UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 FORM 10-Q |X|     
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE
QUARTERLY PERIOD ENDED NOVEMBER 13, 2004 OR |_|     
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-10204 CPI Corp.(Exact name of registrant as specified in its charter) Delaware
  
  43-1256674(State of Incorporation)
  
  (I.R.S. Employer Identification No.)1706 Washington Ave., St. Louis, Missouri
  
  63103(Address of principal executive offices)
  
  (Zip Code) Registrants telephone number, including area code: (314) 231-1575 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 and [2] has been subject to such filing requirements
  for the past 90 days.|X| Yes     |_| NoIndicate by
  check mark whether the registrant is an accelerated filer (as defined in Rule
  12b-2 of the Exchange Act).|X| Yes     |_| No As of December
27, 2004, the Registrant had 7,757,281 common shares outstanding.     CPI
CORP.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
16 Weeks and 40 Weeks Ended November 13, 2004
PagePART 1. FINANCIAL
        INFORMATIONItem 1.
    Financial
        StatementsInterim
        Condensed Consolidated Balance Sheets
        November 13, 2004 (Unaudited) and February 7, 2004
    1Interim
        Condensed Consolidated Statements of Operations (Unaudited)
        16 and 40 Weeks Ended November 13, 2004 and November 8, 2003
    3Interim
        Condensed Consolidated Statement of Changes in Stockholders Equity
        (Unaudited) 40 Weeks Ended November 13, 2004
    4Interim
        Condensed Consolidated Statements of Cash Flows (Unaudited)
        40 Weeks Ended November 13, 2004 and November 8, 2003
    5Notes
        to Interim Condensed Consolidated Financial Statements (Unaudited)
    7Item 2.
    Managements
        Discussions and Analysis of Financial Condition and Results of Operations
    16Item 3.
    Quantitative
        and Qualitative Disclosures about Market Risk
    29Item 4.
    Disclosure
        Controls and Procedures
    29PART II. OTHER INFORMATIONItem 6.
    Exhibits
        and Reports on Form 8-K
    30Signatures
    31Exhibit
        Index
    32

CPI CORP.
Interim Condensed Consolidated Balance Sheets  Assets

PART I.  FINANCIAL INFORMATION

Item
1   Financial Statements

thousands
  
  November
  13, 2004
  (Unaudited)
  
  February
  7, 2004ASSETSCurrent assets:Cash and cash equivalents
  
  
  $
  10,923
  
  
  
  $
  51,011Accounts receivable:Due from licensor stores
  
  
  
  19,877
  
  
  
  
  7,447Other
  
  
  
  121
  
  
  
  
  59Loan receivable
  
  
  
  5,533
  
  
  
  
  Inventories
  
  
  
  12,773
  
  
  
  
  11,858Prepaid expenses and other current assets
  
  
  
  10,451
  
  
  
  
  7,488Refundable income taxes
  
  
  
  11,264
  
  
  
  
  2,166Deferred tax assets
  
  
  
  9,047
  
  
  
  
  11,947Total current assets
  
  
  
  79,989
  
  
  
  
  91,976Property and equipment:Land
  
  
  
  2,765
  
  
  
  
  2,765Building improvements
  
  
  
  26,519
  
  
  
  
  26,520Leasehold improvements
  
  
  
  6,930
  
  
  
  
  6,571Photographic, sales and manufacturing equipment
  
  
  
  183,963
  
  
  
  
  210,745Total
  
  
  
  220,177
  
  
  
  
  246,601Less accumulated depreciation and amortization
  
  
  
  176,127
  
  
  
  
  193,866Property and equipment, net
  
  
  
  44,050
  
  
  
  
  52,735Assets of business
  transferred under contractual arrangements:Preferred Security
  
  
  
  7,000
  
  
  
  
  7,000Accrued dividends on Preferred Security
  
  
  
  544
  
  
  
  
  60Loan receivable
  
  
  
  
  
  
  
  
  1,915Impairment reserve related to preferred security interest
  
  
  
  (7,544
  )
  
  
  
  Assets of supplemental
  retirement plan:Cash surrender value of life insurance policies (net of
  borrowings of $1,548 at February 7, 2004)
  
  
  
  
  
  
  
  
  11,396Other investments
  
  
  
  6,212
  
  
  
  
  95Other assets, net of
  amortization of $1,359 at both November 13, 2004 and February 7, 2004
  
  
  
  8,477
  
  
  
  
  2,052TOTAL ASSETS
  
  
  $
  138,728
  
  
  
  $
  167,229See accompanying notes.
1


CPI
CORP.
Interim Condensed Consolidated Balance Sheets  Liabilities and Stockholders
Equity

thousands,
        except share and per share data
    
    November
        13, 2004
        (Unaudited)
    
    February
        7, 2004LIABILITIESCurrent
        liabilities:Current
        maturities of long-term debt
    
    
    $
    8,580
    
    
    
    $
    8,580Accounts
        payable
    
    
    
    13,976
    
    
    
    
    15,294Accrued
        employment costs
    
    
    
    17,643
    
    
    
    
    12,297Customer
        deposit liability
    
    
    
    34,161
    
    
    
    
    24,897Sales
        taxes payable
    
    
    
    2,645
    
    
    
    
    2,524Accrued
        advertising expenses
    
    
    
    3,108
    
    
    
    
    1,803Accrued
        expenses and other liabilities
    
    
    
    7,318
    
    
    
    
    3,024Total
        current liabilities
    
    
    
    87,431
    
    
    
    
    68,419Long-term
        debt, less current maturities
    
    
    
    17,042
    
    
    
    
    25,589Accrued
        pension obligations
    
    
    
    10,364
    
    
    
    
    10,364Supplemental
        retirement plan obligations
    
    
    
    6,189
    
    
    
    
    3,547Customer
        deposit liability
    
    
    
    4,076
    
    
    
    
    4,769Other
        liabilities
    
    
    
    542
    
    
    
    
    2,715Total
        liabilities
    
    
    
    125,644
    
    
    
    
    115,403STOCKHOLDERS
        EQUITYPreferred
        stock, no par value, 1,000,000 shares authorized; no shares outstanding
    
    
    
    
    
    
    
    
    Preferred
        stock, Series A, no par value, 200,000 shares authorized; no shares outstanding
    
    
    
    
    
    
    
    
    Common
        stock, $0.40 par value. 50,000,000 shares authorized; 18,425,385 and 18,360,238
        shares issued at November 13, 2004 and February 7, 2004, respectively
    
    
    
    7,370
    
    
    
    
    7,344Additional
        paid-in capital
    
    
    
    53,204
    
    
    
    
    52,272Retained
        earnings
    
    
    
    195,211
    
    
    
    
    230,394Accumulated
        other comprehensive loss
    
    
    
    (8,646
    )
    
    
    
    (9,599
    )247,139
    
    
    
    
    280,411Treasury
        stock - at cost, 10,672,236 and 10,292,503 shares at November 13, 2004
        and February 7, 2004, respectively
    
    
    
    (234,031
    )
    
    
    
    (228,577
    )Unamortized
        deferred compensation- restricted stock
    
    
    
    (24
    )
    
    
    
    (8
    )Total
        stockholders equity
    
    
    
    13,084
    
    
    
    
    51,826TOTAL
        LIABILITIES AND STOCKHOLDERS EQUITY
    
    
    $
    138,728
    
    
    
    $
    167,229See accompanying notes.
2


CPI CORP.Interim Condensed Consolidated
Statements of Operations(Unaudited)
16 Weeks
  Ended
  
  40 Weeks
  Endedthousands, except share and per share
  data
  
  November
  13,
  2004
  
  November
  8,
  2003
  
  November
  13,
  2004
  
  November
  8,
  2003Net sales
  
  $
  78,820
  
  $
  80,731
  
  $
  182,366
  
  $
  197,808Cost and
  expenses:Cost of sales (exclusive
  of depreciation and amortization shown below)
  
  
  10,562
  
  
  9,989
  
  
  24,791
  
  
  25,571Selling, general and administrative expenses
  
  
  69,310
  
  
  69,722
  
  
  157,675
  
  
  166,711Depreciation and amortization
  
  
  4,897
  
  
  4,775
  
  
  12,443
  
  
  12,547Other charges and impairments
  
  
  1,707
  
  
  480
  
  
  15,211
  
  
  48086,476
  
  
  84,966
  
  
  210,120
  
  
  205,309Loss from continuing
  operations
  
  
  (7,656
  )
  
  (4,235
  )
  
  (27,754
  )
  
  (7,501
  )Interest expense
  
  
  599
  
  
  808
  
  
  1,730
  
  
  2,293Interest income
  
  
  351
  
  
  414
  
  
  900
  
  
  1,352Other income, net
  
  
  58
  
  
  687
  
  
  208
  
  
  765Impairment and related
  obligations of preferred security interest
  
  
  9,644
  
  
  
  
  
  9,644
  
  
  Loss from continuing
  operations before income tax benefit
  
  
  (17,490
  )
  
  (3,942
  )
  
  (38,020
  )
  
  (7,677
  )Income tax benefit
  
  
  (4,052
  )
  
  (1,521
  )
  
  (10,413
  )
  
  (2,962
  )Net loss from continuing
  operations
  
  
  (13,438
  )
  
  (2,421
  )
  
  (27,607
  )
  
  (4,715
  )Net loss from discontinued
  operations, net of income tax benefit of 
  $4, $1,229, $2,199 and $2,021, respectively
  
  
  (7
  )
  
  (1,956
  )
  
  (3,744
  )
  
  (3,217
  )NET LOSS
  
  $
  (13,445
  )
  $
  (4,377
  )
  $
  (31,351
  )
  $
  (7,932
  )Net loss per share from
  continuing operations - diluted
  
  $
  (1.73
  )
  $
  (0.30
  )
  $
  (3.48
  )
  $
  (0.58
  )Net loss per share from
  discontinued operations - diluted
  
  
  
  
  
