 317  |   |   |        |   |  |   |          |   |  |   |         | 317    |  
|Dividends paid ($.53 per share)                                                    |                                                                                                     |                        |     |             |  |            |     |          |  |               |        |              |  |          | (13,400 | )             |  |   |      |      |   |   |        |   |  |   |          |   |  |   | (13,400 | )     
|Class A common stock sold through employee
    stock purchase plan  38,463 shares |                                                                                                     |                        | 1   |             |  |            |     |          |  |               | 442    |              |  |          |         |               |  |   |      |      |   |   |        |   |  |   |          |   |  |   | 443     |       
|Class A common stock sold through stock
    option plans  329,850 shares          |                                                                                                     |                        | 11  |             |  |            |     |          |  |               | 2,961  |              |  |          |         |               |  |   |      |      |   |   |        |   |  |   |          |   |  |   | 2,972   |       
|Class B common stock sold through stock
    option plans  448,332 shares          |                                                                                                     |                        |     |             |  |            | 15  |          |  |               | 3,406  |              |  |          |         |               |  |   |      |      |   |   |        |   |  |   |          |   |  |   | 3,421   |       
|Income tax benefit from stock options exercised                                    |                                                                                                     |                        |     |             |  |            |     |          |  |               | 3,361  |              |  |          |         |               |  |   |      |      |   |   |        |   |  |   |          |   |  |   | 3,361   |       
|Purchase of treasury shares  774,750
    shares                                   |                                                                                                     |                        |     |             |  |            |     |          |  |               |        |              |  |          |         |               |  |   |      |      |   |   |        |   |  |   | (11,729  | ) |  |   | (11,729 | )     
|Surrender of shares for stock options 
    92,600 shares                          |                                                                                                     |                        |     |             |  |            |     |          |  |               |        |              |  |          |         |               |  |   |      |      |   |   |        |   |  |   | (1,825   | ) |  |   | (1,825  | )     
|Unearned compensation  restricted
    stock awards                                |                                                                                                     |                        |     |             |  |            |     |          |  |               |        |              |  |          |         |               |  |   |      |      |   |   | 295    |   |  |   |          |   |  |   | 295     |       
|                                                                                  
|Balance  February 2,
    2002                                                     |                                                                                                     |                        | 833 |             |  |            | 194 |          |  |               | 86,948 |              |  |          | 204,961 |               |  |   | (567 | )    |   |   | (394   | ) |  |   | (57,277  | ) |  |   | 234,698 |       
|*Comprehensive income:                                                             |                                                                                                     |                        |     |             |  |            |     |          |  |               |        |              |  |          |         |               |  |   |      |      |   |   |        |   |  |   |          |   |  |   |         |       
|                                                                                   | Net income                                                                                          |                        |     |             |  |            |     |          |  |               |        |              |  |          |         | 45,833        |  |   |      |      |   |   |        |   |  |   |          |   |  |   |         | 45,833 |  
|                                                                                   | Unrealized gains on available-for-sale
    securities, net of deferred income taxes of $448.        |                        |     |             |  |            |     |          |  |               |        |              |  |          |         |               |  |   |      | 820  |   |   |        |   |  |   |          |   |  |   |         | 820    |  
|Dividends paid ($.585 per share)                                                   |                                                                                                     |                        |     |             |  |            |     |          |  |               |        |              |  |          | (14,890 | )             |  |   |      |      |   |   |        |   |  |   |          |   |  |   | (14,890 | )     
|Class A common stock sold through employee
    stock purchase plan  32,487 shares |                                                                                                     |                        | 1   |             |  |            |     |          |  |               | 508    |              |  |          |         |               |  |   |      |      |   |   |        |   |  |   |          |   |  |   | 509     |       
|Class A common stock sold through stock
    option plans  171,600 shares          |                                                                                                     |                        | 6   |             |  |            |     |          |  |               | 1,547  |              |  |          |         |               |  |   |      |      |   |   |        |   |  |   |          |   |  |   | 1,553   |       
|Class B common stock sold through stock
    option plans  172,500 shares          |                                                                                                     |                        |     |             |  |            | 6   |          |  |               | 1,310  |              |  |          |         |               |  |   |      |      |   |   |        |   |  |   |          |   |  |   | 1,316   |       
|Income tax benefit from stock options exercised                                    |                                                                                                     |                        |     |             |  |            |     |          |  |               | 1,906  |              |  |          |         |               |  |   |      |      |   |   |        |   |  |   |          |   |  |   | 1,906   |       
|Purchase of treasury shares  66,000
    shares                                    |                                                                                                     |                        |     |             |  |            |     |          |  |               |        |              |  |          |         |               |  |   |      |      |   |   |        |   |  |   | (1,187   | ) |  |   | (1,187  | )     
|Surrender of shares for stock options 
    48,681 shares                          |                                                                                                     |                        |     |             |  |            |     |          |  |               |        |              |  |          |         |               |  |   |      |      |   |   |        |   |  |   | (1,144   | ) |  |   | (1,144  | )     
|Restricted stock awards  100,000 shares                                           |                                                                                                     |                        |     |             |  |            | 3   |          |  |               | 2,728  |              |  |          |         |               |  |   |      |      |   |   | (2,731 | ) |  |   |          |   |  |   |        |       
|Unearned compensation  restricted
    stock awards                                |                                                                                                     |                        |     |             |  |            |     |          |  |               |        |              |  |          |         |               |  |   |      |      |   |   | 750    |   |  |   |          |   |  |   | 750     |       
|                                                                                  
|Balance  February 1,
    2003                                                     |                                                                                                     |                        | 840 |             |  |            | 203 |          |  |               | 94,947 |              |  |          | 235,904 |               |  |   | 253  |      |   |   | (2,375 | ) |  |   | (59,608  | ) |  |   | 270,164 |       
|*Comprehensive income:                                                             |                                                                                                     |                        |     |             |  |            |     |          |  |               |        |              |  |          |         |               |  |   |      |      |   |   |        |   |  |   |          |   |  |   |         |       
|                                                                                   | Net income                                                                                          |                        |     |             |  |            |     |          |  |               |        |              |  |          |         | 31,389        |  |   |      |      |   |   |        |   |  |   |          |   |  |   |         | 31,389 |  
|                                                                                   | Unrealized losses on available-for-sale
    securities, net of deferred income tax benefit of $111. |                        |     |             |  |            |     |          |  |               |        |              |  |          |         |               |  |   |      | (195 | ) |   |        |   |  |   |          |   |  |   |         | (195   | )
|Dividends paid ($.63 per share)                                                    |                                                                                                     |                        |     |             |  |            |     |          |  |               |        |              |  |          | (14,465 | )             |  |   |      |      |   |   |        |   |  |   |          |   |  |   | (14,465 | )     
|Class A common stock sold through employee
    stock purchase plan  28,306 shares |                                                                                                     |                        | 1   |             |  |            |     |          |  |               | 506    |              |  |          |         |               |  |   |      |      |   |   |        |   |  |   |          |   |  |   | 507     |       
|Class A common stock sold through stock
    option plans  288,250 shares          |                                                                                                     |                        | 10  |             |  |            |     |          |  |               | 2,857  |              |  |          |         |               |  |   |      |      |   |   |        |   |  |   |          |   |  |   | 2,867   |       
|Income tax benefit from stock options exercised                                    |                                                                                                     |                        |     |             |  |            |     |          |  |               | 1,366  |              |  |          |         |               |  |   |      |      |   |   |        |   |  |   |          |   |  |   | 1,366   |       
|Purchase of treasury shares  5,302,484
    shares                                 |                                                                                                     |                        |     |             |  |            |     |          |  |               |        |              |  |          |         |               |  |   |      |      |   |   |        |   |  |   | (98,304  | ) |  |   | (98,304 | )     
|Shares reclassified from Class B to
    Class A  477,315 shares                   |                                                                                                     |                        | 16  |             |  |            | (16 | )        |  |               |        |              |  |          |         |               |  |   |      |      |   |   |        |   |  |   |          |   |  |   |        |       
|Unearned compensation  restricted
    stock awards                                |                                                                                                     |                        |     |             |  |            |     |          |  |               |        |              |  |          |         |               |  |   |      |      |   |   | 782    |   |  |   |          |   |  |   | 782     |       
|                                                                                  
|Balance  January 31,
    2004.                                                    |                                                                                                     | $                      | 867 |             |  | $          | 187 |          |  | $             | 99,676 |              |  | $        | 252,828 |               |  | $ | 58   |      |   | $ | (1,593 | ) |  | $ | (157,912 | ) |  | $ | 194,111 |       



---



|  |                                                                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Total comprehensive income for the years ended
    January 31, 2004, February 1, 2003 and
    February 2, 2002 was $31,194, $46,653 and $43,403,
    respectively.

See notes to consolidated financial statements.

24



---



##### 



THE CATO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     Summary of
Significant Accounting Policies:

Principles of Consolidation:The consolidated financial statements
include the accounts of The Cato Corporation and its
wholly-owned subsidiaries (the Company). All
significant intercompany accounts and transactions have been
eliminated.

Description of Business and Fiscal Year:The Company has two business segments
 the operation of womens fashion specialty stores
and a credit card division. The apparel specialty stores operate
under the names Cato, Cato Fashions,
Cato Plus and Its Fashion! and are
located primarily in strip shopping centers in the southeastern
United States. The Companys fiscal year ends on the
Saturday nearest January 31.

Use of Estimates:The preparation of the Companys
financial statements in conformity with accounting principles
generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Significant accounting estimates reflected in the Companys
financial statements include the allowance for doubtful accounts
receivable, reserves relating to workers compensation,
general and auto insurance liabilities, reserves for inventory
markdowns, calculation of asset impairment, shrink accrual and
tax contingency reserves.

Cash and Cash Equivalents and Short-Term
Investments: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 all
classified as available-for-sale. As they are available for
current operations, they are classified in 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 Interest and other income, net.

Concentration of Credit Risk:Financial instruments that potentially
subject the Company to a concentration of credit risk
principally consist of cash equivalents and accounts receivable.
The Company places its cash equivalents with high credit
qualified institutions and, by practice, limits the amount of
credit exposure to any one institution. Concentrations of credit
risks with respect to accounts receivable are limited due to the
dispersion across different geographies of the Companys
customer base.

Supplemental Cash Flow Information:Income tax payments, net of refunds
received, for the fiscal years ended January 31, 2004,
February 1, 2003 and February 2, 2002 were
$12,643,000, $21,982,000 and $24,841,000, respectively.

