The condensed consolidated financial statements have been prepared from the accounting records of The Cato Corporation and its wholly-owned subsidiaries (the “Company”), and all amounts shown as of and for the periods ended May 5,November 3, 2007 and April 29,October 28, 2006 are unaudited. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal, recurring nature. The results of the interim period may not be indicative of the results expected for the entire year.

The interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2007.

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.

Short-term investments are classified as available-for-sale. As they are available for current operations, they are classified in the Condensed Consolidated Balance Sheets as current assets. Available-for-sale securities are carried at fair value, with unrealized gains and temporary losses, net of income taxes, reported as a component of accumulated other comprehensive income. Other than temporary declines in fair value of investments are recorded as a reduction in the cost of the investments in the accompanying Condensed Consolidated Balance Sheets and a reduction of interest and other income in the accompanying Condensed Consolidated Statements of Income and Comprehensive 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.

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

On May 24, 2007, the Board of Directors increased the quarterly dividend by 10% from $.15 per share to $.165 per share, or an annualized rate of $.66 per share.

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 and other convertible securities. Unvestedthe Employee Stock Purchase Plan and the potential vestings of restricted stock is included in the computation of diluted EPScomputed using the treasury stock method.

The following table presents the number of options and shares of restricted stock initially authorized and available forto grant under each of the plans:

Effective with the adoption of FASSFAS No. 123R, the Company began recognizing share-based compensation expense ratably over the vesting period, net of estimated forfeitures. The Company recognized share-based compensation expense of $375,000$470,000 and $244,000$1,282,000 for the firstthird quarter and nine month period ended May 5,November 3, 2007, respectively, compared to $357,000 and April 29,$983,000 for the third quarter and nine month period ended October 28, 2006, respectively, which wasrespectively. These expenses are classified as a component of selling, general and administrative expenses.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes —– an Interpretation of FASB Statement No. 109.” This Interpretation prescribes the recognition threshold a tax position is required to meet before being recognized in the financial statements. The Interpretation also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods and disclosure of uncertain tax positions. The Interpretation is effective for fiscal years beginning after December 15, 2006. The Company adopted Financial Standards Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes —– an interpretation of FASB Statement No. 109,” on February 4, 2007.

As a result of the implementation of FASB Interpretation No. 48, the Company recognized a transition adjustment increasing beginning retained earnings by $362,000. At May 5,February 4, 2007, wethe Company had $6,600,000a liability of approximately $6,200,000 for unrecognized tax benefits, $4,500,000approximately $4,200,000 of which would affect the effective tax rate if recognized. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of May 5,February 4, 2007, wethe Company had approximately $4,000,000$3,900,000 of accrued interest and penalties related to uncertain tax positions. The tax years after 2003 remain open to examination by the major taxing jurisdictions to which the Company is subject.

In September 2006, FASB issued SFAS 157, “Fair Value Measurements.”Measurements”. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements and, accordingly does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is in the process of evaluating the impact that the adoption of SFAS 157 will have on its financial statements.

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 2007 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; 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 February 3, 2007 (fiscal 2006), 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.

As used herein, the terms “we,” “our,” “us” (or similar terms), the “Company” or “Cato” include The Cato Corporation and its subsidiaries, except that when used with reference to common stock or other securities described herein and in describing the positions held by management of the Company, such terms include only The Cato Corporation. Our website is located atwww.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 (including amendments to these reports) filed or furnished pursuant to Section 13(a) or 15(d) under the Securities Exchange Act of 1934. 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 regulations. The documents are also available in print to any shareholder who requests by contacting our corporate secretary at our Company offices at 8100 Denmark Road, Charlotte, North Carolina 28273-5975.

The Company’s accounting policies are more fully described in Note 1 to the Consolidated Financial Statements.Statements in the Company’s Annual Report on Form 10-K for the Fiscal Year Ended February 3, 2007. 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, shrinkage accrual, 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.

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:

$1.5 million in the firstthird quarter of 2007, comparedflat to last year’s firstthird quarter expenses of $1.9$1.5 million. The decrease in costs was principally dueBad debt expense and administrative expenses were lower compared to lower bad debtthe third quarter of 2006, partially offset by higher payroll expense.

Other income in total, as included in total revenues, was $3.1$3.0 million and $9.0 million for the third quarter and first quarternine months of fiscal 2007, compared to $3.3$3.2 million and $9.7 million for the prior year’s comparable first quarter.three and nine months periods, respectively. The overall decrease resulted primarily from lower finance charges and late fee income.layaway charges.

Cost of goods sold was $143.4$126.1 million, or 64.0%69.3% of retail sales and $417.0 million or 66.7% of retail sales for the third quarter and first quarternine months of fiscal 2007, compared to $142.1$127.2 million, or 61.8%67.8% of retail sales and $413.1 million, or 65.3% of retail sales for the prior year’s comparable three and nine month periods, respectively. The overall increase in cost of goods sold as a percent of retail sales for the firstthird quarter of fiscal 2006.2007 resulted primarily from higher markdowns and occupancy costs, partially offset by lower freight cost. The overall increase in cost of goods sold as a percent of retail sales for the first quarternine months of fiscal 2007 resulted primarily from higher markdownsoccupancy cost and occupancy costs, partially offset by lower procurement costs. The reduction in procurement cost was primarily the result of increased direct sourcing.higher markdowns. The increase in markdowns was primarily attributabledue to lower 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)

advertising expenses. For the first nine months of fiscal 2007, the decrease in SG&A expenses as a percentage of retail sales and the overall dollar decrease in SG&A expense resulted primarily from decreased incentive-based compensation expenses, legal feespartially offset by increased payroll, workers’ compensation and bad debts.group health insurance expenses.

