FORWARD LOOKING INFORMATION:
The following information should be read along with the Unaudited Condensed Consolidated Financial Statements, including the accompanying Notes appearing in this report. Any of 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 Form 10-Q 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations"; (4) statements relating to our operations or activities for fiscal 2009 and beyond, including, but not limited to, statements regarding expected amounts of capital expenditures and store openings, relocations, remodelings and closures; and
(5) statements relating to our future contingencies. When possible, we have attempted to identify forward-looking statements by using words such as "expects," "anticipates," "approximates," "believes," "estimates," "hopes," "intends," "may," "plans," "should" and variations of such words and similar expressions. We can give no assurance that actual results or events will not differ materially from those expressed or implied 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, but subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those contemplated by the forward-looking statements. Such factors include, but are not limited to, the following: general economic conditions including, but not limited to, the continuation or worsening of (i) the current adverse or recessionary conditions affecting the U.S. and global economies and consumer spending and (ii) the adverse conditions in the U.S. and global credit markets; uncertainties regarding the impact of any governmental responses to the foregoing adverse economic and credit market conditions; competitive factors and pricing pressures; our ability to predict fashion trends; consumer apparel buying patterns; adverse weather conditions; inventory risks due to shifts in market demand; and other factors discussed under "Risk Factors" in Part I, Item 1A of our annual report on Form 10-K for the fiscal year ended January 31, 2009 (fiscal 2008), as amended or supplemented, and in other reports we file with or furnish to the SEC from time to time. We do not undertake, and expressly decline, any obligation to update any such forward-looking information contained in this report, whether as a result of new information, future events, or otherwise.

THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

CRITICAL ACCOUNTING POLICIES:
The Company's accounting policies are more fully described in Note 1 to the consolidated financial statements included in the Company's Annual Report on Form 10-K. 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, shrinkage accrual and reserves for uncertain tax positions.
The Company's critical accounting policies and estimates are discussed with the Audit Committee.

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

                                                    Three Months Ended
                                                    May 2,        May 3,
                                                     2009          2008
            Total retail sales                         100.0 %      100.0 %
            Other income                                 1.3          1.3
            Total revenues                             101.3        101.3
            Cost of goods sold                          59.6         62.7
            Selling, general and administrative         27.2         24.9
            Depreciation                                 2.3          2.5
            Interest and other income                   (0.4 )       (0.8 )
            Income before income taxes                  12.6         12.1
            Net income                                   7.9          7.5

Comparison of First Quarter of 2009 with 2008 Total retail sales for the first quarter were $238.1 million compared to last year's first quarter sales of $225.8 million, a 5.4% increase. Same-store sales increased 3.0% in the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008. Total revenues, comprised of retail sales and other income (principally, finance charges and late fees on customer accounts receivable and layaway fees), were $241.0 million for the first quarter ended May 2, 2009 compared to $228.8

THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

RESULTS OF OPERATIONS - (CONTINUED):
million for the first quarter ended May 3, 2008. The Company operated 1,285 stores at May 2, 2009 compared to 1,326 stores at the end of last year's first quarter. In the first quarter of fiscal 2009, the Company opened 8 stores and closed 4 stores. The Company expects to open approximately 46 stores, relocate 2 stores and close approximately 39 stores in fiscal 2009.
Credit revenue of $2.4 million represented 1.0% of total revenues in the first quarter of fiscal 2009, compared to 2008 credit revenue of $2.5 million or 1.1% of total revenues. The slight reduction in actual credit revenue was due to lower finance charge and late fee income from lower sales under the Company's proprietary credit card. 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 $1.8 million in the first quarter of 2009 compared to last year's first quarter expenses of $1.6 million. The increase in costs was principally due to an increase in bad debt expense.
Other income in total, as included in total revenues, was flat at $3.0 million for the first quarter of fiscal 2009 and the prior year's comparable first quarter. Finance charges and late fee income remained lower and were offset by an increase in layaway charges.
Cost of goods sold was $141.9 million, or 59.6% of retail sales for the first quarter of fiscal 2009, compared to $141.6 million, or 62.7% of retail sales in the first quarter of fiscal 2008. The overall decrease in cost of goods sold as a percent of retail sales for the first quarter of fiscal 2009 resulted primarily from lower markdowns and lower occupancy costs. The decrease in markdowns was primarily attributable to tight inventory management and higher sell-throughs of regular priced merchandise. 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. Total gross margin dollars (retail sales less cost of goods sold) increased by 14.1% to $96.1 million for the first quarter of fiscal 2009 compared to $84.2 million in the first quarter of fiscal 2008. Gross margin as presented may not be comparable to those of other entities.
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. SG&A expenses were $64.6 million, or 27.2% of retail sales for the first quarter of fiscal 2009, compared to $56.3 million, or 24.9% of retail sales in the first quarter of fiscal 2008. SG&A expenses as a percentage of retail sales increased 230 basis points

THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

RESULTS OF OPERATIONS - (CONTINUED):
for the first quarter of fiscal 2009 as compared to the prior year primarily because of an increase in incentive based compensation expenses, legal reserves and closed store expenses. The overall dollar increase in SG&A expenses for the first quarter of fiscal 2009 resulted primarily from increased incentive based compensation expenses, payroll and legal reserve expenses.
Depreciation expense was $5.5 million, or 2.3% of retail sales for the first quarter of fiscal 2009, compared to $5.6 million, or 2.5% of retail sales in the first quarter of fiscal 2008.
Interest and other income decreased to $1.1 million, or 0.4% of retail sales for the first quarter of fiscal 2009, compared to $1.9 million, or 0.8% of retail sales for the first quarter of fiscal 2008 primarily due to lower interest rates.
Income tax expense was $11.2 million or 4.7% of retail sales for the first quarter of fiscal 2009, compared to $10.3 million, or 4.6% of retail sales for the first quarter of fiscal 2008. The first quarter increase resulted from higher pre-tax income offset by a lower effective tax rate. The effective income tax rate for the first quarter of fiscal 2009 was 37.3% compared to 38.0% for the first quarter of fiscal 2008.
LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK:
The Company has consistently maintained a strong liquidity position. Cash provided by operating activities during the first three months of fiscal 2009 was $30.0 million as compared to $23.3 million in the first three months of fiscal 2008. These amounts enable the Company to fund its regular operating needs, capital expenditure program, cash dividend payments and share repurchases. In addition, the Company maintains $35 million of unsecured revolving credit facilities for short-term financing of seasonal cash needs. There were no outstanding borrowings on these facilities at May 2, 2009. Cash provided by operating activities for the first three months of fiscal 2009 was primarily generated by earnings adjusted for depreciation and changes in working capital. The increase of $6.7 million for the first three months of fiscal 2009 as compared to the first three months of fiscal 2008 was primarily due to an increase in net income, accounts payable, accrued expenses and other liabilities, partially offset by higher inventory.
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 dividends, share repurchases, other operating requirements and expected capital expenditures for fiscal 2009 and for the foreseeable future.

THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK (CONTINUED):
At May 2, 2009, the Company had working capital of $177.0 million compared to $156.5 million at May 3, 2008. Additionally, the Company had $2.3 million invested in privately managed investment funds at May 2, 2009, which are included in other assets on the Condensed Consolidated Balance Sheets. At May 2, 2009, the Company had an unsecured revolving credit agreement, which provides for borrowings of up to $34.3 million. The revolving credit agreement is committed until August 2010. 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 May 2, 2009. There were no borrowings outstanding under these credit facilities during the first quarter ended May 2, 2009 or the fiscal year ended January 31, 2009.
At May 2, 2009 and May 3, 2008, the Company had approximately $4.0 million and $5.0 million, respectively, of outstanding irrevocable letters of credit relating to purchase commitments. In addition, the Company has a standby letter of credit for payments to the current general liability and workers' compensation insurance processor.
Expenditures for property and equipment totaled $3.5 million in the first quarter of fiscal 2009, compared to $5.6 million in last year's first fiscal quarter. The expenditures for the first three months of 2009 were primarily for the development of 8 new stores and additional investments in new technology. In fiscal 2009, the Company is planning to invest approximately $16.8 million for capital expenditures. This includes expenditures to open 46 new stores and relocate 2 stores.
Net cash used for investing activities totaled $25.7 million in the first quarter of fiscal 2009 compared to $1.9 million provided in the comparable period of 2008. The decrease was due primarily to decreased sales of short-term investments.
On May 20, 2009, the Board of Directors maintained the quarterly dividend at $.165 per share or an annualized rate of $.66 per share.
The Company's Board of Director's authorized an increase in the Company's share repurchase program of 2,000,000 and 500,000 on August 30, 2007 and February 26, 2009, respectively. There is no specified expiration on any of these repurchase authorizations. At May 2, 2009, 695,942 shares remain available for repurchase in open authorizations. No shares were repurchased in the first three months of fiscal 2009.
The Company does not use derivative financial instruments.

THE CATO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

LIQUIDITY, CAPITAL RESOURCES AND MARKET RISK (CONTINUED):
At May 2, 2009, the Company's investment portfolio was primarily invested in tax exempt variable rate demand notes and governmental securities held in managed funds. These securities are classified as available-for-sale as they are highly liquid 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 Condensed Consolidated Balance Sheets.

THE CATO CORPORATION