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

Property and Equipment:Property and equipment are recorded at
cost. Maintenance and repairs are charged to operations as
incurred; renewals and betterments are capitalized. The Company
accounts for its software development costs in accordance with
the American Institute of Certified Public Accountants Statement
of Position (SOP) 98-1, Accounting for the
Costs of Computer Software Developed or

25



---



##### 



THE CATO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Obtained for Internal Use. Depreciation is
provided on the straight-line method over the estimated useful
lives of the related assets, as follows:

|                                 |  |              |               | 
|-------------------------------- |  | ------------ | ------------- | 
|                                 |  | Estimated   
|Classification                   |  | Useful Lives
|                                 |  |             
|Land improvements                |  |              | 10 years      | 
|Buildings                        |  |              | 30  40 years | 
|Leasehold improvements           |  |              | 5  10 years  | 
|Fixtures, equipment and software |  |              | 3  10 years  | 

Impairment of Long-Lived Assets

The Company primarily invests in property and
equipment in connection with the opening and remodeling of
stores and in computer software and hardware. Most of the
Companys store leases give the Company the option to
terminate the lease if certain specified sales volumes are not
achieved during the first few years of the lease. The Company
periodically reviews its store locations and estimates the
recoverability of its assets, recording an impairment charge, if
necessary, when the Company decides to close the store or
otherwise determines that future undiscounted cash flows
associated with those assets will not be sufficient to recover
the carrying value. This determination is based on a number of
factors, including the stores historical operating results
and cash flows, estimated future sales growth, real estate
development in the area and perceived local market conditions
that can be difficult to predict and may be subject to change.
In addition, the Company regularly evaluates its
computer-related and other long-lived assets and may accelerate
depreciation over the revised useful life if the asset is
expected to be replaced or has limited future value. When assets
are retired or otherwise disposed of, the cost and related
accumulated depreciation or amortization are removed from the
accounts, and any resulting gain or loss is reflected in income
for that period.

Revenue Recognition

The Company recognizes sales at the point of
purchase when the customer takes possession of the merchandise
and pays for the purchase, generally with cash or credit. Sales
from purchases made with Cato credit, gift cards and layaway
sales are also recorded when the customer takes possession of
the merchandise. Gift cards, layaway deposits and merchandise
credits granted to customers are recorded as deferred revenue
until they are redeemed or forfeited. A provision is made for
estimated product returns based on sales volumes and the
Companys experience; actual returns have not varied
materially from amounts provided historically.

Credit revenue on the Companys private
label credit card portfolio is recognized as earned under the
interest method. Late fees are recognized as earned, less
provisions for estimated uncollectible fees.

Cost of Goods Sold:Cost of goods sold includes
merchandise costs, net of discounts and allowances, buying
costs, distribution costs, occupancy costs, freight, and
inventory shrinkage. Net merchandise costs and in-bound freight
are capitalized as inventory costs. Buying and distribution
costs include payroll, payroll-related costs and operating
expenses for our buying departments and distribution center.
Occupancy expenses include rent, real estate taxes, insurance,
common area maintenance, utilities and maintenance for stores
and distribution facilities. Buying, distribution, occupancy and
internal transfer costs are treated as period costs and are not
capitalized as part of inventory.

Credit Sales:The
Company offers its own credit card to customers. All credit
activity is performed by the Companys wholly-owned
subsidiaries. None of the credit card receivables are secured.
Finance income is recognized as earned under the interest method
and late charges are recognized in the month in which they are
assessed, net of provisions for estimated uncollectible amounts.
The Company evaluates the collectibility

26



---



##### 



THE CATO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of accounts receivable and records an allowance
for doubtful accounts based on estimates of actual write-offs
and the accounts receivable.

Advertising:Advertising costs are expensed in the
period in which they are incurred. Advertising expense was
$5,638,000, $5,299,000 and $4,563,000 for the fiscal years ended
January 31, 2004, February 1, 2003 and
February 2, 2002, respectively.

Earnings Per Share:FASB No. 128 requires dual
presentation of basic EPS and diluted EPS on the face of all
income statements for all entities with complex capital
structures. Basic EPS is computed as net income divided by the
weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could
occur from common shares issuable through stock options,
warrants and other convertible securities. Unvested restricted
stock is included in the computation of diluted EPS using the
treasury stock method for fiscal 2003 and had no impact on
fiscal 2002 and 2001, respectively. The weighted-average number
of shares used in the basic earnings per share computations was
23,140,581, 25,465,543, and 25,193,610 for the fiscal years
ended January 31, 2004, February 1, 2003, and
February 2, 2002, respectively. The weighted-average number
of shares representing the dilutive effect of stock options was
418,960, 481,914 and 695,026 for the fiscal years ended
January 31, 2004, February 1, 2003 and
February 2, 2002, respectively. The weighted-average number
of shares used in the diluted earnings per share computations
was 23,559,541, 25,947,457, and 25,888,636 for the fiscal years
ended January 31, 2004, February 1, 2003 and
February 2, 2002, respectively. There were an immaterial
number of shares withheld in the computation of diluted earnings
per share due to potential anti-dilutive effects for the fiscal
years 2003, 2002 and 2001.

Vendor Allowances:The Company receives certain
allowances from vendors primarily related to purchase discounts
and markdown and damage allowances. All allowances are reflected
in cost of goods sold as earned, generally as the related
products are sold. The Company does not receive cooperative
advertising allowances.

In January 2003, the Emerging Issues Task Force
(EITF) issued EITF 02-16, Accounting by a
Customer (Including a Reseller) for Certain Consideration
Received from a Vendor. Under this EITF, cash
consideration received from a vendor is presumed to be a
reduction of the purchase cost of merchandise and should be
reflected as a reduction of cost of sales or revenue unless it
can be demonstrated this offsets an incremental expense, in
which case it can be netted against that expense. The adoption
of EITF 02-16 did not have a material effect on the
Companys financial position or results of operations for
fiscal year ended January 31, 2004 or February 1, 2003.

Income Taxes:The
Company files a consolidated federal income tax return. Income
taxes are provided based on the asset and liability method of
accounting, whereby deferred income taxes are provided for
temporary differences between the financial reporting basis and
the tax basis of the Companys assets and liabilities.

Store Opening and Closing Costs:Costs relating to the opening of new
stores or the relocating or expanding of existing stores are
expensed as incurred. The Company evaluates all long-lived
assets for impairment. A portion of construction, design, and
site selection costs are capitalized to new, relocated and
remodeled stores.

Closed Store Lease Obligations:At the time stores are closed,
provisions are made for the rentals required to be paid over the
remaining lease terms reduced by sublease rentals.

Insurance:The
Company is self-insured with respect to employee healthcare,
workers compensation and general liability. The
Companys self-insurance liabilities are based on the total
estimated cost of claims filed and estimates of claims incurred
but not reported, less amounts paid against such claims, and are
not discounted. Management reviews current and historical claims
data in developing its estimates. The Company

27



---



##### 



THE CATO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

has stop-loss insurance coverage for individual
claims in excess of $250,000 for employee healthcare, $350,000
for workers compensation and $200,000 for general
liability. Employee health claims are funded through a VEBA
trust to which the Company makes periodic contributions.
Contributions to the VEBA trust were $8,995,000, $8,970,000 and
$9,090,000 in fiscal 2003, 2002 and 2001, respectively. Accrued
healthcare was $1,380,000 and $1,125,000 and assets held in VEBA
trust were $924,000 and $576,000 at January 31, 2004 and
February 1, 2003, respectively. The Company paid
workers compensation and general liability claims of
$3,019,000, $2,609,000 and $3,114,000 in fiscal years 2003, 2002
and 2001, respectively. Including claims incurred, but not yet
paid, the Company recognized an expense of $3,764,000,
$3,284,000 and $3,385,000 in fiscal 2003, 2002 and 2001,
respectively. Accrued workers compensation and general
liabilities was $3,968,000 and $3,222,000 at January 31,
2004 and February 1, 2003, respectively. The Company had no
outstanding letters of credit relating to such claims at
January 31, 2004 or at February 1, 2003.

Fair Value of Financial Instruments:The Companys carrying values of
financial instruments, such as cash, cash equivalents, and debt,
approximate their fair values due to their short terms to
maturity and/or their variable interest rates.

Stock-based Compensation:The Company applies APB Opinion
No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for
its stock option plans. The exercise price for all options
awarded under the Companys Stock Option Plans has been
equal to the fair market value of the underlying common stock on
the date of grant. Accordingly, no compensation expense has been
recognized for options granted under the Plans. Had compensation
expense for fiscal 2003, 2002, and 2001 stock options granted
been determined consistent with SFAS No. 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure, the Companys net income
and basic and diluted earnings per share amounts for fiscal
2003, 2002 and 2001 would approximate the following proforma
amounts (dollars in thousands, except per share data):

|                       |                                                                                                                                                     |             |        |             |   |             |        |        |   |   |        |        |  
|---------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ------ | ----------- | - | ----------- | ------ | ------ | - | - | ------ | ------ | -
|                       |                                                                                                                                                     | January 31, |        | February 1, |   | February 2,
|                       |                                                                                                                                                     | 2004        |        | 2003        |   | 2002       
|                       |                                                                                                                                                     |             |        |             |   |            
|Net Income as Reported |                                                                                                                                                     | $           | 31,389 |             |   | $           | 45,833 |        |   | $ | 43,086 |       
|                       | Add: Stock-Based employee compensation expense
    included in reported net income, net of related tax effects                                      |             |        | 782         |   |             |        | 750    |   |   |        | 295    |  
|                       | Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |             |        | (1,308      | ) |             |        | (1,490 | ) |   |        | (1,888 | )
|                       |                                                                                                                                                     |             |        |             |   |             |        |        |   |   |        |       
|Pro forma Net Income   |                                                                                                                                                     | $           | 30,863 |             |   | $           | 45,093 |        |   | $ | 41,493 |       
|                       |                                                                                                                                                     |             |        |             |   |             |        |        |   |   |        |       
|Earnings per share:    |                                                                                                                                                     |             |        |             |   |             |        |        |   |   |        |       
|                       | Basic  as reported                                                                                                                                 |             | $      | 1.36        |   |             | $      | 1.80   |   |   | $      | 1.71   |  
|                       | Basic  pro forma                                                                                                                                   |             | $      | 1.33        |   |             | $      | 1.77   |   |   | $      | 1.65   |  
|                       | Diluted  as reported                                                                                                                               |             | $      | 1.33        |   |             | $      | 1.77   |   |   | $      | 1.66   |  
|                       | Diluted  pro forma                                                                                                                                 |             | $      | 1.30        |   |             | $      | 1.74   |   |   | $      | 1.60   |  

The weighted-average fair value of each option
granted during fiscal 2003, 2002 and 2001 is estimated at $5.84,
$8.29 and $8.19 per share, respectively. The fair value of each
option grant is estimated using the Black-Scholes option-pricing
model with the following assumptions for grants issued in 2003,
2002 and 2001, respectively: expected dividend yield of 3.01%,
3.29% and 2.62%; expected volatility of 44.34%, 57.06% and
59.84%, adjusted for expected dividends; risk-free interest rate
of 3.29%, 2.60% and 4.36%; and an expected life of 5 years
for 2003, 2002 and 2001. The effects of applying SFAS 148 in
this proforma disclosure are not indicative of future amounts.