Depreciation expense was $5.4$5.7 million, or 2.4%3.1% of retail sales and $16.7 million or 2.6% of retail sales, for the third quarter and first quarternine months of fiscal 2007, compared to $5.2 million, or 2.3%2.7% of retail sales in the first quarterand $15.6 million, or 2.5% of fiscal 2006.retail sales, for prior year’s comparable three and nine month periods, respectively.

Interest and other income was $1.9$2.2 million, or 0.8%1.2% of retail sales and $6.4 million, or 1.0% of retail sales for the third quarter and first quarternine months of fiscal 2007, compared to $1.6$2.1 million, or 0.7%1.1% of retail sales and $5.6 million, or 0.9% of retail sales, for the first quarter of fiscal 2006.prior year’s comparable three and nine month periods, respectively. The increase in the third quarter and first quarternine months of fiscal 2007 resulted primarily from higher interest rates and higher investment balances.

Income tax expense was $10.5$1.0 million, or 4.7%0.6% of retail sales and $17.7 million, or 2.8% of retail sales, for the third quarter and first quarternine months of fiscal 2007, compared to $12.0$3.3 million, or 5.2%1.8% of retail sales and $22.2 million, or 3.5% of retail sales, for the firstprior year’s comparable three and nine month periods. The decrease for the third quarter of fiscal 2006. The first quarter decreaseand nine month period resulted from lower pre-tax income and a lower effective tax rate.rate primarily due to higher tax credits as a percentage of pre-tax income. The effective income tax rate for the third quarter and first quarternine months of fiscal 2007 was 36.0%25.6% and 34.1% respectively, compared to 36.5%35.8% and 36.4% for the first quarter of fiscal 2006.prior year’s comparable three and nine month periods, respectively.

The Company has consistently maintained a strong liquidity position. Cash provided by operating activities during the first threenine months of fiscal 2007 was $38.6$57.6 million as compared to $28.8$34.5 million in the first threenine months of fiscal 2006. These amounts enable the Company to fund its regular operating needs, capital expenditure program, cash dividend payments and purchase of treasury stock. In addition, the Company maintains a $35 million of unsecured revolving credit facilitiesfacility for short-term financing of seasonal cash needs. There were no outstanding borrowings on these facilitiesthis facility at May 5,November 3, 2007.

Cash provided by operating activities for the first threenine months of fiscal 2007 was primarily generated by earnings adjusted for depreciation and changes in working capital. The increase of $9.8$23.1 million for the first threenine months of fiscal 2007 as compared to the first threenine months of fiscal 2006 was primarily due to a decrease in inventories and an increase in accounts payablespayable and other liabilities in fiscal 2007, compared to a reduction in accounts payable in fiscal 2006,partially offset by lower net income and a smaller increase in accrued income taxes in fiscal 2007.

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 planned capital expenditures, dividends, purchase of treasury stock and other operating requirements for fiscal 2007 and for the foreseeable future.

At May 5,November 3, 2007, the Company had working capital of $192.9$193.2 million compared to $147.9$158.7 million at April 29,October 28, 2006. Additionally, the Company had $1.9 million invested in privately managed investment funds at May 5,November 3, 2007 and October 28, 2006, which are included in other assets on the Condensed Consolidated Balance Sheets.

At May 5,November 3, 2007, the Company had an unsecured revolving credit agreement, which providesprovided for borrowings of up to $35 million. The revolving credit agreement is committed until August 2008.2010. 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 5,November 3, 2007. There were no borrowings outstanding under these credit facilities during the first quarternine months ended May 5,November 3, 2007 or the fiscal year ended February 3, 2007.

At May 5,November 3, 2007 and April 29,October 28, 2006, the Company had approximately $4.5$2.5 million and $2.2 million, respectively, of outstanding irrevocable letters of credit relating to purchase commitments.

Expenditures for property and equipment totaled $3.9$14.3 million in the first quarternine months of fiscal 2007, compared to $12.8$23.2 million in last year’s first fiscal quarter.nine months. The expenditures for the first threenine months of 2007 were primarily for thestore development of 10 new stores, relocating 6 stores, and additional investments in new technology. InFor the full fiscal 2007 year, the Company is planningexpects to invest approximately $24.0 to $27.0$19.2 million for capital expenditures. This includes expenditures to open 8060 to 65 new stores, relocate 2018 stores and remodel 15 stores.

Net cash used in investing activities totaled $37.6$42.1 million in the first quarternine months of fiscal 2007 compared to $22.5$23.2 million usedprovided for the comparable period of 2006. The increase was due primarily to the net increase in purchases over sales of short-term investments.

On May 24, 2007, the Board of Directors increased the quarterly dividend by 10% from $.15 per share to $.165 per share, or an annualized rate of $.66 per share.

The Company does not use derivative financial instruments. At May 5,November 3, 2007, the Company’s investment portfolio was primarily invested in governmental and other debt securities with maturities less than 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 Condensed Consolidated Balance Sheets.

The Company is subject to market rate risk from exposure to changes in interest rates based on its financing, investing and cash management activities, but the Company does not believe such exposure is material.

We carried out an evaluation, with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures as of May 5,November 3, 2007. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of May 5,November 3, 2007, our disclosure controls and procedures, as defined in Rule 13a-15(e), under the Securities Exchange Act of 1934 (the “Exchange Act”), were effective to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

No change in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) has occurred during the Company’s fiscal quarter ended May 5,November 3, 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

     Not Applicable

     In addition to the other information in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended February 3, 2007. These risks could materially affect our business, financial condition or future results; however, they are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition or results of operations.

     Not ApplicableThe following table summarizes the Company’s purchases of its common stock for the three months ended November 3, 2007:

     Not Applicable

     Not Applicable

     Not Applicable

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