  (0.24
  )
  
  (0.47
  )
  
  (0.40
  )Net loss per share -
  diluted
  
  $
  (1.73
  )
  $
  (0.54
  )
  $
  (3.95
  )
  $
  (0.98
  )Net loss per share from
  continuing operations - basic
  
  $
  (1.73
  )
  $
  (0.30
  )
  $
  (3.48
  )
  $
  (0.58
  )Net loss per share from
  discontinued operations - basic
  
  
  
  
  
  (0.24
  )
  
  (0.47
  )
  
  (0.40
  )Net loss per share - basic
  
  $
  (1.73
  )
  $
  (0.54
  )
  $
  (3.95
  )
  $
  (0.98
  )Dividends per share
  
  $
  0.16
  
  $
  0.16
  
  $
  0.48
  
  $
  0.44Weighted average number of
  common and common equivalent shares outstanding-diluted
  
  
  7,751,697
  
  
  8,071,830
  
  
  7,927,306
  
  
  8,089,226Weighted average number of
  common and common equivalent shares outstanding-basic
  
  
  7,751,697
  
  
  8,071,830
  
  
  7,927,306
  
  
  8,089,226See
accompanying notes.
3


CPI CORP.
Interim Condensed Consolidated Statement of Changes in Stockholders Equity(Unaudited)
Forty weeks ended
November 13, 2004
thousands, except share andper
  share data
  
  Common
  stock
  
  Additional
  paid-in
  capital
  
  Retained
  earnings
  
  Accumulated
  other
  comprehensive
  loss
  
  Treasury
  stock,
  at cost
  
  Deferred
  compensation -
  restricted
  stock
  
  TotalBalance at February 7, 2004
  
  $
  7,344
  
  $
  52,272
  
  $
  230,394
  
  $
  (9,599
  )
  $
  (228,577
  )
  
  $
  (8
  )
  
  $
  51,826Net loss
  
  
  
  
  
  
  
  
  (31,351
  )
  
  
  
  
  
  
  
  
  
  
  
  
  (31,351
  )Total other comprehensive income
  
  
  
  
  
  
  
  
  
  
  
  953
  
  
  
  
  
  
  
  
  
  
  953Total comprehensive loss
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  (30,398
  )Issuance of common stock to employee benefit plans, restricted stock awards and option exercises (92,194 shares)
  
  
  26
  
  
  932
  
  
  
  
  
  
  
  
  554
  
  
  
  (25
  )
  
  
  1,487Dividends ($.48 per common share)
  
  
  
  
  
  
  
  
  (3,832
  )
  
  
  
  
  
  
  
  
  
  
  
  
  (3,832
  )Purchase of treasury stock, at cost (406,780 shares)
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  (6,008
  )
  
  
  
  
  
  
  (6,008
  )Amortization of deferred compensation - restricted stock
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  9
  
  
  
  9Balance at November 13, 2004
  
  $
  7,370
  
  $
  53,204
  
  $
  195,211
  
  $
  (8,646
  )
  $
  (234,031
  )
  
  $
  (24
  )
  
  $
  13,084See accompanying notes.
4

CPI CORP.
Interim Condensed Consolidated Statements of Cash Flows(Unaudited)
40 Weeks
  Endedthousands
  
  November
  13,
  2004
  
  November
  8,
  2003Reconciliation of net loss
  from continuing operations to cash flows provided by (used in) operating
  activities:Net loss from continuing
  operations
  
  
  $
  (27,607
  )
  
  
  $
  (4,715
  )Adjustments for items not
  requiring cash:Depreciation and amortization
  
  
  
  12,443
  
  
  
  
  12,547Loss on disposition of property, plant and equipment
  
  
  
  1,058
  
  
  
  
  112Deferred income taxes
  
  
  
  (3,992
  )
  
  
  
  (1,824
  )Deferred revenues and related costs
  
  
  
  7,414
  
  
  
  
  3,615Accrued interest on preferred security
  
  
  
  (484
  )
  
  
  
  (463
  )Impairment losses
  
  
  
  5,083
  
  
  
  
  Impairment and related obligations of preferred security
  interest
  
  
  
  9,644
  
  
  
  
  Accelerated vesting of supplemental retirement plan
  benefits
  
  
  
  3,338
  
  
  
  
  Other
  
  
  
  710
  
  
  
  
  (144
  )(Increase) decrease in
  current assets:Receivables and inventories
  
  
  
  (13,908
  )
  
  
  
  (9,958
  )Refundable income taxes
  
  
  
  (6,899
  )
  
  
  
  2,644Prepaid expenses and other current assets
  
  
  
  (2,092
  )
  
  
  
  (1,313
  )Increase (decrease) in
  current liabilities:Accounts payable
  
  
  
  (1,170
  )
  
  
  
  2,163Accrued expenses and other liabilities
  
  
  
  6,702
  
  
  
  
  3,274Cash flows (used in)
  provided by continuing operations
  
  
  
  (9,760
  )
  
  
  
  5,938Cash flows used in
  discontinued operations
  
  
  
  (2,736
  )
  
  
  
  (5,306
  )Cash flows (used in)
  provided by operating activities
  
  
  $
  (12,496
  )
  
  
  $
  632See accompanying notes.
5


CPI
CORP.
Interim Condensed Consolidated Statements of Cash Flows (continued)(Unaudited)
40 Weeks
  Endedthousands
  
  November
  13,
  2004
  
  November
  8,
  2003Cash flows (used in)
  provided by operating activities
  
  
  $
  (12,496
  )
  
  
  $
  632Cash flows (used in)
  provided by financing activities:Repayment of long-term obligations
  
  
  
  (8,580
  )
  
  
  
  (8,580
  )Proceeds from issuance of common stock to employee stock
  plans and option exercises
  
  
  
  958
  
  
  
  
  172Cash dividends
  
  
  
  (3,832
  )
  
  
  
  (3,558
  )Purchase of treasury stock
  
  
  
  (6,008
  )
  
  
  
  (935
  )Cash flows used in financing
  activities:
  
  
  
  (17,462
  )
  
  
  
  (12,901
  )Cash flows (used in)
  provided by investing activities:Additions to property and equipment
  
  
  
  (13,212
  )
  
  
  
  (14,663
  )Proceeds from sales of property and equipment
  
  
  
  363
  
  
  
  
  Redemptions of preferred security
  
  
  
  
  
  
  
  
  2,500Changes in loan receivable:Borrowings
  
  
  
  (37,593
  )
  
  
  
  (44,847
  )Repayments
  
  
  
  33,975
  
  
  
  
  39,882Purchases of investment securities in Rabbi Trust
  
  
  
  (456
  )
  
  
  
  (1,337
  )Proceeds from sales of investment securities in Rabbi
  Trust
  
  
  
  5,735
  
  
  
  
  2,746Cash flows used in investing activities
  
  
  
  (11,188
  )
  
  
  
  (15,719
  )Effect of exchange rate
  changes on cash and cash equivalents
  
  
  
  1,058
  
  
  
  
  607Net decrease in cash and
  cash equivalents
  
  
  
  (40,088
  )
  
  
  
  (27,381
  )Cash and
  cash equivalents at beginning of period
  
  
  
  51,011
  
  
  
  
  57,922Cash and
  cash equivalents at end of period
  
  
  $
  10,923
  
  
  
  $
  30,541Supplemental cash flow
  information:Interest paid
  
  
  $
  1,278
  
  
  
  $
  1,621Income taxes refunded
  
  
  $
  (6
  )
  
  
  $
  (3,972
  )Supplemental non-cash
  financing activities:Issuance of common stock under the employee profit
  sharing plan
  
  
  $
  
  
  
  
  $
  606Issuance of treasury stock under the employee profit
  sharing plan
  
  
  $
  554
  
  
  
  $
  Repayment of borrowings against cash surrender value of
  life insurance via liquidation of related policies
  
  
  $
  1,548
  
  
  
  $
  See accompanying notes.
6


CPI CORP.
Notes to Interim Condensed Consolidated Financial Statements(Unaudited)

NOTE 1 
  DESCRIPTION OF BUSINESS AND INTERIM CONDENSED CONSOLIDATED FINANCIAL
  STATEMENTSThe Company operates 1,018 professional portrait studios as of November
13, 2004 throughout the United States, Canada and Puerto Rico under license
agreements with Sears, Roebuck and Co. (Sears).    During the second quarter of 2004, as described in Note 9 to
the Interim Condensed Consolidated Financial Statements herein, the Companys
recently reconstituted Board of Directors made a strategic decision to exit
both the Mexican and mobile photography operations which began operations in
2002.  In addition, the Company operates
searsphotos.com, an on-line photofinishing service as well as a vehicle for the
Companys customers to archive, share portraits via email and order additional
portraits and products.

The Interim Condensed Consolidated Balance Sheet as of November 13,
2004, the related Interim Condensed Consolidated Statements of Operations for
the 16 and 40 weeks ended November 13, 2004 and November 8, 2003, the Interim
Condensed Consolidated Statement of Changes in Stockholders Equity for the 40
weeks ended November 13, 2004 and the Interim Condensed Consolidated Statements
of Cash Flows for the 40 weeks ended November 13, 2004 and November 8, 2003,
are unaudited.  The interim condensed
consolidated financial statements reflect all adjustments (consisting only of
normal recurring accruals), which are, in the opinion of management, necessary
for a fair presentation of the results for the interim periods presented. The
interim condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the CPI Corp. 2003 Annual Report on Form 10-K for its fiscal year
ended February 7, 2004.  The results of
operations for the interim periods should not be considered indicative of
results to be expected for the full year.
Certain reclassifications have been made to the 2003 financial
statements to conform with the current year presentation.