28



---



##### 



THE CATO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Recent Accounting Pronouncements

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 annual disclosure requirements of SFAS
No. 123 are effective for fiscal years ending after
December 15, 2002. The implementation of this Statement did
not affect the Companys financial position or results of
operations and the Companys adopted the disclosure
requirements beginning with the first quarter of fiscal 2003.

In March 2003, the Emerging Issues Task Force
(EITF) reached a final consensus on Issue No. 02-16,
Accounting by a Customer (Including a Reseller) for Cash
Considerations Received from a Vendor. EITF Issue
No. 02-16 provides guidance on how cash considerations
received by a customer or reseller should be classified in the
customers statement of earnings. EITF Issue No. 02-16
is effective for all transactions with vendors after
December 31, 2002. The adoption of EITF Issue
No. 02-16 did not have a material impact on the
Companys consolidated financial position or results of
operations.

Reclassifications:Certain reclassifications have been
made to the consolidated financial statements for prior fiscal
years to conform with presentation for fiscal 2003.

2.     Interest and
Other Income, Net

The components of Interest and other income, net
are shown below in gross amounts (in thousands):

|                               |  |             |        |             |  |             |        |   |  |   |        |  
|------------------------------ |  | ----------- | ------ | ----------- |  | ----------- | ------ | - |  | - | ------ | -
|                               |  | January 31, |        | February 1, |  | February 2,
|                               |  | 2004        |        | 2003        |  | 2002       
|                               |  |             |        |             |  |            
|Dividend income                |  | $           | (2     | )           |  | $           | (10    | ) |  | $ | (10    | )
|Interest income                |  |             | (1,704 | )           |  |             | (3,046 | ) |  |   | (4,316 | )
|Miscellaneous income           |  |             | (1,235 | )           |  |             | (2,342 | ) |  |   | (2,011 | )
|Interest expense               |  |             | 306    |             |  |             | 21     |   |  |   | 38     |  
|(Gain)/loss investment sales   |  |             | (673   | )           |  |             | 1,697  |   |  |   | 0      |  
|                               |  |             |        |             |  |             |        |   |  |   |        |  
|Interest and other income, net |  | $           | (3,308 | )           |  | $           | (3,680 | ) |  | $ | (6,299 | )
|                               |  |             |        |             |  |             |        |   |  |   |        |  

29



---



##### 



THE CATO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

3.     Short-Term
Investments:

Short-Term investments at January 31, 2004
and February 1, 2003 include the following (in thousands):

|                                                                                                    |                        |                  |        |                  |  |            |      |      |   |             |        |            |  |   |        |        |  |   |     |      |   |   |        |        | 
|--------------------------------------------------------------------------------------------------- | ---------------------- | ---------------- | ------ | ---------------- |  | ---------- | ---- | ---- | - | ----------- | ------ | ---------- |  | - | ------ | ------ |  | - | --- | ---- | - | - | ------ | ------ | 
|                                                                                                    |                        |                  |        |                 
|                                                                                                    |                        | January 31, 2004 |        | February 1, 2003
|                                                                                                    |                        |                  |        |                 
|                                                                                                    |                        |                  |        | Unrealized       |  | Estimated  |      |      |   | Unrealized  |        | Estimated 
|Security Type:                                                                                      |                        | Cost             |        | Gain/(Loss)      |  | Fair Value |      | Cost |   | Gain/(Loss) |        | Fair Value
|                                                                                                    |                        |                  |        |                  |  |            |      |      |   |             |        |           
|Debt Securities issued by U.S.
    Treasury & other U.S. government corporations and
    agencies:  |                        |                  |        |                  |  |            |      |      |   |             |        |            |  |   |        |        |  |   |     |      |   |   |        |       
|                                                                                                    | With unrealized gain   |                  | $      |                 |  |            | $    |     |   |             | $      |           |  |   | $      | 1,000  |  |   | $   | 87   |   |   | $      | 1,087  | 
|Debt Securities issued by states of the United
    States and political subdivisions of the states: |                        |                  |        |                  |  |            |      |      |   |             |        |            |  |   |        |        |  |   |     |      |   |   |        |       
|                                                                                                    | With unrealized gain   |                  |        | 37,777           |  |            |      | 146  |   |             |        | 37,923     |  |   |        | 36,355 |  |   |     | 443  |   |   |        | 36,798 | 
|                                                                                                    | With unrealized (loss) |                  |        | 7,500            |  |            |      | (345 | ) |             |        | 7,155      |  |   |        | 26,643 |  |   |     | (244 | ) |   |        | 26,399 | 
|Corporate debt securities:                                                                          |                        |                  |        |                  |  |            |      |      |   |             |        |            |  |   |        |        |  |   |     |      |   |   |        |       
|                                                                                                    | With unrealized gain   |                  |        |                 |  |            |      |     |   |             |        |           |  |   |        | 3,626  |  |   |     | 128  |   |   |        | 3,754  | 
|                                                                                                    | With unrealized (loss) |                  |        | 2,500            |  |            |      | (33  | ) |             |        | 2,467      |  |   |        | 6,833  |  |   |     |     |   |   |        | 6,833  | 
|                                                                                                    |                        |                  |        |                  |  |            |      |      |   |             |        |            |  |   |        |        |  |   |     |      |   |   |        |       
|Total                                                                                               |                        | $                | 47,777 |                  |  | $          | (232 | )    |   | $           | 47,545 |            |  | $ | 74,457 |        |  | $ | 414 |      |   | $ | 74,871 |       
|                                                                                                    |                        |                  |        |                  |  |            |      |      |   |             |        |            |  |   |        |        |  |   |     |      |   |   |        |       

The accumulated unrealized gains in short-term
investments at January 31, 2004 of $148,000, net of a
deferred income tax liability of $84,000 offset by the
accumulated unrealized losses in equity investments of $206,000,
net of a deferred income tax benefit of $117,000 and the
accumulated unrealized gains of February 1, 2003 of
$265,000, net of a deferred income tax liability of $149,000
offset by the accumulated unrealized losses in equity
investments of $12,000 net of a deferred income tax benefit of
$6,000 are reflected in accumulated other comprehensive gains
(losses) in the Consolidated Balance Sheets. All unrealized
losses disclosed were in a loss position for less than
12 months.

The Companys short-term investments are all
classified as available-for-sale. As they are available for
current operations, they are classified in 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 Interest and other income, net.

As reported in our footnote 2 to our financial
statements, the Company had realized gains of $673 in fiscal
2003 and realized losses of $1,697 in fiscal 2002.

30



---



##### 



THE CATO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The amortized cost and estimated fair value of
debt securities at January 31, 2004, by contractual
maturity, are shown below (in thousands):

|                                    |  |      |        |            |  |   |        | 
|----------------------------------- |  | ---- | ------ | ---------- |  | - | ------ | 
|                                    |  |      |        | Estimated 
|Security Type                       |  | Cost |        | Fair Value
|                                    |  |      |        |           
|Due in one year or less             |  | $    | 8,621  |            |  | $ | 8,605  | 
|Due in one year through three years |  |      | 39,156 |            |  |   | 38,940 | 
|                                    |  |      |        |            |  |   |        | 
|Total                               |  | $    | 47,777 |            |  | $ | 47,545 | 
|                                    |  |      |        |            |  |   |        | 

Additionally, the Company had $1.6 million
invested in privately managed investment funds at
January 31, 2004, which are reported under other assets in
the Consolidated Balance Sheets.

4.     Accounts
Receivable:

Accounts receivable consist of the following (in
thousands):

|                                                              |  |             |        |             |  |   |        | 
|------------------------------------------------------------- |  | ----------- | ------ | ----------- |  | - | ------ | 
|                                                              |  | January 31, |        | February 1,
|                                                              |  | 2004        |        | 2003       
|                                                              |  |             |        |            
|Customer accounts  principally
    deferred payment accounts |  | $           | 55,480 |             |  | $ | 56,853 | 
|Miscellaneous trade receivables                               |  |             | 3,569  |             |  |   | 3,362  | 
|                                                              |  |             |        |             |  |   |        | 
|Total                                                         |  |             | 59,049 |             |  |   | 60,215 | 
|Less allowance for doubtful accounts                          |  |             | 6,335  |             |  |   | 6,099  | 
|                                                              |  |             |        |             |  |   |        | 
|Accounts receivable  net                                     |  | $           | 52,714 |             |  | $ | 54,116 | 
|                                                              |  |             |        |             |  |   |        | 

Finance charge and late charge revenue on
customer deferred payment accounts totaled $14,169,000,
$13,672,000 and $12,951,000 for the fiscal years ended
January 31, 2004, February 1, 2003 and
February 2, 2002, respectively, and the allowance for
doubtful accounts was $6,098,000, $4,764,000 and $5,913,000, for
the fiscal years ended January 31, 2004, February 1,
2003 and February 2, 2002, respectively. The allowance for
doubtful accounts is classified as a component of selling,
general and administrative expenses in the accompanying
Consolidated Statements of Income.

5.     Property and
Equipment:

Property and equipment consist of the following
(in thousands):

|                                 |  |             |         |             |  |   |         | 
|-------------------------------- |  | ----------- | ------- | ----------- |  | - | ------- | 
|                                 |  | January 31, |         | February 1,
|                                 |  | 2004        |         | 2003       
|                                 |  |             |         |            
|Land and improvements            |  | $           | 2,019   |             |  | $ | 2,019   | 
|Buildings                        |  |             | 17,751  |             |  |   | 17,751  | 
|Leasehold improvements           |  |             | 39,354  |             |  |   | 34,697  | 
|Fixtures, equipment and software |  |             | 155,394 |             |  |   | 143,080 | 
|Construction in progress         |  |             | 2,534   |             |  |   | 2,246   | 
|                                 |  |             |         |             |  |   |         | 
|Total                            |  |             | 217,052 |             |  |   | 199,793 | 
|Less accumulated depreciation    |  |             | 102,685 |             |  |   | 86,486  | 
|                                 |  |             |         |             |  |   |         | 
|Property and equipment  net     |  | $           | 114,367 |             |  | $ | 113,307 | 
|                                 |  |             |         |             |  |   |         | 

Construction in progress primarily represents
investments in technology and a carton sortation system for the
distribution center scheduled to be implemented over the next
12 months.

