Three Months Ended

Pay to Faulkner on the next business day after the Revocation Period described in Paragraph 15, in a lump sum, $750,000, less (i) $29,196.12 already paid in November 2006, or $720,803.88, and (ii) less $3,357.86 as described in Section 2(b) below. Of the $720,803.88 lump sum amount, $583,303.88 shall be deemed to be compensation in settlement of any wage, bonus, stock, severance, or employment claims and will be subject to withholding for Federal and North Carolina income tax purposes and for which Faulkner will be issued a Form W-2 for the year 2007 at the time provided for under existing governmental regulations. For the balance of the lump sum amount, or $137,500 paid in settlement of other claims, including in tort or any other basis, that Faulkner releases herein, Faulkner will be issued a Form 1099 for the year 2007 with respect thereto at the time provided for under existing governmental regulations.

Continue Faulkner’s health insurance coverage (on the same basis and at the same level it is provided to current Cato associates) from October 31, 2006 through October 31, 2007 or until Faulkner becomes eligible for another employer’s group

health insurance benefits, whichever occurs first. Faulkner’s share of the health insurance premiums will be $3,357.86. Faulkner agrees that this $3,357.86 amount will be withheld by Cato from the $720,803.88 lump sum payment above. From the $3,357.86 amount, Cato will deduct any amounts needed to pay prior months of coverage, and going forward, Cato will deduct $306.07 each month for Faulkner’s share of the health insurance premiums. In the event Faulkner becomes eligible for another employer’s group health insurance benefits before October 31, 2007, Faulkner will notify Cato and Cato will pay to Faulkner any amount of the $3,357.86 that has not already been applied to Faulkner’s monthly share of the health insurance premiums.

Faulkner may convert the existing group life insurance coverage to an individual plan upon request to Cato’s Director of Benefits and Cato will provide the necessary paperwork and information upon Faulkner’s request.

As of November 1, 2007, Faulkner will be eligible to continue group health and major medical coverage pursuant to the Consolidated Omnibus and Reform Act (COBRA), at the applicable COBRA rate for his coverage (excluding Life Insurance, Short Term Disability and Long Term Disability coverage), provided that Faulkner pays his monthly COBRA charges on or before the first day of each month of continuing coverage. Faulkner will be responsible for premium increases should any occur. Unless Faulkner informs Cato that he has become eligible for another employer’s group health insurance benefits before October 31, 2007, Cato’s Human Resources Department will send information to Faulkner for such continuation election prior to October 31, 2007.

Title VII of the Civil Rights Act of 1964;

Sections 1981 through 1988 of Title 42 of the United States Code;

The Employee Retirement Income Security Act of 1974 (except for any vested benefits under any tax qualified benefit plan);

The Immigration Reform and Control Act;

The Americans with Disabilities Act of 1990;

The Age Discrimination in Employment Act of 1967;

The Workers Adjustment and Retraining Notification Act;

The Fair Credit Reporting Act;

The Sarbanes-Oxley Act of 2002;

All North Carolina statutes, laws, and regulations;

Any other federal, state, or local law, rule, regulation, or ordinance;

Any public policy, contract, tort, or common law; or

Any basis for recovering costs, fees, or other expenses including attorneys’ fees incurred in any such matters.

He has not filed, nor caused to be filed, nor is he presently a party to, any claim against Cato or any Cato Affiliate that (i) is not being released by this instrument, and (ii) if filed, has not been withdrawn or dismissed.

He has been paid for and/or has received all leaves (paid or unpaid), compensation, wages, bonuses, stock awards, commissions, and/or benefits to which he may be entitled other than those provided to be paid under the terms of this Agreement.

He has no known workplace injuries or occupational diseases.

He will not apply in the future for employment, or accept employment, with Cato or any of its subsidiaries.

Faulkner acknowledges the highly competitive nature of Cato’s business and affirms that he has not divulged, and will not divulge, to anyone outside of Cato

any proprietary or confidential information of Cato. “Confidential Information” means any information (i) which is, or is designed to be or may be used in Cato’s business, (ii) which is private or confidential in that it is not generally known or available to the public, and (iii) which gives or may give Cato an opportunity to obtain an advantage over competitors or possible competitors, or which, if obtained by a competitor or possible competitor, would give or may give that competitor or possible competitor an advantage over Cato that a competitor may not otherwise have. Faulkner further acknowledges and affirms that he has not divulged, and will not divulge, to anyone outside of Cato any non-public information about Cato’s company performance, future plans, or performance of Cato Affiliates, whether “Confidential Information” or not, that Faulkner learned in the course of and because of his employment with Cato. Faulkner also acknowledges that he will not divulge to anyone outside of Cato any non-public information about Cato’s internal business practices, whether “Confidential Information” or not, that Faulkner learned in the course of and because of his employment with Cato. Provided, however, that Faulkner shall be entitled, subject to Paragraph 7 below, to respond to questions by a prospective employer with respect to his business relationship as Chief Financial Officer with John Cato as Chief Executive Officer that led to Faulkner’s resignation from the company.

At Cato’s reasonable advance request, and at mutually convenient times, Faulkner will make himself available to answer factual questions or provide factual information on subjects related to business matters of Cato of which he has knowledge arising from his former employment with Cato. In any legal proceeding to which he is not a party, his sworn testimony, including testimony in discovery, shall, however, be procured by subpoena.

The Parties agree that nothing in this Paragraph is intended to limit or prohibit, or shall be construed as limiting or prohibiting, either Party from providing information in response to a lawfully issued subpoena or otherwise complying with any legal requirement, or from participating in any investigation if requested to do so by a federal, state or local agency. The Parties further agree that the existence and substance of this Agreement may be disclosed in order to enforce its terms.

Faulkner affirms that he has returned all of Cato’s property, documents, and/or any confidential information in whatever form, and any duplicates thereof, in his possession or control. Faulkner also affirms that he is in possession of all of his property and that Cato is not in possession of any of his property.