NOTE 2 
  IMPAIRMENT AND RELATED OBLIGATIONS OF
  PREFERRED SECURITY INTERESTAs is more fully discussed in Note 3 to the Companys Consolidated
Financial Statements included in its Annual Report on Form 10-K for the year
ended February 7, 2004, CPI has a continuing financial interest in Prints Plus,
its former Wall Décor segment.  This
continuing financial interest is represented by a Preferred Security carrying a
9% annual dividend rate, a secured revolving line of credit and operating lease
guarantees related to certain of Prints Plus retail store locations.
The Preferred Security was initially valued at $11.0 million at the
time of the sale of Prints Plus and through voluntary redemptions has been paid
down to $7.0 million at November 13, 2004. 
Further at November 13, 2004, the balance outstanding on the $6.4
million secured revolving line of credit was $5.5 million and the maximum
future obligation to the Company under its lease guarantees was $6.0
million.  Based on scheduled lease
payments by Prints Plus, the maximum future obligations of the Company would
decrease an additional $757,000 by the end of CPIs fiscal year (February 5,
2005), then by $2.9 million in fiscal 2005 and approximately $2.3 million over
the next two fiscal years.
7

CPI CORP.
Notes to Interim Condensed Consolidated Financial Statements(Unaudited)
The operating performance of Prints Plus significantly deteriorated
during its quarter ended November 13, 2004 and subsequent thereto.  As a result, the Company has determined that
it is now probable that the remaining carrying value of the Preferred Security
at November 13, 2004 ($7.0 million) and the related accrued dividends
($544,000) will not be recoverable.  In
addition, it is also likely that the Company will incur a liability related to
its ongoing guarantees of certain of Prints Plus operating leases.  Accordingly at November 13, 2004, the
Company has recorded an impairment reserve of approximately $7.5 million
related to the Preferred Security and related dividends and an additional $2.1
million in accrued lease liability obligations relating to its lease
guarantees.  CPI believes that the $5.5
million amount advanced under its secured revolving line of credit at November
13, 2004 is fully recoverable through the application of anticipated busy
season cash receipts of Prints Plus with any shortfall adequately covered by
other asset collateral value.  The
Company anticipates this $5.5 million will be received within a year and
accordingly has classified this amount as current.
NOTE 3  OTHER CHARGES AND IMPAIRMENTS

Other charges and impairments for the periods ended November 13, 2004
and November 8, 2003 included the following:

16 Weeks
  Ended
  
  40 Weeks
  Endedthousands
  
  Nov. 13,
  2004
  
  Nov. 8,
  2003
  
  Nov. 13,
  2004
  
  Nov. 8,
  2003Accruals related to
  accelerated vesting of supplemental retirement plan benefits and guaranteed
  bonuses for 2004
  
  
  $
  92
  
  
  
  $
  
  
  
  
  $
  3,582
  
  
  
  $
  Impairment charges
  
  
  
  1,729
  
  
  
  
  
  
  
  
  
  6,875
  
  
  
  
  Reserves for severance and
  related costs
  
  
  
  
  
  
  
  
  
  
  
  
  
  3,182
  
  
  
  
  Consent solicitation costs
  
  
  
  (30
  )
  
  
  
  480
  
  
  
  
  816
  
  
  
  
  480Other
  
  
  
  (84
  )
  
  
  
  
  
  
  
  
  756
  
  
  
  
  Total Other Charges and
  Impairments
  
  
  $
  1,707
  
  
  
  $
  480
  
  
  
  $
  15,211
  
  
  
  $
  480Accelerated Vesting of Supplemental
Retirement Plan Benefits and Guaranteed Bonuses for 2004
In the first quarter of 2004, change of control provisions in executive
employment contracts were triggered as a result of the change in the
composition of the Companys Board of Directors resulting from the completion
of the consent solicitation, as more fully discussed in Note 8 in the
accompanying Notes to Interim Condensed Consolidated Financial Statements.  As a result, the Company accrued $3.3
million in the first quarter related to the accelerated vesting of executives
benefits covered by the Companys supplemental retirement plan and guaranteed
bonuses provided for in employment contracts of $76,000 in each of the first
and second quarters, and $92,000 in the third quarter for those covered
executives whose employment continues with the Company.

Impairment Charges
During the first quarter of 2004, the Companys recently reconstituted
Board along with its new management leadership in the technology function, made
a decision to materially alter the Companys previously planned and recently
in-process technology platform that was to serve as the foundation for the
eventual conversion to full digital technology in the portrait studios.  As a result of this decision, certain
previously capitalized software development costs related to the development of
the previous platform no longer have future utility to the Company and,
accordingly, have been written off.
8

CPI CORP.
Notes to Interim Condensed Consolidated Financial Statements(Unaudited)
During the second and third quarters of 2004, additional strategic
decisions were made regarding the Companys technology platform that
necessitated the write-off or write-down of certain other technology-related
assets to their anticipated fair value.
Reserves for Severance and Related Costs
During the first quarter of 2004, the Company established a reserve for
severance and related costs consisting principally of potential benefits
related to severance pay and supplemental retirement plan costs associated with
the dismissal of certain executives. 
The amounts recorded in the second quarter relate to severance accruals
associated with corporate headquarters staff reductions that occurred during
the quarter.
Consent Solicitation Costs

In the first three quarters of 2004, the Company incurred $816,000 of
professional services costs related to the then-ongoing consent
solicitation.  These costs included
$152,000 of total consent-related costs incurred by the Knightspoint Group,
which the Company has reimbursed. 
During the 2004 third quarter, a favorable settlement of a legal billing
was negotiated resulting in the reversal of $30,000 of a previous accrual.

Other
In early March 2004, prior to the change of control, the Company
received a lending commitment related to the proposed refinancing of its
then-existing debt structure.  In exchange
for that commitment, the Company paid a $200,000 non-refundable loan commitment
fee.  Subsequent to the receipt of the
commitment and prior to its funding, the consent solicitation was completed
resulting in the installation of a new Board of Directors and the lending
commitment expired, necessitating the write-off of the previously capitalized
non-refundable fee during the first quarter of 2004.  During the second quarter of 2004, the Company recorded $640,000
of accruals resulting from early contract terminations and settlements with
certain of the Companys vendors as a result of strategic decisions to modify
such relationships.  In the third
quarter of 2004, the Company favorably settled one of the aforementioned
matters resulting in the reversal of $84,000 of previously accrued amounts.
9

CPI CORP.
Notes to Interim Condensed Consolidated Financial Statements(Unaudited)
NOTE 4  STOCKHOLDERS EQUITY
The
following table shows the computation of comprehensive income (loss):
16 Weeks
  Ended
  
  40 Weeks
  Endedthousands
  
  Nov. 13,
  2004
  
  Nov. 13,
  2004Net loss
  
  
  $
  (13,445
  )
  
  
  $
  (31,351
  )Other comprehensive income:Foreign currency translation adjustments
  
  
  
  1,172
  
  
  
  
  953Total accumulated other comprehensive income
  
  
  
  1,172
  
  
  
  
  953Total comprehensive loss
  
  
  $
  (12,273
  )
  
  
  $
  (30,398
  )The following table displays the components
of accumulated other comprehensive loss as of November 13, 2004 and February 7,
2004.
thousands
  
  Nov. 13,
  2004
  
  Feb. 7,
  2004Foreign
  currency translation adjustments
  
  
  $
  1,252
  
  
  
  $
  2,205Minimum pension liability, net of taxes
  
  
  
  7,394
  
  
  
  
  7,394Accumulated other comprehensive loss
  
  
  $
  8,646
  
  
  
  $
  9,59910

CPI CORP.
Notes to Interim Condensed Consolidated Financial Statements(Unaudited)

NOTE 5  STOCK-BASED COMPENSATION PLANS

At November 13, 2004, the Company had various stock-based employee
compensation plans, which are described more fully in Note 7 of the Notes to
Consolidated Financial Statements in the Companys 2003 Annual Report on Form
10-K.  The Company accounts for those
plans in accordance with APB No. 25, Accounting For Stock Issued to
Employees, and related Interpretations. 
No stock-based employee compensation cost was reflected in net income,
as no options granted under those plans had an exercise price less than the
market value of the underlying common stock on the date of grant.  The following table illustrates the effect
on net loss and loss per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, Accounting for Stock-Based
Compensation.

16 Weeks Ended
  
  40 Weeks
  Endedthousands,
  except per share data
  
  Nov. 13,
  2004
  
  Nov. 8,
  2003
  
  Nov. 13,
  2004
  
  Nov. 8,
  2003Net loss - as reported
  
  
  $
  (13,445
  )
  
  
  $
  (4,377
  )
  
  
  $
  (31,351
  )
  
  
  $
  (7,932
  )Less: Total stock-based employee compensation expense
  determined under fair value based method for all awards, net of related taxes
  
  
  
  (367
  )
  
  
  
  (80
  )
  
  
  
  (497
  )
  
  
  
  (149
  )Net loss - pro forma
  
  
  $
  (13,812
  )
  
  
  $
  (4,457
  )
  
  
  $
  (31,848
  )
  
  
  $
  (8,081
  )Loss per common share - basicAs reported
  
  
  $
  (1.73
  )
  
  
  $
  (0.54
  )
  
  
  $
  (3.95
  )
  
  
  $
  (0.98
  )Pro forma
  
  
  $
  (1.78
  )
  
  
  $
  (0.55
  )
  
  
  $
  (4.02
  )
  
  
  $
  (1.00
  )Loss per common share - dilutedAs reported
  
  
  $
  (1.73
  )
  
  
  $
  (0.54
  )
  
  
  $
  (3.95
  )
  
  
  $
  (0.98
  )Pro forma
  
  
  $
  (1.78
  )
  
  
  $
  (0.55
  )
  
  
  $
  (4.02
  )
  
  
  $
  (1.00
  )NOTE 6  RECENTLY ISSUED ACCOUNTING STANDARDS
There were no accounting standards issued during the third quarter of
2004, which will impact the Companys consolidated financial statements.