31



---



##### 



THE CATO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

6.     Accrued
Expenses:

Accrued expenses consist of the following (in
thousands):

|                                                            |  |             |        |             |  |   |        | 
|----------------------------------------------------------- |  | ----------- | ------ | ----------- |  | - | ------ | 
|                                                            |  | January 31, |        | February 1,
|                                                            |  | 2004        |        | 2003       
|                                                            |  |             |        |            
|Accrued bonus and retirement savings plan
    contributions |  | $           | 2,784  |             |  | $ | 6,233  | 
|Accrued payroll and related items                           |  |             | 4,348  |             |  |   | 4,265  | 
|Accrued advertising                                         |  |             | 976    |             |  |   | 762    | 
|Closed store lease obligations                              |  |             | 616    |             |  |   | 1,004  | 
|Property and other taxes                                    |  |             | 8,719  |             |  |   | 7,593  | 
|Accrued insurance                                           |  |             | 5,348  |             |  |   | 4,347  | 
|Other                                                       |  |             | 5,024  |             |  |   | 4,572  | 
|                                                            |  |             |        |             |  |   |        | 
|Total                                                       |  | $           | 27,815 |             |  | $ | 28,776 | 
|                                                            |  |             |        |             |  |   |        | 

7.     Financing
Arrangements:

At January 31, 2004, the Company had an
unsecured revolving credit agreement which provided for
borrowings of up to $35 million. A new revolving credit
agreement was entered into on August 22, 2003 and is
committed until August 2006. The credit agreement contains
various financial covenants and limitations, including the
maintenance of specific financial ratios with which the Company
was in compliance as of January 31, 2004. There were no
borrowings outstanding during the fiscal year ended
January 31, 2004 or February 1, 2003. Interest is
based on LIBOR, which was 1.10% on January 31, 2004.

On August 22, 2003, the Company entered into
a new unsecured $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, which was 1.10% on January 31, 2004.

The Company had approximately $5,365,000 and
$6,496,000 at January 31, 2004 and February 1, 2003,
respectively, of outstanding irrevocable letters of credit
relating to purchase commitments.

8.     Stockholders
Equity:

The holders of Class A Common Stock are
entitled to one vote per share, whereas the holders of
Class B Common Stock are entitled to ten votes per share.
Each share of Class B Common Stock may be converted at any
time into one share of Class A Common Stock. Subject to the
rights of the holders of any shares of Preferred Stock that may
be outstanding at the time, in the event of liquidation,
dissolution or winding up of the Company, holders of
Class A Common Stock are entitled to receive a preferential
distribution of $1.00 per share of the net assets of the
Company. Cash dividends on the Class B Common Stock cannot
be paid unless cash dividends of at least an equal amount are
paid on the Class A Common Stock.

The Companys charter provides that shares
of Class B Common Stock may be transferred only to certain
Permitted Transferees consisting generally of the
lineal descendants of holders of Class B Stock, trusts for
their benefit, corporations and partnerships controlled by them
and the Companys employee benefit plans. Any transfer of
Class B Common Stock in violation of these restrictions,
including a transfer to the Company, results in the automatic
conversion of the transferred shares of Class B Common
Stock held by the transferee into an equal number of shares of
Class A Common Stock.

During 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,

32



---



##### 



THE CATO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 for a total
cost of $95,043,454. Including related expenses of $520,000 for
investment banking and related professional fees, the total cost
was $95,563,454 or an average purchase price of $18.60 per
share. The repurchase 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. The
LIBOR rate at January 31, 2004 was 1.10%. Additionally,
during 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.

In October 1993, the Company registered 250,000
shares of Class A Common Stock available for issuance under
an Employee Stock Purchase Plan (the Plan). In May
1998, the shareholders approved an amendment to the Plan to
increase the maximum number of Class A shares of Common
Stock authorized to be issued from 250,000 to 500,000 shares.
The 1993 Plan expired October 1, 2003. In May
2003, the shareholders approved a new 2003 Employee Stock
Purchase Plan with 250,000 Class A shares of Common Stock
authorized. Under the terms of the Plan, substantially all
employees may purchase Class A Common Stock through payroll
deductions of up to 10% of their salary, up to a maximum market
value of $25,000 per year. The Class A Common Stock is
purchased at the lower of 85% of market value on the first or
last business day of a six-month payment period. Additionally,
each April 15, employees are given the opportunity to make
a lump sum purchase of up to $10,000 of Class A Common
Stock at 85% of market value. The number of shares purchased by
participants through the plan were 28,306 shares, 32,487 shares
and 38,463 shares for the years ended January 31, 2004,
February 1, 2003 and February 2, 2002, respectively.

In December 2003, the Board of Directors
authorized a dividend of one preferred share purchase right (a
Right) for each share of Class A Common Stock
and Class B Common Stock, each par value $.03 1/3 per
share (Common Shares), of the Company outstanding at
the close of business on January 7, 2004 (the Record
Date). In connection with the authorization of Rights, the
Company entered into a Rights Agreement, dated as of
December 18, 2003 (the Rights Agreement), with
Wachovia Bank, National Association, a national banking
association, as Rights Agent (the Rights Agent).

The Company has an Incentive Stock Option Plan
and a Non-Qualified Stock Option Plan for key employees of the
Company. Total shares issuable under the plans are 3,900,000, of
which 825,000 shares are issuable under the Incentive Stock
Option Plan and 3,075,000 shares are issuable under the
Non-Qualified Stock Option Plan. The purchase price of the
shares under the option must be at least 100 percent of the
fair market value of Class A Common Stock at the date of
the grant. Options granted under these plans vest over a 5-year
period and expire 10 years after the date of the grant
unless otherwise expressly authorized by the Board of Directors.

In August 1999, the Board of Directors adopted
the 1999 Incentive Compensation Plan, of which 1,000,000 shares
are issuable. No awards may be granted after July 31, 2004
and shares must be exercised within 10 years of the grant
date unless otherwise authorized by the Board of Directors.

In August 1999, the Board of Directors granted
under the 1999 Incentive Compensation Plan, restricted stock
awards of 100,000 shares of Class B Common Stock, with a
per share fair value of $11.81 to a key executive. In May 2002,
the Board of Directors approved and granted under the 1999
Incentive Compensation Plan restricted stock awards of 100,000
shares of Class B Common Stock, with a per share fair value
of $27.31 to a key executive. These stock awards cliff vest
after four years and the unvested portion is included in
stockholders equity as unearned compensation in the
accompanying financial statements. The charge to compensation
expense for these stock awards was $782,000, $750,000 and
$295,000 in fiscal 2003, 2002 and 2001, respectively.

33



---



##### 



THE CATO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Option plan activity for the three fiscal years
ended January 31, 2004 is set forth below:

|                     |                  |         |  |               |   |          |   |                |  |  |   |       | 
|-------------------- | ---------------- | ------- |  | ------------- | - | -------- | - | -------------- |  |  | - | ----- | 
|                     |                  |         |  |               |   | Weighted
|                     |                  |         |  | Range of      |   | Average 
|                     |                  | Options |  | Option Prices |   | Price   
|                     |                  |         |  |               |   |         
|Outstanding options, |                  |         |  |               |   |          |   |                |  |  |   |      
|                     | February 3, 2001 |         |  | 2,537,382     |   |          | $ | 4.94  $14.59  |  |  | $ | 9.68  | 
|                     | Granted          |         |  | 21,750        |   |          |   | 12.66   18.91 |  |  |   | 16.17 | 
|                     | Exercised        |         |  | (778,182      | ) |          |   | 4.94   14.59  |  |  |   | 8.20  | 
|                     | Cancelled        |         |  | (25,700       | ) |          |   | 7.69   14.59  |  |  |   | 11.61 | 
|                     |                  |         |  |               |   |          |   |                |  |  |   |      
|Outstanding options, |                  |         |  |               |   |          |   |                |  |  |   |      
|                     | February 2, 2002 |         |  | 1,755,250     |   |          |   | 4.94   18.91  |  |  |   | 10.39 | 
|                     | Granted          |         |  | 45,500        |   |          |   | 18.05   26.76 |  |  |   | 20.89 | 
|                     | Exercised        |         |  | (344,100      | ) |          |   | 4.94   17.63  |  |  |   | 8.11  | 
|                     | Cancelled        |         |  | (14,700       | ) |          |   | 8.25   12.28  |  |  |   | 11.27 | 
|                     |                  |         |  |               |   |          |   |                |  |  |   |      
|Outstanding options, |                  |         |  |               |   |          |   |                |  |  |   |      
|                     | February 1, 2003 |         |  | 1,441,950     |   |          |   | 4.94   26.76  |  |  |   | 11.20 | 
|                     | Granted          |         |  | 19,500        |   |          |   | 16.65   21.29 |  |  |   | 17.66 | 
|                     | Exercised        |         |  | (288,250      | ) |          |   | 4.94   18.86  |  |  |   | 9.94  | 
|                     | Cancelled        |         |  | (18,800       | ) |          |   | 8.25   18.86  |  |  |   | 12.75 | 
|                     |                  |         |  |               |   |          |   |                |  |  |   |      
|Outstanding options, |                  |         |  |               |   |          |   |                |  |  |   |      
|                     | January 31, 2004 |         |  | 1,154,400     |   |          | $ | 5.13  $26.76  |  |  | $ | 11.54 | 
|                     |                  |         |  |               |   |          |   |                |  |  |   |      

The following tables summarize stock option
information at January 31, 2004:

| |  |                 |                |                     |  |                  |           |                |  |  |            |  |  |   |       | 
| |  | --------------- | -------------- | ------------------- |  | ---------------- | --------- | -------------- |  |  | ---------- |  |  | - | ----- | 
| |  |                 |                |                    
| |  |                 |                | Options Outstanding
| |  |                 |                |                    
| |  |                 |                |                     |  | Weighted Average |           | Weighted      
| |  | Range of        |                |                     |  | Remaining        |           | Average       
| |  | Exercise Prices |                | Options             |  | Contractual Life |           | Exercise Price
| |  |                 |                |                     |  |                  |           |               
| |  | $               | 5.13  $ 7.69  |                     |  |                  | 57,300    |                |  |  | 1.27 years |  |  | $ | 7.67  | 
| |  |                 | 8.25    9.59  |                     |  |                  | 364,000   |                |  |  | 3.63 years |  |  |   | 8.28  | 
| |  |                 | 10.66   12.72 |                     |  |                  | 287,600   |                |  |  | 5.66 years |  |  |   | 12.44 | 
| |  |                 | 13.06   26.76 |                     |  |                  | 445,500   |                |  |  | 5.32 years |  |  |   | 14.12 | 
| |  |                 |                |                     |  |                  |           |                |  |  |            |  |  |   |       | 
| |  | $               | 5.13  $26.76  |                     |  |                  | 1,154,400 |                |  |  | 4.67 years |  |  | $ | 11.54 | 
| |  |                 |                |                     |  |                  |           |                |  |  |            |  |  |   |       | 

| |  |                 |                |                     |  |                |         |  |  |   |       | 
| |  | --------------- | -------------- | ------------------- |  | -------------- | ------- |  |  | - | ----- | 
| |  |                 |                |                    
| |  |                 |                | Options Exercisable
| |  |                 |                |                    
| |  |                 |                |                     |  | Weighted      
| |  | Range of        |                |                     |  | Average       
| |  | Exercise Prices |                | Options             |  | Exercise Price
| |  |                 |                |                     |  |               
| |  | $               | 5.13  $ 7.69  |                     |  |                | 57,300  |  |  | $ | 7.67  | 
| |  |                 | 8.25    9.59  |                     |  |                | 357,800 |  |  |   | 8.26  | 
| |  |                 | 10.66   12.72 |                     |  |                | 190,400 |  |  |   | 12.46 | 
| |  |                 | 13.06   26.76 |                     |  |                | 352,750 |  |  |   | 13.34 | 
| |  |                 |                |                     |  |                |         |  |  |   |       | 
| |  | $               | 5.13  $26.76  |                     |  |                | 958,250 |  |  | $ | 10.93 | 
| |  |                 |                |                     |  |                |         |  |  |   |       | 

34



---



##### 



THE CATO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Outstanding options at January 31, 2004
covered 702,000 shares of Class B Common Stock and 452,400
shares of Class A Common Stock. Outstanding options at
February 1, 2003 covered 717,000 shares of Class B
Common Stock and 724,950 shares of Class A Common Stock.
Options available to be granted under the option plans were
406,600 at January 31, 2004 and 421,618 at February 1,
2003.

