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 July 30, 2011 and July 31, 2010 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 unless otherwise noted. 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 January 29, 2011. Amounts as of January 29, 2011, have been derived from the audited balance sheet other than the retrospective application of the change in accounting principle.

On August 25, 2011, the Board of Directors maintained the quarterly dividend at $.23 per share or an annualized rate of $0.92 per share.

The Company elected to change its method of accounting for inventory to the weighted average cost method from the retail method effective January 30, 2011. In accordance with ASC 250 “Accounting Changes and Error Corrections”, all periods have been retrospectively adjusted to reflect the period-specific effects of the change to the weighted average cost method. The Company believes that the weighted average cost method better matches cost of sales with related sales, as well as having an inventory valuation that more closely reflects the acquisition cost of inventory by valuing inventory on a unit basis versus the product department level under the retail method. The cumulative adjustment as of January 31, 2010, was an increase in inventory of $11,700,000 and an increase in retained earnings of $7,300,000.

Additionally, the Company has changed the classification for certain balance sheet items to conform to the 2011 presentation. This change in classification has reduced accounts payable and inventory by $1,600,000 as of January 29, 2011 and $500,000 as of July 31, 2010.

In addition, the Company has changed the classification of certain prior year income statement items to conform to the 2011 presentation. The change has no effect on net income; however, it does reduce retail sales by $26,000 and cost of goods sold by $98,000 and increases selling, general and administrative expense by $72,000 for the three months ended July 31, 2010. The change also reduces retail sales by $746,000, cost of goods sold by $339,000 and selling, general and administrative expense by $407,000 for the six months ended July 31, 2010.

On August 25, 2011, the Board of Directors maintained the quarterly dividend at $.23 per share or an annualized rate of $0.92 per share.

As a result of this retrospective application of the change in accounting principle and the change in the classification of the Balance Sheet, the following items in the Company's Condensed Consolidated Balance Sheets have been adjusted as follows:




	January 29, 2011
	(Unaudited)
	(Dollars in thousands)
	As Previously Reported		Total Changes		As Adjusted
Merchandise inventories	$	132,020	$	12,008	$	144,028
Deferred income taxes		5,001		(1,341)		3,660
Total Current Assets		414,774		10,667		425,441
Total Assets		522,092		10,667		532,759
Accounts payable		105,526		(1,628)		103,898
Total Current Liabilities		175,546		(1,628)		173,918
Deferred income taxes		5,695		3,845		9,540
Retained earnings		255,768		8,450		264,218
Total Stockholders' Equity		325,564		8,450		334,014
Total Liabilities and Stockholders’ Equity	$	522,092	$	10,667	$	532,759



	July 31, 2010
	(Unaudited)
	(Dollars in thousands)
	As Previously Reported		Total Changes		As Adjusted
Merchandise inventories	$	95,720	$	9,437	$	105,157
Deferred income taxes		7,748		54		7,802
Total Current Assets		385,205		9,491		394,696
Total Assets		493,573		9,491		503,064
Accounts payable		79,802		(526)		79,276
Total Current Liabilities		152,944		(526)		152,418
Deferred income taxes		4,087		3,746		7,833
Retained earnings		252,037		6,270		258,307
Total Stockholders' Equity		320,181		6,270		326,451
Total Liabilities and Stockholders’ Equity	$	493,573	$	9,491	$	503,064


As a result of this retrospective application of the change in accounting principle and the change in the classification of the Income Statement, the following items in the Company's Condensed Consolidated Statements of Income and Condensed Consolidated Statement of Cash Flows have been adjusted as follows:

	Three Months Ended
	July 31, 2010
	(Unaudited)
	(Dollars in thousands, except per share data)
	As Previously Reported		Total Changes		As Adjusted
Retail Sales	$	231,865	$	(26)	$	231,839
Total Revenues		234,727		(26)		234,701
Cost of goods sold		143,039		(1,635)		141,404
Selling, general and administrative		62,268		72		62,340
Cost and expenses, net		209,627		(1,563)		208,064
Income before income taxes		25,100		1,537		26,637
Income tax expense		9,081		578		9,659
Net income	$	16,019	$	959	$	16,978
Basic earnings per share	$	0.54	$	0.04	$	0.58
Diluted earnings per share	$	0.54	$	0.04	$	0.58


	Six Months Ended
	July 31, 2010
	(Unaudited)
	(Dollars in thousands, except per share data)
	As Previously Reported		Total Changes		As Adjusted
Retail Sales	$	491,625	$	(746)	$	490,879
Total Revenues		497,410		(746)		496,664
Cost of goods sold		289,893		1,371		291,264
Selling, general and administrative		130,828		(407)		130,421
Cost and expenses, net		429,419		964		430,383
Income before income taxes		67,991		(1,710)		66,281
Income tax expense		24,912		(643)		24,269
Net income	$	43,079	$	(1,067)	$	42,012
Basic earnings per share	$	1.46	$	(0.04)	$	1.42
Diluted earnings per share	$	1.46	$	(0.04)	$	1.42

	Six Months Ended
	July 31, 2010
	(Unaudited)
	(Dollars in thousands)
	As Previously Reported		Total Changes		As Adjusted
Cash flow from operating activities:
Net income	$	43,079	$	(1,067)	$	42,012
Merchandise inventories		22,908		1,584		24,492
Accounts payable, accrued expenses
and other liabilities	$	(27,840)	$	(517)	$	(28,357)