11

CPI CORP.
Notes to Interim Condensed Consolidated Financial Statements(Unaudited)
NOTE 7  EMPLOYEE BENEFIT PLANS
The Company maintains a qualified, noncontributory pension plan that
covers all full-time United States employees meeting certain age and service
requirements.  The plan provides pension
benefits based on an employees length of service and the average compensation
earned from the later of the hire date or January 1, 1998 to the retirement
date. The Companys funding policy is to contribute annually at least the
minimum amount required by government funding standards, but not more than is
tax deductible.  Plan assets consist
primarily of marketable equity securities funds, guaranteed interest contracts,
cash equivalents, immediate participation guarantee contracts and government
bonds.
The Company also maintains a noncontributory defined benefit plan
providing supplemental retirement benefits for certain current and former
executives.  The cost of providing these
benefits is accrued over the remaining expected service lives of the active
plan participants.  The supplemental
retirement plan is unfunded and as such does not have a specific investment
policy or long-term rate of return assumptions.  However, certain assets will be used to finance these future
obligations and consist of investments in a Rabbi Trust.
The
following table sets forth the components of net periodic benefit cost for the
defined benefit plans:
16 Weeks
  Ended
  
  40 Weeks
  EndedPension
  Plan
  
  SupplementalRetirement
  Plan
  
  Pension
  Plan
  
  SupplementalRetirement
  Planthousands
  
  Nov. 13,
  2004
  
  Nov. 13,
  2004
  
  Nov. 13,
  2004
  
  Nov. 13,
  2004Components of net periodic
  benefit cost:Service cost
  
  
  $
  157
  
  
  
  $
  62
  
  
  
  $
  628
  
  
  
  $
  145Interest cost
  
  
  
  831
  
  
  
  
  119
  
  
  
  
  2,078
  
  
  
  
  292Expected return on plan assets
  
  
  
  (903
  )
  
  
  
  
  
  
  
  
  (2,257
  )
  
  
  
  Amortization of prior service cost
  
  
  
  14
  
  
  
  
  12
  
  
  
  
  34
  
  
  
  
  22Amortization of net loss
  
  
  
  134
  
  
  
  
  
  
  
  
  
  554
  
  
  
  
  Accelerated vesting
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  3,338Settlement expense (gain)
  
  
  
  
  
  
  
  
  (55
  )
  
  
  
  
  
  
  
  
  31Curtailment expense
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  230Net periodic benefit cost
  
  
  $
  233
  
  
  
  $
  138
  
  
  
  $
  1,037
  
  
  
  $
  4,05812

CPI CORP.
Notes to Interim Condensed Consolidated Financial Statements(Unaudited)

NOTE 8  CHANGE OF CONTROL

On November 6, 2003, Knightspoint Partners I, L.P. and other entities
participating with them (Knightspoint Group) filed with the SEC preliminary
consent materials relating to the Knightspoint Groups commencement of a
solicitation of the Companys stockholders. 
The purpose of the consent solicitation was to, among other things,
remove seven of the nine members of the Companys Board of Directors, decrease
the size of the Board to eight directors and elect six Knightspoint Group
nominees to the Board.  On January 23,
2004, the Knightspoint Group filed with the SEC definitive consent solicitation
materials.  The Company also filed
definitive proxy materials with the SEC on February 20, 2004 relating to its
opposition to the Knightspoint Groups consent solicitation.  On March 18, 2004, the Knightspoint Group
delivered to the Company written consents. 
On March 24, 2004, an independent inspector certified that the consents
delivered by Knightspoint Group represented a majority of the Companys
outstanding common stock consenting to the election of the Knightspoint Groups
nominees as directors of the Company, the removal of seven of the nine members
of the sitting Board and the adoption of the Knightspoint Groups proposals
included in such consents.

The material change in the composition of the Board resulting from the
Knightspoint Groups successful consent solicitation triggered change of
control provisions in various employment and stock option agreements between
the Company and certain of its executives and employees.  As described in Note 3 of the Notes to
Interim Condensed Consolidated Financial Statements included herein, in the
first quarter of 2004 the Company accrued $3.3 million related to the accelerated
vesting of executives benefits covered by the Companys supplemental
retirement plan.  In the first, second
and third quarters of 2004, the Company also accrued guaranteed bonuses
provided for in employment contracts of $244,000 for those covered executives
whose employment continues with the Company.
NOTE 9  DISCONTINUED OPERATIONS
During the second quarter of 2004, the Companys recently reconstituted
Board of Directors made a strategic decision to exit both the Mexican and
mobile photography operations which began operations in 2002.  This decision was made to allow the Company
to enhance focus on the core Sears Portrait Studios business as well as to
eliminate the ongoing operating dilution associated with these businesses.

The Company executed and completed its plan to exit both its Mexican
and mobile photography operations during the second quarter and recorded the
combined losses on the operations of its Mexican and mobile operations,
including the loss on disposition, net of tax, as a separate component after
net loss from continuing operations. 
The prior years operating activities for these operations have been
reclassified to discontinued operations in the accompanying Interim Condensed
Consolidated Statements of Operations.
13

CPI CORP.
Notes to Interim Condensed Consolidated Financial Statements(Unaudited)
NOTE 10  TERMINATION AND WITHDRAWAL OF
SELF-TENDER OFFER
On November 12, 2004, the Company commenced a Dutch Auction self-tender
offer for up to 1,000,000 shares, or approximately 12.9%, of its outstanding
common stock, at prices ranging from $11.00 to $14.00 per share.  The tender offer was to expire December 20,
2004, unless extended by the Company.  The
tender offer was subject to the receipt of financing, market, economic and business
conditions affecting the Company and other customary conditions.
CPI anticipated that it would have obtained all of the funds necessary
to purchase the shares tendered in the tender offer through a combination of
cash on hand and funds derived from the anticipated funding of a financing
commitment received from National City Bank. 
The financing commitment, which was subject to definitive documentation
and other customary closing conditions, was for a $30 million, five-year term
loan and a $30 million revolving credit facility.
On December 10, 2004, the Company announced that it would terminate and
withdraw its previously announced Dutch Auction tender offer.  National City Bank chose to terminate its
financing commitment to CPI based on the Banks view of the uncertain effects
of the pending Sears and Kmart merger. The Company strongly disagrees that
National City Bank has the right to terminate its commitment on the basis
claimed.  The Company, furthermore, believes
that the pending merger will have a positive effect on the Companys
business.  Although the Company
currently has cash resources to complete the tender offer, the Company believes
that it is prudent not to go forward with its tender offer without the
committed bank facility in light of the Companys ongoing capital investment
program.
NOTE 11 -
CONTINGENCIES

Standby Letters of Credit

As of November 13, 2004, the Company had outstanding standby letters of
credit in the principal amount of $6.2 million used in conjunction with the
Companys self insurance programs.

Litigation
The Company is a defendant in various lawsuits arising in the ordinary
course of business.  It is the opinion
of management that the ultimate liability, if any, resulting from such lawsuits
will not materially affect the consolidated financial position or results of
operations of the Company.
14

CPI CORP.
Notes to Interim Condensed Consolidated Financial Statements(Unaudited)

Debt Covenants


At November 13, 2004, the Company had
$25.6 million outstanding under its existing Senior Note Agreement and $6.2 million of
outstanding letters of credit against its $7.5 million Revolving Credit Facility, which
was used solely for letters of credit.


The Company was in compliance with
all the covenants under its Senior Note Agreement and its Revolving Credit Facility as of
November 13, 2004 except as noted below. As a result of the unexpected $9.6 million
non-operating charge recorded in the quarter ended November 13, 2004 related to the
significant deterioration of Prints Plus operating performance, the Company was in
default of its Revolving Credit Facility for failing to comply with the underlying minimum
net worth covenant as of November 13, 2004. The Revolving Credit Facility was a facility
put in place in the second quarter of 2004 solely to support the Companys
outstanding letters of credit used in conjunction with its self-insurance programs, not as
a borrowing facility. The Revolving Credit Facility was expected to be converted into a
longer-term facility in accordance with a financing commitment dated November 4, 2005 that
has been withdrawn by the lender of such commitment who is also the lender under the
existing Revolving Credit Facility. Because the Company and the lender were not able to
reach a mutually acceptable amendment/waiver to address the covenant violation with
respect to the existing Revolving Credit Facility, on December 27, 2004, the Company
elected to terminate the Revolving Credit Facility and, pursuant to the terms of the Revolving Credit Facility, secured the outstanding letters of
credit with cash collateral of the Company deposited directly with the lender of the
terminated Revolving Credit Facility. Because the Company was in default under the
Revolving Credit Facility it was also in default under the Senior Note Agreement. A
default under the Senior Note Agreement arises if the Company is in default in the
compliance with any term of the Revolving Credit Facility and, as a consequence of such
default or condition, the lenders under the Revolving Credit Facility are entitled to
declare the Revolving Credit Facility to be due and payable before its stated maturity or
before its regularly scheduled dates of payment.


If an event of default under the
Senior Note Agreement has occurred and is continuing, the holders of the Senior Notes may
at any time at their option, by notice or notices to the Company, declare all of the
Senior Notes to be immediately due and payable. Because the Company has terminated the
Revolving Credit Facility the default under the Senior Note Agreement is not continuing.
Accordingly, the Company does not believe that the holders of the Senior Notes can declare
the Senior Notes immediately due and payable.