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

Total comprehensive income for the years ended
January 31, 2004, February 1, 2003 and
February 2, 2002 is as follows (in thousands):

|                                                               |  |             |        |             |  |             |        |   |  |   |        |  
|-------------------------------------------------------------- |  | ----------- | ------ | ----------- |  | ----------- | ------ | - |  | - | ------ | -
|                                                               |  | January 31, |        | February 1, |  | February 2,
|Fiscal Year Ended                                              |  | 2004        |        | 2003        |  | 2002       
|                                                               |  |             |        |             |  |            
|Net income                                                     |  | $           | 31,389 |             |  | $           | 45,833 |   |  | $ | 43,086 |  
|Unrealized gains (losses) on
    available-for-sale securities |  |             | (306   | )           |  |             | 1,268  |   |  |   | 488    |  
|Income tax effect                                              |  |             | 111    |             |  |             | (448   | ) |  |   | (171   | )
|                                                               |  |             |        |             |  |             |        |   |  |   |        |  
|Unrealized gains (losses) net of taxes                         |  |             | (195   | )           |  |             | 820    |   |  |   | 317    |  
|                                                               |  |             |        |             |  |             |        |   |  |   |        |  
|Total comprehensive income                                     |  | $           | 31,194 |             |  | $           | 46,653 |   |  | $ | 43,403 |  
|                                                               |  |             |        |             |  |             |        |   |  |   |        |  

The net unrealized gain/loss on investments held
reflected in comprehensive income for the periods presented were
net of reclassification adjustments for gains/(losses) reported
in income in the amounts of $429, ($1,083) and $0 for fiscal
years 2003, 2002 and 2001, respectively, net of income taxes.

9.     Employee
Benefit Plans:

The Company has a defined contribution retirement
savings plan (401(k)) which covers all employees who meet
minimum age and service requirements. The 401(k) plan allows
participants to contribute up to 60% of their annual
compensation up to the maximum elective deferral, designated by
the IRS. The Company is obligated to make a minimum contribution
to cover plan administrative expenses. Further Company
contributions are at the discretion of the Board of Directors.
The Companys contributions for the years ended
January 31, 2004, February 1, 2003 and
February 2, 2002 were approximately $1,764,000, $1,906,000
and $2,596,000, respectively.

The Company has an Employee Stock Ownership Plan
(ESOP), which covers substantially all employees who meet
minimum age and service requirements. The Board of Directors
determines contributions to the ESOP. No contributions were made
to the ESOP for the years ended January 31, 2004,
February 1, 2003 or February 2, 2002.

The Company is primarily self-insured for
healthcare, workers compensation and general liability
costs. These costs are significant primarily due to the large
number of the Companys retail locations and employees. The
Companys self-insurance liabilities are based on the total
estimated costs of claims filed and estimates of claims incurred
but not reported, less amounts paid against such claims, and are
not discounted. Management reviews current and historical claims
data in developing its estimates. If the underlying facts and
circumstances of the claims change or the historical trend is
not indicative of future trends, then the Company may be
required to record additional expense or a reduction to expense
which could be material to the reported financial condition and
results of operations. The Company has stop-loss insurance
coverage for individual claims in excess of $250,000. Employee
health claims are funded through a VEBA trust to which the
Company makes periodic contributions. Contributions to the VEBA
trust were $8,995,000, $8,970,000 and $9,090,000 in fiscal 2003,
2002 and 2001, respectively. Accrued healthcare was $1,380,000
and $1,125,000 and assets held in the VEBA trust were $924,000
and $576,000 at January 31, 2004 and February 1, 2003,
respectively.

35



---



##### 



THE CATO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

10.     Leases:

The Company has operating lease arrangements for
store facilities and equipment. Facility leases generally are
fixed rate for periods of five years with renewal options and
most provide for additional contingent rentals based on a
percentage of store sales in excess of stipulated amounts. For
leases with landlord capital improvement funding, the funded
amount is booked as a deferred liability and amortized over the
term of the lease. Equipment leases are generally for one to
three year periods.

The minimum rental commitments under
non-cancelable operating leases are (in thousands):

|                             |  |   |         | 
|---------------------------- |  | - | ------- | 
|Fiscal Year                  |  |  
|                             |  |  
|2004                         |  | $ | 40,482  | 
|2005                         |  |   | 32,488  | 
|2006                         |  |   | 25,167  | 
|2007                         |  |   | 16,249  | 
|2008                         |  |   | 6,740   | 
|                             |  |   |         | 
|Total minimum lease payments |  | $ | 121,126 | 
|                             |  |   |         | 

The following schedule shows the composition of
total rental expense for all leases (in thousands):

|                     |  |             |        |             |  |             |        |  |  |   |        | 
|-------------------- |  | ----------- | ------ | ----------- |  | ----------- | ------ |  |  | - | ------ | 
|                     |  | January 31, |        | February 1, |  | February 2,
|Fiscal Year Ended    |  | 2004        |        | 2003        |  | 2002       
|                     |  |             |        |             |  |            
|Minimum rentals      |  | $           | 39,998 |             |  | $           | 37,848 |  |  | $ | 37,117 | 
|Contingent rent      |  |             | 165    |             |  |             | 389    |  |  |   | 471    | 
|                     |  |             |        |             |  |             |        |  |  |   |        | 
|Total rental expense |  | $           | 40,163 |             |  | $           | 38,237 |  |  | $ | 37,588 | 
|                     |  |             |        |             |  |             |        |  |  |   |        | 

11.     Related Party
Transactions:

The Company leases certain of its stores from
entities in which Mr. George S. Currin, a director of the
Company, has an ownership interest. Rent expense and related
charges totaling $872,607, $883,367, and $785,936 were paid in
fiscal 2003, 2002 and 2001, respectively, under these leases.

During 2000, 2001, 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 its internal controls to prevent
the payment of similar expenses in the future. As a result of
this change, any payment requests for or on behalf of related
parties require the prior review by and approval of the Chief
Financial Officer.

36



---



##### 



THE CATO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

12.     Income
Taxes:

The provision for income taxes consists of the
following (in thousands):

|                         |         |             |        |             |  |             |        |        |  |   |        |        | 
|------------------------ | ------- | ----------- | ------ | ----------- |  | ----------- | ------ | ------ |  | - | ------ | ------ | 
|                         |         | January 31, |        | February 1, |  | February 2,
|Fiscal Year Ended        |         | 2004        |        | 2003        |  | 2002       
|                         |         |             |        |             |  |            
|Current income taxes:    |         |             |        |             |  |             |        |        |  |   |        |       
|                         | Federal |             | $      | 12,550      |  |             | $      | 24,572 |  |   | $      | 22,309 | 
|                         | State   |             |        | 337         |  |             |        | 1,364  |  |   |        | 469    | 
|                         |         |             |        |             |  |             |        |        |  |   |        |       
|                         | Total   |             |        | 12,887      |  |             |        | 25,936 |  |   |        | 22,778 | 
|                         |         |             |        |             |  |             |        |        |  |   |        |       
|Deferred income taxes:   |         |             |        |             |  |             |        |        |  |   |        |       
|                         | Federal |             |        | 4,457       |  |             |        | 63     |  |   |        | 376    | 
|                         | State   |             |        | 544         |  |             |        | 7      |  |   |        | 46     | 
|                         |         |             |        |             |  |             |        |        |  |   |        |       
|                         | Total   |             |        | 5,001       |  |             |        | 70     |  |   |        | 422    | 
|                         |         |             |        |             |  |             |        |        |  |   |        |       
|Total income tax expense |         | $           | 17,888 |             |  | $           | 26,006 |        |  | $ | 23,200 |       
|                         |         |             |        |             |  |             |        |        |  |   |        |       

Significant components of the Companys
deferred tax assets and liabilities as of January 31, 2004
and February 1, 2003 are as follows (in thousands):

|                             |                                            |                                |       |             |        |   |       |        |        | 
|---------------------------- | ------------------------------------------ | ------------------------------ | ----- | ----------- | ------ | - | ----- | ------ | ------ | 
|                             |                                            | January 31,                    |       | February 1,
|                             |                                            | 2004                           |       | 2003       
|                             |                                            |                                |       |            
|Deferred tax assets:         |                                            |                                |       |             |        |   |       |       
|                             | Bad debt reserve                           |                                | $     | 2,426       |        |   | $     | 2,338  |       
|                             | Inventory valuation                        |                                |       | 946         |        |   |       | 1,739  |       
|                             | Write-down of short-term investments       |                                |       |            |        |   |       | 669    |       
|                             | Restricted stock options                   |                                |       | 428         |        |   |       | 407    |       
|                             | Capital loss carryover                     |                                |       | 669         |        |   |       |       |       
|                             | Reserves                                   |                                |       | 3,872       |        |   |       | 2,972  |       
|Other, net                   |                                            |                                | 764   |             |        |   |      |       
|                             |                                            |                                |       |             |        |   |       |       
|                             |                                            | Total deferred tax assets      |       |             | 9,105  |   |       |        | 8,125  | 
|                             |                                            |                                |       |             |        |   |       |       
|Deferred tax liabilities:    |                                            |                                |       |             |        |   |       |       
|                             | Tax over book depreciation                 |                                |       | 17,974      |        |   |       | 11,682 |       
|                             | Unrealized gains on short-term investments |                                |       | 33          |        |   |       | 143    |       
|Other, net                   |                                            |                                | 1,017 |             |        |   | 1,218 |       
|                             |                                            |                                |       |             |        |   |       |       
|                             |                                            | Total deferred tax liabilities |       |             | 19,024 |   |       |        | 13,043 | 
|                             |                                            |                                |       |             |        |   |       |       
|Net deferred tax liabilities |                                            | $                              | 9,919 |             |        | $ | 4,918 |       
|                             |                                            |                                |       |             |        |   |       |       

Certain of the Companys deferred tax assets
have a limited life and realization of these assets is not
assured. The capital loss carryover expires in 2008.