15

Item 2.    Managements Discussion and Analysis of
Financial Condition and Results of Operations
Managements Discussion and Analysis of Financial Condition and Results
of Operations is designed to provide the reader of the financial statements
with a narrative on the Companys results of operations, financial position and
liquidity, significant accounting policies and critical estimates, and the
future impact of accounting standards that have been issued but are not yet
effective.   Managements Discussion and
Analysis is presented in the following sections:  Executive Overview; Results of Operations; Liquidity and Capital
Resources; and Accounting Pronouncements and Policies.  It is useful to read Managements Discussion
and Analysis in conjunction with the interim condensed consolidated financial
statements and related notes thereto contained elsewhere in this document.
EXECUTIVE
OVERVIEW
The Companys Operations
CPI Corp. is a
long-standing leader, based on sittings and related revenues, in the
professional portrait photography of young children and families.  From the single studio opened by its
predecessor company in 1942, we have grown to 1,018 studios throughout
the United States, Canada and Puerto Rico under license agreements with
Sears.  We have provided professional
portrait photography for Sears customers since 1959 and have been the
exclusive Sears portrait studio operator since 1986.
As of the end of the third quarter in fiscal 2004 and 2003, November
13, 2004 and November 8, 2003, respectively, the Companys Sears Portrait
Studio counts were:
November
  13, 2004
  
  November
  8, 2003United States and Puerto Rico:Within full-line Sears stores
  
  
  
  864
  
  
  
  
  862Locations not within Sears stores
  
  
  
  37
  
  
  
  
  40Canada
  
  
  
  117
  
  
  
  
  121Total
  
  
  
  1,018
  
  
  
  
  1,023In 2002, the Company commenced operations of a Mexican portrait studio
business and a mobile photography operation. 
During the second quarter of 2004, the Companys recently reconstituted
Board of Directors made a strategic decision to exit both the Mexican and
mobile photography operations.  This
decision was made to allow the Company to enhance focus on the core Sears
Portrait Studios business as well as to eliminate the ongoing operating dilution
associated with these businesses.
16


RESULTS
OF OPERATIONS
A summary of consolidated results of operations and key statistics were
as follows:
16 Weeks
  Ended
  
  40 Weeks
  Endedthousands, except per share data
  
  Nov. 13,
  2004
  
  Nov. 8,
  2003
  
  Nov. 13,
  2004
  
  Nov. 8,
  2003Net sales
  
  
  $
  78,820
  
  
  
  $
  80,731
  
  
  
  $
  182,366
  
  
  
  $
  197,808Cost and expenses:Cost of sales
  
  
  
  10,562
  
  
  
  
  9,989
  
  
  
  
  24,791
  
  
  
  
  25,571(exclusive of depreciation and amortization shown below)Cost of sales as a percentage of net
  sales
  
  
  
  13.4
  %
  
  
  
  12.4
  %
  
  
  
  13.6
  %
  
  
  
  12.9
  %Gross margin as a percentage of net
  sales
  
  
  
  86.6
  %
  
  
  
  87.6
  %
  
  
  
  86.4
  %
  
  
  
  87.1
  %Selling, general and administrative expenses
  
  
  
  69,310
  
  
  
  
  69,722
  
  
  
  
  157,675
  
  
  
  
  166,711Selling, general and administrative expenses as a
  percentage of net sales
  
  
  
  87.9
  %
  
  
  
  86.4
  %
  
  
  
  86.5
  %
  
  
  
  84.3
  %Depreciation and
  amortization
  
  
  
  4,897
  
  
  
  
  4,775
  
  
  
  
  12,443
  
  
  
  
  12,547Other charges and impairments
  
  
  
  1,707
  
  
  
  
  480
  
  
  
  
  15,211
  
  
  
  
  48086,476
  
  
  
  
  84,966
  
  
  
  
  210,120
  
  
  
  
  205,309Loss from continuing
  operations
  
  
  
  (7,656
  )
  
  
  
  (4,235
  )
  
  
  
  (27,754
  )
  
  
  
  (7,501
  )Interest expense
  
  
  
  599
  
  
  
  
  808
  
  
  
  
  1,730
  
  
  
  
  2,293Interest income
  
  
  
  351
  
  
  
  
  414
  
  
  
  
  900
  
  
  
  
  1,352Other income, net
  
  
  
  58
  
  
  
  
  687
  
  
  
  
  208
  
  
  
  
  765Impairment and related
  obligations of preferred security interest
  
  
  
  9,644
  
  
  
  
  
  
  
  
  
  9,644
  
  
  
  
  Loss from continuing
  operations before income tax benefit
  
  
  
  (17,490
  )
  
  
  
  (3,942
  )
  
  
  
  (38,020
  )
  
  
  
  (7,677
  )Income tax benefit
  
  
  
  (4,052
  )
  
  
  
  (1,521
  )
  
  
  
  (10,413
  )
  
  
  
  (2,962
  )Net loss from continuing
  operations
  
  
  
  (13,438
  )
  
  
  
  (2,421
  )
  
  
  
  (27,607
  )
  
  
  
  (4,715
  )Net loss from discontinued
  operations, net of income tax benefit
  
  
  
  (7
  )
  
  
  
  (1,956
  )
  
  
  
  (3,744
  )
  
  
  
  (3,217
  )NET
  LOSS
  
  
  $
  (13,445
  )
  
  
  $
  (4,377
  )
  
  
  $
  (31,351
  )
  
  
  $
  (7,932
  )Net loss per share from
  continuing operations - diluted
  
  
  $
  (1.73
  )
  
  
  $
  (0.30
  )
  
  
  $
  (3.48
  )
  
  
  $
  (0.58
  )Net loss per share from
  discontinued operations - diluted
  
  
  
  
  
  
  
  
  (0.24
  )
  
  
  
  (0.47
  )
  
  
  
  (0.40
  )Net
  loss per share - diluted
  
  
  $
  (1.73
  )
  
  
  $
  (0.54
  )
  
  
  $
  (3.95
  )
  
  
  $
  (0.98
  )16 weeks ended
November 13, 2004 compared to 16 weeks ended November 8, 2003
The Company reported a net loss for the 16-week third quarter ended
November 13, 2004 of $13.4 million or $1.73 per diluted share compared to a net
loss of $4.4 million or $.54 per diluted share for the comparable quarter of
fiscal 2003.  The third quarter of
fiscal 2004 was significantly impacted by the recording of other charges and
impairments totaling  $1.7 million and
by the recording of other non-operating charges related to an investment in and
operating lease guarantees associated with its former Wall Décor segment,
Prints Plus, totaling $9.6 million.  On
an after-tax basis, the other charges and impairments and the other
non-operating charges totaled $8.7 million or $1.13 per diluted share.  The other charges and impairments relate to
the write-off or write-down of certain studio photographic and computer
equipment resulting from the continuing implementation of changes to the
Companys going-forward technology and operating strategies.  The other non-operating charges were
necessitated by the recent significant deteriorating financial performance of
Prints Plus.  In the third quarter of
2003, other charges and impairments totaling $480,000, $295,000 on an after-tax
basis or $0.04 per diluted share, were recorded.

17

Net sales totaled $78.8 million and $80.7 million in the third quarter
of fiscal 2004 and 2003, respectively.

  Consolidated
  net sales for the third quarter of 2004 decreased $1.9 million or 2.4% to
  $78.8 million from the $80.7 million reported in the third quarter of
  2003.  During the third quarter of
  2004 and compared to the comparable 2003 quarter, the Companys studios
  experienced an 8.1% decrease in sittings which was partially offset by a 5.6%
  increase in average sales per customer sitting.  Compared to the first half of 2004 when net sales were down
  11.6% from the 2003 first half and the early part of the 2004 third quarter
  when the first half trends continued and slightly worsened, the Company has
  since experienced a partial reversal in its negative sales trends.The rate of
  sittings decline slowed slightly during the Companys 2004 third quarter to
  8.1% compared to the first half of 2004. 
  It is likely that changes to certain of the Companys offers
  reflecting higher prices resulted in the loss of some of the more price
  conscious consumers.  In addition,
  the Company believes sittings continue to be impacted by continuing
  competitive pressures, including the opening of new competitor locations and
  price discounting, as well as the impact of amateur digital photography
  potentially impacting frequency of visits to portrait studios.  Finally, the active hurricane season in
  the southeastern part of the United States also likely had a negative impact
  on sitting trends in the quarter.As
  previously noted, a substantial portion of the Companys third quarter
  sittings shortfall to the comparable quarter of the prior year was
  substantially offset by a 5.6% increase in average sales per customer
  sitting.  The increase in average
  sales per customer sitting is attributable to the positive customer and
  associate response to our recent studio-wide hardware upgrade, an increased
  allocation of training and coverage hours in our studios and the recently
  completed conversion of 128 of our studios to a full digital format.  In addition, we have made numerous
  pricing/offer changes which we believe have also had a positive impact on
  average sales.Costs and expenses were $86.5 million in the third quarter of
2004, compared with $85.0 million in the comparable prior year period.

  Cost of
  sales, excluding depreciation and amortization expense, as a percentage of
  net sales was 13.4% in the third quarter of 2004, compared to 12.4% in the
  comparable quarter in 2003. 
  Correspondingly, gross margin rates were 86.6% and 87.6% in the third
  quarter of 2004 and 2003, respectively. 
  The increase in cost of sales despite a decline in overall sales
  resulted principally from a $600,000 reversal during the third quarter of
  2003 of a previously-accrued liability related to minimum usage requirements
  under a renegotiated paper supply contract. 
  In addition, during the third quarter of 2004, the Company incurred
  higher costs associated with increased markdowns on merchandise sales of
  frames and accessories in an effort to clear older inventory and higher
  effective media costs associated both with the new digital studios as well as
  inefficiencies related to the start-up operation of new digital printers in
  the analog studios.
  Selling,
  general and administrative (SG&A) expenses were $69.3 million and $69.7
  million for third quarter of 2004 and 2003, respectively.  As a percentage of sales, these expenses
  were 87.9% in 2004 and 86.4% in 2003.SG&A
  expenses decreased $412,000 in the third quarter of 2004 compared to
  2003.   The decline in SG&A
  expenses resulted from a $1.5 million planned reduction in advertising costs
  and a net decrease in various other categories of expenses resulting from the
  Companys cost reduction initiatives, mostly offset by planned increases of
  approximately $2.8 million in studio employment costs as preparation for the
  busy season as well as increased health insurance costs.18


  Depreciation
  and amortization was $4.9 million in the third quarter of 2004, compared to
  $4.8 million in the comparable quarter of 2003.
  Other
  charges and impairments reflect costs incurred from strategic actions
  implemented by the Company to restructure its operations, costs that are
  unpredictable and atypical of the Companys operations and additional charges
  due to asset impairments.  In the
  third quarter of 2004, the Company recognized $1.7 million in other charges
  and impairments consisting of the following:16 Weeks
  Endedthousands
  
  Nov. 13,
  2004
  
  Nov. 8,
  2003Accruals related to
  guaranteed bonuses for 2004
  
  
  $
  92
  
  
  
  $
  Impairment charges
  
  
  
  1,729
  
  
  
  
  Consent solicitation costs
  
  
  
  (30
  )
  
  
  
  480Other
  
  
  
  (84
  )
  
  
  
  Total Other Charges and
  Impairments
  
  
  $
  1,707
  
  
  
  $
  480o
  Guaranteed
  Bonuses for 2004In the first
  quarter of 2004, change of control provisions in executive employment
  contracts were triggered as a result of the change in the composition of the
  Companys Board of Directors resulting from the completion of the consent
  solicitation.  As a result, in the
  third quarter of 2004, the Company accrued additional guaranteed bonuses
  provided for in employment contracts of $92,000 for those covered executives
  whose employment continues with the Company.o
  Impairment
  ChargesDuring the
  third quarter of 2004, additional strategic decisions were made regarding the
  Companys technology platform that necessitated the write-off or write-down
  of certain other technology related assets to their anticipated fair value.o
  Consent
  Solicitation CostsDuring the
  third quarter of 2004, a favorable settlement of a legal billing was
  negotiated resulting in the reversal of $30,000 of a previous accrual.o
  OtherDuring the
  second quarter of 2004, the Company recorded accruals resulting from early
  contract terminations and settlements with certain of the Companys vendors
  as a result of strategic decisions to modify such relationships.  In the third quarter of 2004, the Company
  favorably settled one of the aforementioned matters resulting in the reversal
  of $84,000 of previously accrued amounts.
  Interest
  expense was $599,000 in the third quarter of 2004 compared to $808,000 in the
  comparable period of the prior year. 
  The reduction in interest expense is primarily a result of scheduled
  annual principal payments totaling $8.6 million made in June 2004 reducing
  the outstanding balance of the Senior Notes.
  Interest income was
  $351,000 in the third quarter of 2004 compared to $414,000 in the third
  quarter of 2003.  The decrease is primarily due to lower average
  invested cash balances resulting from significant second quarter cash outlays
  for equipment purchases, a repurchase of company stock and principal and
  interest payments on the Companys senior notes and the shortening of
  maturities in certain investments.  These factors were partially
  offset by the current rising interest rate environment.19


  The
  impairment and related obligations of preferred security interest represents
  charges related to an investment in and operating lease guarantees associated
  with its former Wall Décor segment, Prints Plus, totaling $9.6 million.  These charges were necessitated by the
  recent significant deteriorating financial performance of Prints Plus and are
  more fully discussed in the section of Managements Discussion and Analysis
  entitled Contingencies which follows.
  Income tax
  benefits on losses from continuing operations were $4.1 million and $1.5
  million in the third quarter of 2004 and 2003, respectively.  These benefits resulted in effective tax
  rates of 23.2% in 2004 and 38.6% in 2003. 
  The lower effective income tax rate in the third quarter of 2004 was
  attributable to the permanent difference associated with the impairment
  charge related to the Preferred Security interest in Prints Plus.40 weeks ended November 13, 2004 compared to
40 weeks ended November 8, 2003
The Company reported a net loss for the 40 weeks ended November 13,
2004 of $31.4 million, or $3.95 per diluted share compared to a net loss of
$7.9 million, or $.98 per diluted share for the comparable 40 weeks ended
November 8, 2003.  The overall results
for the 40 weeks ended November 13, 2004 were significantly impacted by the
recording of other charges and impairments totaling $15.2 million and by the
recording of other non-operating charges discussed earlier related to Prints
Plus totaling $9.6 million.  On an
after-tax basis, the other charges and impairments and the other non-operating
charges totaled $18.0 million or $2.28 per diluted share.  For the 40 weeks ended November 8, 2003,
other charges and impairments were recorded totaling $480,000, $295,000 on an
after-tax basis or $.04 per diluted share.
Net sales totaled $182.4 million and $197.8 million for the 40 weeks of
fiscal 2004 and 2003, respectively.


  Total net
  sales for 2004 decreased $15.4 million or 7.8% to $182.4 million from the
  $197.8 million recorded in 2003.  This
  sales decline was driven by a 9.5% decrease in sittings only partially offset
  by an increase of 1.2% in average sales per customer sitting.  Compared to the first half of 2004 when
  net sales were down 11.6% from the 2003 first half and the early part of the
  2004 third quarter when the first half trends continued and slightly
  worsened, the Company has since experienced a partial reversal in its
  negative sales trends.It is likely
  that changes to certain of the Companys offers reflecting higher prices
  resulted in the loss of some of the more price conscious consumers.  In addition, the Company believes sittings
  continue to be impacted by continuing competitive pressures, including the
  opening of new competitor locations and price discounting, as well as the
  impact of amateur digital photography potentially impacting frequency of
  visits to portrait studios.  Finally,
  the active hurricane season in the southeastern part of the United States also
  likely had a negative impact on sitting trends in the third quarter.The increase
  in average sale per customer sitting was driven by several initiatives
  implemented during the 3rd quarter of 2004 and was partially offset by the
  increased price discounting in response to competitive pricing pressures and
  the elimination of sitting fees on certain offers targeted at new customer
  acquisition experienced in the first half of the year.  The third quarter initiatives positively
  impacting the average sales per customer include the positive customer and
  associate response to our recent studio-wide hardware upgrade, an increased
  allocation of training and coverage hours in our studios and the recently
  completed conversion of 128 of our studios to a full digital format.  In addition, we have made numerous
  pricing/offer changes during the third quarter of 2004 which we believe have
  also had a positive impact on average sales.20

Costs and expenses were $210.1 million for fiscal 2004, compared
with $205.3 million in the comparable prior year period.


  Cost of
  sales, excluding depreciation and amortization expense, as a percentage of
  net sales was 13.6% for 2004, compared to 12.9% in the comparable period in
  2003.  Correspondingly, gross margin
  rates were 86.4% and 87.1% for 2004 and 2003, respectively.  Cost of sales decreased at a lesser rate
  than sales principally from a $600,000 reversal during the third quarter of
  2003 of a previously accrued liability related to minimum usage requirements
  under a renegotiated paper supply contract. 
  In addition in 2004, the Company incurred higher costs associated with
  markdowns on merchandise sales of frames and accessories in an effort to
  clear older inventory and higher effective media costs associated both with
  the new digital studios as well as inefficiencies related to the start-up
  operation of new digital printers in the analog studios.
  Selling,
  general and administrative expenses were $157.7 million and $166.7 million
  for 2004 and 2003, respectively.  As a
  percentage of sales, these expenses were 86.5% in 2004 and 84.3% in 2003.Selling,
  general and administrative expenses decreased $9.0 million in 2004 compared
  to 2003.  The decrease in selling,
  general and administrative expenses is primarily attributable to a $2.6
  million planned reduction in advertising costs, a $1.0 million decrease in employment
  costs ($557,000 increase related to studio employment costs offset by a
  decrease of  approximately $1.5
  million in corporate headquarters employment costs), and net decreases in
  various other categories of expenses, partially offset by increased health
  insurance costs.  The slight overall
  increase in studio employment is due to the substantial planned increase in
  the third quarter of 2004 in studio training and coverage hours in
  preparation for busy season.  The
  decline in corporate headquarters employment costs is the result of
  previously discussed executive and staff reductions that took place near the
  end of the first quarter and during the second quarter of 2004.
  Depreciation
  and amortization was $12.4 million for fiscal 2004, compared to $12.5 million
  for the comparable period of 2003.21


  Other
  charges and impairments reflect costs incurred from strategic actions
  implemented by the Company to restructure its operations, costs that are
  unpredictable and atypical of the Companys operations and additional charges
  due to asset impairments. Other charges and impairments are as follows:40 Weeks
  Endedthousands
  
  Nov. 13,
  2004
  
  Nov. 8,
  2003Accruals related to
  accelerated vesting of supplemental retirement plan benefits and guaranteed
  bonuses for 2004
  
  
  $
  3,582
  
  
  
  $
  Impairment charges
  
  
  
  6,875
  
  
  
  
  Reserves for severance and
  related costs
  
  
  
  3,182
  
  
  
  
  Consent solicitation costs
  
  
  
  816
  
  
  
  
  480Other
  
  
  
  756
  
  
  
  
  Total Other Charges and
  Impairments
  
  
  $
  15,211
  
  
  