37



---



##### 



THE CATO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The reconciliation of the Companys
effective income tax rate with the statutory rate is as follows:

|                          |  |             |      |             |  |             |      |   |  |  |      |  
|------------------------- |  | ----------- | ---- | ----------- |  | ----------- | ---- | - |  |  | ---- | -
|                          |  | January 31, |      | February 1, |  | February 2,
|Fiscal Year Ended         |  | 2004        |      | 2003        |  | 2002       
|                          |  |             |      |             |  |            
|Federal income tax rate   |  |             | 35.0 | %           |  |             | 35.0 | % |  |  | 35.0 | %
|State income taxes        |  |             | 1.3  |             |  |             | 1.2  |   |  |  | 0.9  |  
|Other                     |  |             | 0.0  |             |  |             | 0.0  |   |  |  | (0.9 | )
|                          |  |             |      |             |  |             |      |   |  |  |      |  
|Effective income tax rate |  |             | 36.3 | %           |  |             | 36.2 | % |  |  | 35.0 | %
|                          |  |             |      |             |  |             |      |   |  |  |      |  

13.     Quarterly
Financial Data (Unaudited):

Summarized quarterly financial results are as
follows (in thousands, except per share data):

|                           |  |       |         |        |  |       |         |        |  |   |         |  |  |   |         | 
|-------------------------- |  | ----- | ------- | ------ |  | ----- | ------- | ------ |  | - | ------- |  |  | - | ------- | 
|Fiscal 2003                |  | First |         | Second |  | Third |         | Fourth
|                           |  |       |         |        |  |       |         |       
|Retail sales               |  | $     | 197,304 |        |  | $     | 188,218 |        |  | $ | 153,171 |  |  | $ | 193,077 | 
|Total revenues             |  |       | 201,210 |        |  |       | 191,993 |        |  |   | 157,129 |  |  |   | 196,935 | 
|Cost of goods sold         |  |       | 126,998 |        |  |       | 132,616 |        |  |   | 108,557 |  |  |   | 140,230 | 
|Gross margin               |  |       | 70,306  |        |  |       | 55,602  |        |  |   | 44,614  |  |  |   | 52,847  | 
|Income before income taxes |  |       | 27,444  |        |  |       | 12,137  |        |  |   | 1,251   |  |  |   | 8,445   | 
|Net income                 |  |       | 17,482  |        |  |       | 7,731   |        |  |   | 797     |  |  |   | 5,379   | 
|Basic earnings per share   |  | $     | .69     |        |  | $     | .30     |        |  | $ | .04     |  |  | $ | .26     | 
|Diluted earnings per share |  | $     | .68     |        |  | $     | .30     |        |  | $ | .04     |  |  | $ | .26     | 

|                           |  |       |         |        |  |       |         |        |  |   |         |  |  |   |         | 
|-------------------------- |  | ----- | ------- | ------ |  | ----- | ------- | ------ |  | - | ------- |  |  | - | ------- | 
|Fiscal 2002                |  | First |         | Second |  | Third |         | Fourth
|                           |  |       |         |        |  |       |         |       
|Retail sales               |  | $     | 196,617 |        |  | $     | 186,900 |        |  | $ | 158,217 |  |  | $ | 191,008 | 
|Total revenues             |  |       | 200,491 |        |  |       | 190,715 |        |  |   | 162,228 |  |  |   | 194,897 | 
|Cost of goods sold         |  |       | 124,460 |        |  |       | 125,854 |        |  |   | 110,188 |  |  |   | 135,843 | 
|Gross margin               |  |       | 72,157  |        |  |       | 61,046  |        |  |   | 48,029  |  |  |   | 55,165  | 
|Income before income taxes |  |       | 28,683  |        |  |       | 19,213  |        |  |   | 8,507   |  |  |   | 15,436  | 
|Net income                 |  |       | 18,300  |        |  |       | 12,258  |        |  |   | 5,427   |  |  |   | 9,848   | 
|Basic earnings per share   |  | $     | .72     |        |  | $     | .48     |        |  | $ | .21     |  |  | $ | .39     | 
|Diluted earnings per share |  | $     | .71     |        |  | $     | .47     |        |  | $ | .21     |  |  | $ | .38     | 

14.     Reportable
Segment Information:

The Company has two reportable segments: retail
and credit. The Company operates its womens fashion
specialty retail stores in 28 states, principally in
southeastern United States. The Company offers its own credit
card to its customers and all credit authorizations, payment
processing, and collection efforts are performed by a separate
subsidiary of the Company.

38



---



##### 



THE CATO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following schedule summarizes certain segment
information (in thousands):

|                               |  |        |         |        |  |       |        |  |  |   |         |  
|------------------------------ |  | ------ | ------- | ------ |  | ----- | ------ |  |  | - | ------- | -
|Fiscal 2003                    |  | Retail |         | Credit |  | Total
|                               |  |        |         |        |  |      
|Revenues                       |  | $      | 732,796 |        |  | $     | 14,471 |  |  | $ | 747,267 |  
|Depreciation                   |  |        | 18,617  |        |  |       | 78     |  |  |   | 18,695  |  
|Interest and other income, net |  |        | (3,308  | )      |  |       |       |  |  |   | (3,308  | )
|Income before taxes            |  |        | 44,553  |        |  |       | 4,724  |  |  |   | 49,277  |  
|Total assets                   |  |        | 289,200 |        |  |       | 62,373 |  |  |   | 351,573 |  
|Capital expenditures           |  |        | 20,549  |        |  |       | 4      |  |  |   | 20,553  |  

|                               |  |        |         |        |  |       |        |  |  |   |         |  
|------------------------------ |  | ------ | ------- | ------ |  | ----- | ------ |  |  | - | ------- | -
|Fiscal 2002                    |  | Retail |         | Credit |  | Total
|                               |  |        |         |        |  |      
|Revenues                       |  | $      | 734,352 |        |  | $     | 13,979 |  |  | $ | 748,331 |  
|Depreciation                   |  |        | 14,851  |        |  |       | 62     |  |  |   | 14,913  |  
|Interest and other income, net |  |        | (3,680  | )      |  |       |       |  |  |   | (3,680  | )
|Income before taxes            |  |        | 66,375  |        |  |       | 5,464  |  |  |   | 71,839  |  
|Total assets                   |  |        | 310,173 |        |  |       | 73,237 |  |  |   | 383,410 |  
|Capital expenditures           |  |        | 28,953  |        |  |       |       |  |  |   | 28,953  |  

|                               |  |        |         |        |  |       |        |  |  |   |         |  
|------------------------------ |  | ------ | ------- | ------ |  | ----- | ------ |  |  | - | ------- | -
|Fiscal 2001                    |  | Retail |         | Credit |  | Total
|                               |  |        |         |        |  |      
|Revenues                       |  | $      | 686,092 |        |  | $     | 13,229 |  |  | $ | 699,321 |  
|Depreciation                   |  |        | 10,821  |        |  |       | 65     |  |  |   | 10,886  |  
|Interest and other income, net |  |        | (6,299  | )      |  |       |       |  |  |   | (6,299  | )
|Income before taxes            |  |        | 62,786  |        |  |       | 3,500  |  |  |   | 66,286  |  
|Total assets                   |  |        | 263,909 |        |  |       | 68,132 |  |  |   | 332,041 |  
|Capital expenditures           |  |        | 25,684  |        |  |       |       |  |  |   | 25,684  |  

The accounting policies of the segments are the
same as those described in the summary of significant accounting
policies. The Company evaluates performance based on profit or
loss from operations before income taxes. The Company does not
allocate certain corporate expenses or income taxes to the
segments.

The following schedule summarizes the credit
segment and related direct expenses which are reflected in
selling, general and administrative expenses (in thousands):

|                 |  |             |       |             |  |             |       |  |  |   |       | 
|---------------- |  | ----------- | ----- | ----------- |  | ----------- | ----- |  |  | - | ----- | 
|                 |  | January 31, |       | February 1, |  | February 2,
|                 |  | 2004        |       | 2003        |  | 2002       
|                 |  |             |       |             |  |            
|Bad debt expense |  | $           | 6,098 |             |  | $           | 4,764 |  |  | $ | 5,913 | 
|Payroll          |  |             | 1,101 |             |  |             | 1,117 |  |  |   | 1,126 | 
|Postage          |  |             | 1,131 |             |  |             | 1,121 |  |  |   | 1,127 | 
|Other expenses   |  |             | 1,339 |             |  |             | 1,451 |  |  |   | 1,498 | 
|                 |  |             |       |             |  |             |       |  |  |   |       | 
|Total expenses   |  | $           | 9,669 |             |  | $           | 8,453 |  |  | $ | 9,664 | 
|                 |  |             |       |             |  |             |       |  |  |   |       | 

15.     Commitments
and Contingencies:

Workers compensation and general liability claims
are settled through a claims administrator and are limited by
stop-loss insurance coverage for individual claims in excess of
$350,000 and $200,000, respectively. The Company paid claims of
$3,019,000, $2,609,000 and $3,114,000 in fiscal 2003, 2002 and
2001, respectively. Including claims incurred, but not yet paid,
the Company recognized an expense of $3,764,000, $3,284,000 and
$3,385,000 in fiscal 2003, 2002 and 2001, respectively. Accrued
workers compensation and

39



---



##### 



THE CATO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

general liabilities was $3,968,000 and $3,222,000
at January 31, 2004 and February 1, 2003,
respectively. The Company had no outstanding letters of credit
relating to such claims at January 31, 2004 or at
February 1, 2003. See Note 7 for letters of credit
related to purchase commitments, Note 9 for 401(k) plan
contribution obligations and Note 10 for lease commitments.

The Company does not have any guarantees with
third parties. The Company has placed a $2 million deposit
with Cedar Hill National Bank (Cedar Hill), a wholly
owned subsidiary, as security and collateral for the payment of
amounts due from Cato West LLC, a wholly owned subsidiary, to
Cedar Hill. The deposit has no set term. The deposit was made at
the request of the Office of the Comptroller of the Currency
because the receivable is not settled immediately and Cedar Hill
has a risk of loss until payment is made. Cato West purchases
receivables from Cedar Hill on a daily basis (generally one day
in arrears). In the event Cato West fails to transfer to Cedar
Hill the purchase price for any receivable within two business
days, Cedar Hill shall have the right to withdraw any amount
necessary from the account established by the Company to satisfy
the amount due Cedar Hill from Cato West. Although the amount of
potential future payments is limited to the amount of the
deposit, Cedar Hill may require, at its discretion, the Company
to increase the amount of the deposit with no limit on the
increase. The deposit is based upon the amount of payments that
would be due from Cato West to Cedar Hill for the highest credit
card sales weekends of the year that would remain unpaid until
the following business day. The Company has no obligations
related to the deposit at year-end. No recourse provisions exist
nor are any assets held as collateral that would reimburse the
Company if Cedar Hill withdraws a portion of the deposit.