  $
  480o
  Accelerated
  Vesting of Supplemental Retirement Plan Benefits and Guaranteed Bonuses for
  2004In the first
  quarter of 2004, change of control provisions in executive employment
  contracts were triggered as a result of the change in the composition of the
  Companys Board of Directors resulting from the completion of the consent
  solicitation.  As a result, the
  Company accrued $3.6 million related to the accelerated vesting of
  executives benefits covered by the Companys supplemental retirement plan
  and guaranteed bonuses provided for in employment contracts of $76,000 in the
  first and second quarters and $92,000 in the third quarter for those covered
  executives whose employment continues with the Company.o
  Impairment
  ChargesDuring the
  first half of 2004, the Companys new Board along with its new management
  leadership in the technology function, made a decision to materially alter
  the Companys previously planned technology platform that was to serve as the
  foundation for the eventual conversion to full digital technology in the
  portrait studios.  As a result of this
  decision, certain previously capitalized items related to the previous
  platform no longer have future utility to the Company and, accordingly, have
  been written off.During the
  second and third quarters of 2004, additional strategic decisions were made
  regarding the Companys technology platform that necessitated the write-off
  or write-down of certain other technology related assets to their anticipated
  fair value.o
  Reserves for
  Severance and Related CostsDuring the
  first quarter of 2004, the Company established a reserve for severance and
  related costs consisting principally of potential benefits related to
  severance pay and supplemental retirement plan costs associated with the
  dismissal of certain executives.  The
  amounts recorded in the second quarter relate to severance accruals associated
  with corporate headquarters staff reductions that occurred during the
  quarter.22

o
  Consent
  Solicitation CostsIn the first
  three quarters of 2004, the Company incurred $816,000 of professional
  services costs related to the then-ongoing consent solicitation.  These costs included $152,000 of total
  consent-related costs incurred by the Knightspoint Group, which the Company
  has reimbursed.During the
  2004 third quarter, a favorable settlement of a legal billing was negotiated
  resulting in the reversal of $30,000 of a previous accrual.o
  OtherIn early
  March 2004, prior to the change of control, the Company received a lending
  commitment related to the proposed refinancing of its then-existing debt
  structure.  In exchange for that
  commitment, the Company paid a $200,000 non-refundable loan commitment
  fee.  Subsequent to the receipt of the
  commitment and prior to its funding, the consent solicitation was completed
  resulting in the installation of a new Board of Directors and the lending
  commitment expired, necessitating the write-off of the previously capitalized
  non-refundable fee during the first quarter of 2004.During the
  second quarter of 2004, the Company recorded $640,000 of accruals resulting
  from early contract terminations and settlements with certain of the
  Companys vendors as a result of strategic decisions to modify such
  relationships.  In the third quarter
  of 2004, the Company favorably settled one of the aforementioned matters
  resulting in the reversal of $84,000 of previously accrued amounts.
  Interest
  expense was $1.7 million in 2004 compared to $2.3 million in the comparable
  period of the prior year.  The
  reduction in interest expense is primarily a result of scheduled annual
  principal payments totaling $8.6 million made in June 2004 reducing the
  outstanding balance of the Senior Notes.
  Interest income was
  $900,000 in 2004 compared to $1.4 million in 2003.  The decrease is
  primarily due to lower average invested cash balances following significant
  second quarter cash outlays for equipment purchases, a repurchase of company
  stock and principal and interest payments on the Companys senior notes and
  the shortening of maturities in certain investments.  These factors were
  partially offset by the current rising interest rate
  environment.  The remaining decrease is due to interest of $208,000
  received in 2003 on an income tax refund, which did not occur in the current
  year.
  The
  impairment and related obligations of preferred security interest represents
  charges in the third quarter of 2004 related to an investment in and
  operating lease guarantees associated with its former Wall Décor segment,
  Prints Plus, totaling $9.6 million. 
  These charges were necessitated by the recent significant deteriorating
  financial performance of Prints Plus and are more fully discussed in the
  section of Managements Discussion and Analysis entitled  Contingencies which follows.
  Income tax
  benefits on losses from continuing operations were $10.4 million and $3.0
  million in 2004 and 2003, respectively. 
  These benefits resulted in effective tax rates of 27.4% in 2004 and
  38.6% in 2003.  The lower effective
  income tax rate in 2004 was attributable to permanent differences associated
  with the impairment of the Preferred Security interest in Prints Plus,
  taxable gains primarily resulting from the surrendering of company owned life
  insurance policies held by a Rabbi Trust and previously used as funding
  vehicles for the Companys supplemental executive retirement plan and
  non-deductible  accruals related to
  the termination of certain Company executives.23

LIQUIDITY
AND CAPITAL RESOURCES

The following table presents a summary of our cash flows for the first
three quarters of 2004 and 2003.

40 Weeks
  Endedthousands
  
  Nov. 13,
  2004
  
  Nov. 8,
  2003Net cash (used in) provided by:Operating activities
  
  
  $
  (12,496
  )
  
  
  $
  632Investing activities
  
  
  
  (11,188
  )
  
  
  
  (15,719
  )Financing activities
  
  
  
  (17,462
  )
  
  
  
  (12,901
  )Effect of exchange rate changes on cash
  
  
  
  1,058
  
  
  
  
  607Net decrease in cash
  
  
  $
  (40,088
  )
  
  
  $
  (27,381
  )Net Cash Used In Operating Activities
Net cash used in operating activities was $12.5 million during the
forty weeks of 2004 compared to net cash provided by operating activities of
$632,000 in the comparable period 2003. 
The increase in cash used in 2004 compared to 2003 resulted primarily
from increased net losses, which included expenses and charges related to the
change of control of the Companys Board of Directors and strategic and
leadership changes implemented by the reconstituted Board.  These increases in cash used were partially
offset by $5.1 million in impairment charges, $3.3 million related to the
accelerated vesting of executives benefits covered by the Companys
supplemental retirement plan and $9.6 million for the impairment and related
obligations of the Preferred Security interest of Prints Plus, all of which did
not require cash.  In addition,
operating cash flows for the forty weeks of 2004 were also impacted by net
changes in current assets from 2003, principally receivables from Sears and
refundable income taxes.  The receivable
from Sears increased in 2004 due to the higher sales volumes late in the third
quarter resulting from the earlier start of the busy season with Veterans Day
occurring in the third quarter of 2004 and in the fourth quarter of 2003.  Refundable income taxes increased in 2004 as
a result of the forty-week loss and the receipt in the first quarter of 2003 of
an income tax refund totaling $4.4 million. 
Cash flows used in discontinued operations in 2004 were $2.7 million
versus $5.3 million used in the comparable period of 2003.

Net Cash Used In Investing Activities
Net cash used in investing activities during the first three quarters
of 2004 was $11.2 million compared to $15.7 million in fiscal 2003.  The decrease in cash used in investing
activities is primarily related to $3.8 million reduction in the Rabbi Trust
assets.  The Company determined the
assets in the Rabbi Trust exceeded the liability of the supplemental executive
retirement plan and withdrew the $3.8 million from the trust and returned the
funds to corporate cash.  In addition,
there was a decrease in capital expenditures of $1.5 million and a decrease of
$1.3 million in net borrowings by Prints Plus under our revolving line of
credit.  These were offset by no
voluntary redemptions in 2004 by Prints Plus on the Preferred Security compared
to $2.5 million of such redemptions in the first quarter of 2003.
24


Net Cash Used In
Financing Activities
Net cash used in financing activities was $17.5 million in the first
three quarters of 2004 compared to $12.9 million in the comparable prior year
period.  The increase in net cash used
in 2004 was primarily related to a $6.0 million repurchase of Company shares in
a negotiated transaction.  Also, there
was a $274,000 increase in cash dividends which resulted from the Board of
Directors June 3, 2003 decision to increase the annual dividend rate paid on
the Companys common stock from $.56 per share to $.64 per share effective with
the third quarter 2003 dividend payment. 
The increase in net cash used was partially offset by an increase in
proceeds from the issuance of common stock for employee stock plans and option
exercises of $786,000 and the purchase of treasury stock in 2003 of $935,000.
Debt Covenants


At November 13, 2004, the Company had
$25.6 million outstanding under its existing Senior Note Agreement and $6.2 million of
outstanding letters of credit against its $7.5 million Revolving Credit Facility, which
was used solely for letters of credit.


The Company was in compliance with
all the covenants under its Senior Note Agreement and its Revolving Credit Facility as of
November 13, 2004 except as noted below. As a result of the unexpected $9.6 million
non-operating charge recorded in the quarter ended November 13, 2004 related to the
significant deterioration of Prints Plus operating performance, the Company was in
default of its Revolving Credit Facility for failing to comply with the underlying minimum
net worth covenant as of November 13, 2004. The Revolving Credit Facility was a facility
put in place in the second quarter of 2004 solely to support the Companys
outstanding letters of credit used in conjunction with its self-insurance programs, not as
a borrowing facility. The Revolving Credit Facility was expected to be converted into a
longer-term facility in accordance with a financing commitment dated November 4, 2005 that
has been withdrawn by the lender of such commitment who is also the lender under the
existing Revolving Credit Facility. Because the Company and the lender were not able to
reach a mutually acceptable amendment/waiver to address the covenant violation with
respect to the existing Revolving Credit Facility, on December 27, 2004, the Company
elected to terminate the Revolving Credit Facility and, pursuant to the terms of the Revolving Credit Facility, secured the outstanding letters of
credit with cash collateral of the Company deposited directly with the lender of the
terminated Revolving Credit Facility. Because the Company was in default under the
Revolving Credit Facility it was also in default under the Senior Note Agreement. A
default under the Senior Note Agreement arises if the Company is in default in the
compliance with any term of the Revolving Credit Facility and, as a consequence of such
default or condition, the lenders under the Revolving Credit Facility are entitled to
declare the Revolving Credit Facility to be due and payable before its stated maturity or
before its regularly scheduled dates of payment.


If an event of default under the
Senior Note Agreement has occurred and is continuing, the holders of the Senior Notes may
at any time at their option, by notice or notices to the Company, declare all of the
Senior Notes to be immediately due and payable. Because the Company has terminated the
Revolving Credit Facility the default under the Senior Note Agreement is not continuing.
Accordingly, the Company does not believe that the holders of the Senior Notes can declare
the Senior Notes immediately due and payable.


25

Off-Balance Sheet Arrangements
Other than stand-by letters of credit to support our various
self-insurance programs and the ongoing guarantee of certain operating real
estate leases of Prints Plus, both of which are more fully discussed in the
following Contingencies section, the Company has no additional off-balance
sheet arrangements.
Contingencies
The Company uses stand-by letters of credit to support its various
self-insurance programs.  Letters of
credit are issued under CPI Corp.s revolving credit facility, generally having
a one-year maturity and are renewed annually. 
As of November 13, 2004, the Company had outstanding standby letters of
credit in the principal amount of $6.2 million.