The Company is a defendant in legal proceedings
considered to be in the normal course of business and none of
which, singularly or collectively, are considered to be material
to the Company as a whole.

40



---



##### 





|        |                                                                                              
|------- | ---------------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial
    Disclosure:

Effective September 16, 2003, The Cato
Corporation (the Company) dismissed
Deloitte & Touche LLP as its principal independent
accountants from the engagement to perform the audit of the
financial statements of the Company for the fiscal year ending
January 31, 2004. Deloitte & Touche LLP had served
as the Companys principal independent accountants since
1995. The decision to dismiss Deloitte & Touche LLP was
made by the Audit Committee of the Board of Directors of the
Company.

The audit reports of Deloitte & Touche
LLP on the financial statements of the Company for the fiscal
years ended February 1, 2003 and February 2, 2002
contained no adverse opinion or disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope, or
accounting principles.

In connection with the audits of the financial
statements of the Company for the fiscal years ended
February 1, 2003 and February 2, 2002 and through the
date hereof, the Company had no disagreement with
Deloitte & Touche LLP on any matter of accounting
principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreement, if not resolved
to the satisfaction of Deloitte & Touche LLP, would
have caused them to make reference to such disagreement in their
reports for such periods; and there were no reportable events as
defined in Item 304(a)(1)(v) of Regulation S-K.

Deloitte & Touche LLP was provided a
copy of the above disclosures and was requested to furnish the
Company with a letter addressed to the Securities and Exchange
Commission stating whether it agreed with the above statements
and, if not, stating in what respects it did not agree. A letter
from Deloitte & Touche LLP was attached as
Exhibit 16 to the Companys Form 8-K, filed
September 23, 2003, as amended by Form 8-K/ A, filed
October 6, 2003.

On September 16, 2003, the Company engaged
the accounting firm of PricewaterhouseCoopers LLP as independent
accountants to audit the Companys financial statements for
the fiscal year ending January 31, 2004. The decision to
engage PricewaterhouseCoopers LLP was made by the Audit
Committee of the Board of Directors of the Company. During the
fiscal years ended February 1, 2003 and February 2,
2002 and through the date hereof, the Company did not consult
with PricewaterhouseCoopers LLP regarding any of the matters or
reportable events set forth in Item 304(a)(2)(i) and
(ii) of the Regulation S-K.



|         |                         
|-------- | ------------------------
|Item 9A. | Controls and Procedures:

Evaluation of disclosure controls and
procedures.As of January 31,
2004, an evaluation of the effectiveness of the Companys
disclosure controls and procedures (as defined in
Rule 13(a)-15(e) and 15d-15(e) promulgated under the
Securities Exchange Act of 1934, as amended (the Exchange
Act)) was performed under the supervision and with the
participation of the Companys management, including the
Chief Executive Officer and Chief Finance Officer. Based on that
evaluation, the Companys Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of the
period covered by this report, the Companys disclosure
controls and procedures were effective to ensure that
information required to be disclosed by the Company in its
reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified in the Securities Exchange Commission rules
and forms.

Changes in internal control over financial
reports.During the Companys
fourth fiscal quarter of 2003, there has been no change in the
Companys internal controls over financial reporting (as
defined in Rule 13a-15(f) and 15d-15(f) promulgated under
the Exchange Act) that has materially affected, or is reasonably
likely to materially affect, the Companys internal
controls over financial reporting.

PART III



|         |                                                        
|-------- | -------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant:

Information contained under the captions
Election of Directors, Meetings and
Committees and Section 16(a) Beneficial
Ownership Reporting and Compliance in the
Registrants Proxy Statement for its

41



---



##### 



2004 annual stockholders meeting (the
2004 Proxy Statement) is incorporated by reference
in response to this Item 10. The information in response to
this Item 10 regarding executive officers of the Company is
contained in Item 1, Part I hereof under the caption
Executive Officers of the Registrant.


Code of Ethics and Code of Business Conduct
and Ethics

The Company has adopted a written Code of Ethics
(the Code of Ethics) that applies to the
Companys Chairman, President, and Chief Executive Officer,
Executive Vice President, Chief Financial Officer and Secretary,
and Senior Vice President, Controller. The Company has adopted a
Code of Business Conduct and Ethics (the Code of
Conduct) that applies to all employees, officers, and
directors of the Company. The Code of Ethics and Code of Conduct
are available on the Companys website at
www.catocorp.com, under the Corporate
Governance caption and print copies are available to any
shareholder that requests a copy. Any amendments to the Code of
Ethics or Code of Conduct, or any waivers of the Code of Ethics,
or any waiver of the Code of Conduct for directors or executive
officers, will be disclosed on the Companys website
promptly following the date of such amendment or waiver.



|         |                        
|-------- | -----------------------
|Item 11. | Executive Compensation:

Incorporated by reference to Registrants
Proxy Statement for 2004.



|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

Equity Compensation Plan
Information.

The following table provides information about
stock options outstanding and shares available for future awards
under all of Catos equity compensation plans. The
information is as of January 31, 2004.

|                                                               |  |                            |           |                        |  |                         |       |  |  |  |         | 
|-------------------------------------------------------------- |  | -------------------------- | --------- | ---------------------- |  | ----------------------- | ----- |  |  |  | ------- | 
|                                                               |  | (a)                        |           | (b)                    |  | (c)                    
|                                                               |  |                            |           |                        |  | Number of securities   
|                                                               |  |                            |           |                        |  | remaining available for
|                                                               |  |                            |           |                        |  | future issuance under  
|                                                               |  | Number of securities to be |           | Weighted-average       |  | equity compensation    
|                                                               |  | issued upon exercise of    |           | exercise price of      |  | plans (excluding       
|                                                               |  | outstanding options,       |           | outstanding options,   |  | securities reflected in
|Plan Category                                                  |  | warrants and rights(1)     |           | warrants and rights(1) |  | column (a))(2)         
|                                                               |  |                            |           |                        |  |                        
|Equity compensation plans approved by security
    holder      |  |                            | 1,154,400 |                        |  | $                       | 11.54 |  |  |  | 669,087 | 
|Equity compensation plans not approved by
    security holders |  |                            |          |                        |  |                         |      |  |  |  |        | 
|Total                                                          |  |                            | 1,154,400 |                        |  | $                       | 11.54 |  |  |  | 669,087 | 



---



|    |                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------
|(1) | This column contains information regarding
    employee stock options only; there are no warrants or stock
    appreciation rights outstanding.
|   
|(2) | Includes the following:                                                                                                                        



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 406,600 shares available for grant under the
    Companys stock incentive plan, referred to as the
    1999 Incentive Plan. Under this plan, non-qualified
    stock options may be granted to key employees. No awards may be
    granted after 2004. Additionally, 14,318 shares available for
    grant under the Companys stock incentive plan, referred to
    as the 1987 Non-qualified Stock Option Plan. Stock
    options have terms of 10 years, vest evenly over
    5 years, and are assigned an exercise price of not less
    than the fair market value of the Companys stock on the
    date of grant; and
|
| | 248,169 shares available under the 2003 Employee
    Stock Purchase Plan. Eligible employees may participate in the
    purchase of designated shares of the Companys common
    stock. The purchase price of this stock is equal to 85% of the
    lower of the closing price at the beginning or the end of each
    semi-annual stock purchase period.                                                                                                                                                                                                                                                                       

42



---



##### 



Information contained under Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters in the 2004 Proxy
Statement is incorporated by reference in response to this Item.



|         |                                                    
|-------- | ---------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions:

Information contained under the caption
Certain Transactions in the 2004 Proxy Statement is
incorporated by reference in response to this Item.



|         |                                            
|-------- | -------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services:

The information required by this Item is
incorporated herein by reference to the section entitled
Audit Fees in the 2004 Proxy Statement.

PART IV



|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K:

(a) The following documents are filed as
part of this report:

(1) Financial Statements:

|                                                                                                                                           |  |      |    | 
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|                                                                                                                                           |  | Page
|                                                                                                                                           |  |     
|Report of Independent Auditors
    (PricewaterhouseCoopers LLP)                                                                            |  |      | 19 | 
|Report of Predecessor Auditor (Deloitte &
    Touche LLP)                                                                                  |  |      | 20 | 
|Consolidated Statements of Income for the fiscal
    years ended January 31, 2004, February 1, 2003 and
    February 2, 2002               |  |      | 21 | 
|Consolidated Balance Sheets at January 31,
    2004 and February 1, 2003                                                                   |  |      | 22 | 
|Consolidated Statements of Cash Flows for the
    fiscal years ended January 31, 2004, February 1, 2003
    and February 2, 2002           |  |      | 23 | 
|Consolidated Statements of Stockholders
    Equity for the fiscal years ended January 31, 2004,
    February 1, 2003 and February 2, 2002 |  |      | 24 | 
|Notes to Consolidated Financial Statements                                                                                                 |  |      | 25 | 

(2) Financial Statement Schedules: The
following report and financial statement schedules are filed
herewith:

|                                                                 |  |  |     | 
|---------------------------------------------------------------- |  |  | --- | 
|Predecessor Independent Auditors Consent                        |  |  | S-1 | 
|Schedule II  Valuation and
    Qualifying Accounts and Reserves |  |  | S-2 | 

All other schedules are omitted as the required
information is inapplicable or the information is presented in
the consolidated financial statements or related notes thereto.

43



---



##### 



(3) Index to Exhibits: The following
exhibits are filed with this report or, as noted, incorporated
by reference herein.

|        |      |                        |  |                                                                                                                                                                                                                                                                                                       
|------- | ---- | ---------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |                       
|Number  |      | Description of Exhibit
|        |      |                       
|        | 3.1  |                        |  | Registrants Restated Certificate of
    Incorporation of the Registrant dated March 6, 1987,
    incorporated by reference to Form S-8 of the Registrant
    filed February 7, 2000.                                                                                                                 
|        | 3.2  |                        |  | Registrants By Laws incorporated by
    reference to Form S-8 of the Registrant Filed
    February 7, 2000.                                                                                                                                                                                          
|        | 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.)                               
|        | 4.2  |                        |  | Share Rights Agreement dated December 18,
    2003, incorporated by reference to Form 8-A12G of the
    Registrant filed December 22, 2003 and as amended in
    Form 8-A12B/A filed on January 6, 2004.                                                                                              
|        | 10.1 |                        |  | Employment Agreement dated May 20, 1999
    between The Cato Corporation and John P. Derham Cato,
    incorporated by reference to Form 10-K of the Registrant
    for the fiscal year ended January 29, 2000.                                                                                        
|        | 10.2 |                        |  | 1999 Incentive Compensation Plan dated
    August 26, 1999, incorporated by reference to Form S-8
    of the Registrant filed February 7, 2000.                                                                                                                                                       
|        | 10.3 |                        |  | Agreement, dated as of August 29, 2003,
    between the Registrant and Wayland H. Cato, Jr.,
    incorporated by reference to Form 8-K of the Registrant
    filed on July 22, 2003.                                                                                                                  
|        | 10.4 |                        |  | Agreement, dated as of August 29, 2003,
    between the Registrant and Edgar T. Cato, incorporated by
    reference to Form 8-K of the Registrant filed on
    July 22, 2003.                                                                                                                         
|        | 10.5 |                        |  | Retirement Agreements between Registrant and
    Wayland H. Cato, Jr. and Edgar T. Cato dated
    August 29, 2003 incorporated by reference to Form 10-Q
    of the Registrant for quarter ended August 2, 2003.                                                                                      
|        | 16.1 |                        |  | Change in the Registrants Independent Accountants
    from Deloitte & Touche, LLP to
    PricewaterhouseCoopers, LLP effective September 16,
    2003, incorporated by reference to Form 8-K of the
    Registrant filed September 23, 2003 and as amended in
    Form 8-K/A filed on October 6, 2003.
|        | 21   |                        |  | Subsidiary of Registrant.                                                                                                                                                                                                                                                                             
|        | 23.1 |                        |  | Consent of Independent Accountants.                                                                                                                                                                                                                                                                   
|        | 23.2 |                        |  | Consent of Predecessor Independent Accountants.                                                                                                                                                                                                                                                       
|        | 31.1 |                        |  | Certification pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002 of Chief Executive Officer.                                                                                                                                                                                               
|        | 31.2 |                        |  | Certification pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002 of Chief Financial Officer.                                                                                                                                                                                               
|        | 32.1 |                        |  | Certification pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002 of Chief Executive Officer.                                                                                                                                                                                               
|        | 32.2 |                        |  | Certification pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002 of Chief Financial Officer.                                                                                                                                                                                               

(b) Reports on Form 8-K:

Form 8-K was filed on November 18, 2003
disclosing the November 18, 2003 Press Release regarding
the Companys financial results for the third quarter of
2003.

Form 8-A was filed on December 22, 2003
disclosing that on December 4, 2003 the Board of Directors
of the Company adopted a Stockholder Rights Plan.

Pursuant to General Instruction B on
Form 8-K, any reports previously or in the future submitted
under Items 9 and 12 are not deemed to be filed for
the purpose of Section 18 of the Securities Exchange Act of
1934, as amended (the Exchange Act), and the Company
is not subject to the liabilities of that section. The Company
is not incorporating, and will not incorporate, by reference
these reports into a filing under the Securities Act of 1933, as
amended, or the Exchange Act.

44



---



##### 



EXHIBIT INDEX

|            |      |  |  |                                                |  |  |     | 
|----------- | ---- |  |  | ---------------------------------------------- |  |  | --- | 
|Designation |      |  |  |                                               
|of Exhibit  |      |  |  | Page                                          
|            |      |  |  |                                               
|            | 21   |  |  | Subsidiaries of the Registrant                 |  |  | 46  | 
|            | 23.1 |  |  | Consent of Independent Accountants             |  |  | 47  | 
|            | 23.2 |  |  | Consent of Predecessor Independent Accountants |  |  | S-1 | 

45



---



##### 



EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT

|                                      |  |                             |  |                                      
|------------------------------------- |  | --------------------------- |  | -------------------------------------
|                                      |  | State of                    |  | Name under which                     
|Name of Subsidiary                    |  | Incorporation/Organization  |  | Subsidiary does Business             
|                                      |  |                             |  |                                      
|CHW LLC                               |  | Delaware                    |  | CHW LLC                              
|Providence Insurance Company, Limited |  | A Bermudian Company         |  | Providence Insurance Company, Limited
|CatoSouth LLC                         |  | North Carolina              |  | CatoSouth LLC                        
|Cato of Texas L.P.                    |  | Texas                       |  | Cato of Texas L.P.                   
|Cato Southwest, Inc.                  |  | Delaware                    |  | Cato Southwest, Inc.                 
|CaDel LLC                             |  | Delaware                    |  | CaDel LLC                            
|CatoWest LLC                          |  | Nevada                      |  | CatoWest LLC                         
|Cedar Hill National Bank              |  | A Nationally Chartered Bank |  | Cedar Hill National Bank             
|catocorp.com, LLC                     |  | Delaware                    |  | catocorp.com, LLC                    

46



---



##### 



EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by
reference in Registration Statement No. 333-96283 on
Form S-8 pertaining to The Cato Corporation 1999 Incentive
Compensation Plan, in Registration Statement No. 33-41314
on Form S-8 pertaining to The Cato Corporation 1987
Incentive Stock Option Plan, in Registration Statement
No. 33-41315 on Form S-8 pertaining to The Cato
Corporation 1987 Nonqualified Stock Option Plan, and in
Registration Statement Nos. 33-69844 and 333-96285 on
Forms S-8 pertaining to The Cato Corporation
1993 Employee Stock Purchase Plan, of our report dated
March 31, 2004 relating to the financial statements and
financial statement schedules, which appears in this
Form 10-K.

/s/ PricewaterhouseCoopers LLP

Charlotte, North Carolina

April 22, 2004


47



---



##### 



SIGNATURES

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

The Cato Corporation

| |  |                                                                                                       |  |                                                                                                               
| |  | ----------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------
|
| |  | By /s/ JOHN P. DERHAM CATOJohn P. Derham Cato
    Chairman, President and
    Chief Executive Officer |  | By /s/ MICHAEL O. MOOREMichael O. Moore
    Executive Vice President
    Chief Financial Officer and Secretary
|
| |  | By /s/ ROBERT M. SANDLERRobert M. Sandler
    Senior Vice President
    Controller                    |  |                                                                                                               

Date: April 22, 2004

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

| |  |                                                                   |  |                                                      
| |  | ----------------------------------------------------------------- |  | -----------------------------------------------------
| |  | /s/ JOHN P. DERHAM CATOJohn P. Derham Cato
    (Director)         |  | /s/ GEORGE S. CURRINGeorge S. Currin
    (Director)  
|
| |  | /s/ MICHAEL O. MOOREMichael O. Moore
    (Director)               |  | /s/ GRANT L. HAMRICKGrant L. Hamrick
    (Director)  
|
| |  | /s/ THOMAS E. CATOThomas E. Cato
    (Director)                   |  | /s/ JAMES H. SHAWJames H. Shaw
    (Director)        
|
| |  | /s/ ROBERT W. BRADSHAW, JR.Robert W. Bradshaw, Jr.
    (Director) |  | /s/ A.F. (PETE) SLOANA.F. (Pete) Sloan
    (Director)

48



---



##### 



EXHIBIT 23.2

PREDECESSOR INDEPENDENT AUDITORS
CONSENT

We consent to the incorporation by reference in
Registration Statement No. 333-96283 on Form S-8
pertaining to The Cato Corporation 1999 Incentive Compensation
Plan, in Registration Statement No. 33-41314 on
Form S-8 pertaining to The Cato Corporation 1987 Incentive
Stock Option Plan, in Registration Statement No. 33-41315
on Form S-8 pertaining to The Cato Corporation 1987
Nonqualified Stock Plan, and in Registration Statement
Nos. 33-69844 and 333-96285 on Forms S-8 pertaining to
The Cato Corporation 1993 Employee Stock Purchase Plan, of our
report dated April 21, 2003, with respect to the
consolidated financial statements and financial statement
schedule of the Cato Corporation included in and incorporated by
reference in the Annual Report on Form 10-K for the year
ended January 31, 2004.

/s/ Deloitte & Touche LLP

Charlotte, North Carolina

April 22, 2004

S-1



---



##### 



SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

|                            |                                         |                |       |                |      |            |       |        |   |   |     |     | 
|--------------------------- | --------------------------------------- | -------------- | ----- | -------------- | ---- | ---------- | ----- | ------ | - | - | --- | --- | 
|                            |                                         | Allowance      |       |                |      |           
|                            |                                         | for            |       | Reserve for    |      | Allowance 
|                            |                                         | Doubtful       |       | Rental         |      | for Sales 
|                            |                                         | Accounts(a)    |       | Commitments(b) |      | Returns(c)
|                            |                                         |                |       |                |      |           
|                            |                                         |               
|                            |                                         | (In thousands)
|Balance at February 3, 2001 |                                         | $              | 5,422 |                |      | $          | 1,649 |        |   | $ |    |    
|                            | Additions charged to costs and expenses |                |       | 5,913          |      |            |       | 691    |   |   |     |    | 
|                            | Additions charged to other accounts     |                |       | 1,052          | (d)  |            |       |       |   |   |     |    | 
|                            | Deductions                              |                |       | (6,419         | )(e) |            |       | (1,263 | ) |   |     |    | 
|                            |                                         |                |       |                |      |            |       |        |   |   |     |    
|                           
|Balance at February 2, 2002 |                                         |                | 5,968 |                |      |            | 1,077 |        |   |   |    |    
|                            | Additions charged to costs and expenses |                |       | 4,763          |      |            |       | 1,000  |   |   |     | 390 | 
|                            | Additions charged to other accounts     |                |       | 887            | (d)  |            |       |       |   |   |     |    | 
|                            | Deductions                              |                |       | (5,519         | )(e) |            |       | (1,121 | ) |   |     |    | 
|                            |                                         |                |       |                |      |            |       |        |   |   |     |    
|                           
|Balance at February 1, 2003 |                                         |                | 6,099 |                |      |            | 956   |        |   |   | 390 |    
|                            | Additions charged to costs and expenses |                |       | 6,098          |      |            |       | 1,062  |   |   |     | 10  | 
|                            | Additions charged to other accounts     |                |       | 858            | (d)  |            |       |       |   |   |     |    | 
|                            | Deductions                              |                |       | (6,720         | )(e) |            |       | (1,402 | ) |   |     |    | 
|                            |                                         |                |       |                |      |            |       |        |   |   |     |    
|Balance at January 31, 2004 |                                         | $              | 6,335 |                |      | $          | 616   |        |   | $ | 400 |    
|                            |                                         |                |       |                |      |            |       |        |   |   |     |    



---



|    |                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------
|(a) | Deducted from trade accounts receivable.                                                                                            
|   
|(b) | Provision for the difference between costs and
    revenues from non-cancelable subleases over the lease terms of
    closed stores.
|   
|(c) | Gross margin revenue on return sales.                                                                                               
|   
|(d) | Recoveries of amounts previously written off.                                                                                       
|   
|(e) | Uncollectible accounts written off.                                                                                                 

S-2