As is more fully discussed in Note 3 to the Companys Consolidated
Financial Statements included in its Annual Report on Form 10-K for the year
ended February 7, 2004, CPI has a continuing financial interest in Prints Plus,
its former Wall Décor segment.  This
continuing financial interest is represented by a Preferred Security carrying a
9% annual dividend rate, a secured revolving line of credit and operating lease
guarantees related to certain of Prints Plus retail store locations.

The Preferred Security was initially valued at $11.0 million at the
time of the sale of Prints Plus and through voluntary redemptions has been paid
down to $7.0 million at November 13, 2004. 
Further at November 13, 2004, the balance outstanding on the $6.4
million secured revolving line of credit was $5.5 million and the maximum
future obligation to the Company under its lease guarantees was $6.0
million.  Based on scheduled lease
payments by Prints Plus, the maximum future obligations of the Company would
decrease an additional $757,000 by the end of CPIs fiscal year (February 5,
2004), then by $2.9 million in fiscal 2005 and approximately $2.3 million over
the next two fiscal years.
The operating performance of Prints Plus significantly deteriorated
during its quarter ended November 13, 2004 and subsequent thereto.  As a result, the Company has determined that
it is now probable that the remaining carrying value of the Preferred Security
at November 13, 2004 ($7.0 million) and the related accrued dividends
($544,000) will not be recoverable.  In
addition, it is also likely that the Company will incur a liability related to
its ongoing guarantees of certain of Prints Plus operating leases.  Accordingly at November 13, 2004, the
Company has recorded an impairment reserve of approximately $7.5 million
related to the Preferred Security and related dividends and an additional $2.1
million in accrued lease liability obligations relating to its lease
guarantees.  CPI believes that the $5.5
million amount advanced under its secured revolving line of credit at November
13, 2004 is fully recoverable through the application of anticipated busy
season cash receipts of Prints Plus with any shortfall adequately covered by
other asset collateral value.  The
Company anticipates this $5.5 million will be received within a year and
accordingly has classified this amount as current.
Termination and
Withdrawal of Self-Tender Offer
On November 12, 2004, the Company commenced a Dutch Auction self-tender
offer for up to 1,000,000 shares, or approximately 12.9%, of its outstanding
common stock, at prices ranging from $11.00 to $14.00 per share.  The tender offer was to expire December 20,
2004, unless extended by the Company. 
The tender offer was subject to the receipt of financing, market,
economic and business conditions affecting the Company and other customary
conditions.
CPI anticipated that it would have obtained all of the funds necessary
to purchase the shares tendered in the tender offer through a combination of
cash on hand and funds derived from the anticipated funding of a financing
commitment received from National City Bank. 
The financing commitment, which was subject to definitive documentation
and other customary closing conditions, was for a $30 million, five-year term
loan and a $30 million revolving credit facility.

26
On December 10, 2004, the Company announced that it would terminate and
withdraw its previously announced Dutch Auction tender offer.  National City Bank chose to terminate its
financing commitment to CPI based on the Banks view of the uncertain effects
of the pending Sears and Kmart merger. The Company strongly disagrees that
National City Bank has the right to terminate its commitment on the basis
claimed.  The Company, furthermore,
believes that the pending merger will have a positive effect on the Companys
business.  Although the Company
currently has cash resources to complete the tender offer, the Company believes
that it is prudent not to go forward with its tender offer without the
committed bank facility in light of the Companys ongoing capital investment
program.
Although there are no immediate plans to reinstate the tender offer,
the Company may repurchase shares from time to time through its existing open
market authorization (350,843 shares remaining at November 13, 2004) and/or
through a future tender process.


Liquidity
Cash flows from operations and cash and cash equivalents on hand
represent our expected sources of funds in 2004 to meet our obligations and
commitments, including debt service, annual dividends to shareholders, planned
capital expenditures and normal operating needs.


Despite the termination of its
recently negotiated refinancing commitment discussed in the immediately preceding section, the Company currently anticipates that its cash on hand and cash
flows from operations in 2005 will be sufficient to meet its operating and capital needs,
including the digital conversion of all or a substantial share of its studios.
Nevertheless, CPI is pursuing alternative financing options to provide additional
financial flexibility.

27

ACCOUNTING
PRONOUNCEMENTS AND POLICIES
Adoption of New
Accounting Standards
There were no accounting standards issued during the third quarter of
2004, which will impact the Companys consolidated financial statements.
Application of
Critical Accounting Policies
The Companys significant accounting policies are discussed in the
Notes to the Consolidated Financial Statements that are included in the
Companys 2003 Annual Report on Form 10-K that is filed with the Securities and
Exchange Commission.  In most cases, the
accounting policies utilized by the Company are the only ones permissible under
U.S. Generally Accepted Accounting Principles for businesses in our industry.  However, the application of certain of these
policies requires significant judgments or a complex estimation process that
can affect the results of operations and financial position of the Company, as
well as the related footnote disclosures. 
The Company bases its estimates on historical experience and other
assumptions that it believes are reasonable. If actual amounts are ultimately
different from previous estimates, the revisions are included in the Companys
results of operations for the period in which the actual amounts become known.  The accounting policies and estimates that
can have a significant impact on the operating results, financial position and
footnote disclosures of the Company are described in the Management Discussion
and Analysis of Financial Condition and Results of Operations in the Companys
2003 Annual Report on Form 10-K.
CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING INFORMATION
The statements contained in this report, and in particular in the Managements Discussion and Analysis of
Financial Condition and Results of Operations
section that are not historical facts are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, and involve
risks and uncertainties.  Management
wishes to caution the reader that these forward-looking statements, such as the
Companys outlook for portrait studios, future cash requirements, compliance
with debt covenants, valuation allowances, and capital expenditures, are only
predictions or expectations; actual events or results may differ materially as
a result of risks facing the Company. 
Such risks include, but are not limited to:  customer demand for the Companys products and services, the
Companys ability to obtain financing when needed under reasonable terms, the
overall level of economic activity in the Companys major markets, competitors
actions, manufacturing interruptions, dependence on certain suppliers, changes
in the Companys relationship with Sears and the condition and strategic
planning of Sears, fluctuations in operating results, the condition of Prints
Plus Inc., the attraction and retention of qualified personnel, unforeseen
difficulties arising from installation and operation of new equipment in our
portrait studios and other risks as may be described in the Companys filings
with the Securities and Exchange Commission, including its Form 10-K for the
year ended February 7, 2004.
28

Item
3.  Quantitative and Qualitative
Disclosures About Market Risk
Market risks relating to the Companys operations result primarily from
changes in interest rates and changes in foreign exchange rates.  The Companys debt obligations have
primarily fixed interest rates, therefore, the Companys exposure to changes in
interest rates is minimal. The Companys exposure to changes in foreign
exchange rates relates to its Canadian operations and is also minimal, as these
operations constitute 11.1% of the Companys total assets at November 13, 2004
and 7.2% of the Companys total net sales for the 40 weeks then ended.
Item
4.  Disclosure Controls and Procedures
An evaluation of the Companys disclosure controls and procedures (as
defined in Section 13(a)-14(c) of the Securities Exchange Act of 1934 (the
Act) was carried out under the supervision and with the participation of the
Companys Chief Executive Officer, Chief Financial Officer and several other
members of the Companys senior management as of the end of the period
reported. The Companys Chief Executive Officer and Chief Financial Officer
concluded that the Companys disclosure controls and procedures as currently in
effect are effective in ensuring that the information required to be disclosed
by the Company in the reports it files or submits under the Act is (i)
accumulated and communicated to the Companys management (including the Chief
Executive Officer and Chief Financial Officer) in a timely manner, and (ii)
recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms.
In the quarter ended November 13, 2004, the Company did not make any
significant changes in, nor take any corrective actions regarding, its internal
controls or other factors that could significantly affect these controls.  In addition, since the date of this
evaluation to the filing date of this Quarterly Report, there have been no significant
changes in the Companys internal controls or in other factors that could
significantly affect internal controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
29

Item 6.  Exhibits and Reports on Form 8-K
a.
  ExhibitsAn Exhibit
  Index has been filed as part of this Report on Page E-1.b.
  Reports on
  Form 8-K.-
  
  On September
  1, 2004, CPI Corp. filed an 8-K Current Report on the issuance of a press
  release dated August 26, 2004 announcing 2004 second quarter results.-
  
  On October
  12, 2004, CPI Corp. filed an 8-K Current Report on the issuance of a press
  release dated October 7, 2004 announcing the creation of an interim Office of
  the Chief Executive and the commencement of a search for a permanent chief
  executive officer.-
  
  On November
  10, 2004, CPI Corp. filed an 8-K Current Report on the issuance of a press
  release dated November 5, 2004 announcing recent financial developments and a
  Dutch Auction self-tender offer to repurchase up to 1,000,000 of its shares._
  
  On November
  16, 2004, CPI Corp. filed an 8-K Current Report on the issuance of a press
  release dated November 12, 2004 announcing the commencement of a Dutch
  Auction self-tender offer to repurchase 1,000,000 of its shares.30

CPI CORP.

SIGNATURES

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.

CPI Corp.(Registrant)By:
  /s/ Gary W. DouglassGary W. DouglassExecutive Vice President,
  Finance and Chief Financial Officer and
  Member of the Office of the Chief Executive 
  (Principal Financial Officer)Dated: December 28, 2004By:
  /s/ Kimberly A. LaBelleKimberly A. LaBelleVice President, Corporate
  Controller
  (Principal Accounting Officer)Dated: December 28, 200431

CPI CORP.

E-1
EXHIBIT INDEX

Exhibit No.11.1
  
  Computation of Per Share
  Earnings - Diluted - for the 16 and 40 weeks ended November 13, 2004 and
  November 8, 200311.2
  
  Computation of Per Share
  Earnings - Basic - for the 16 and 40 weeks ended November 13, 2004 and
  November 8, 200331.1
  
  Certification Pursuant to
  Rule 13a-14(a) Under the Securities and Exchange Act of 1934 by the Chairman
  of the Board of Directors and Member of the Office of the Chief Executive31.2
  
  Certification Pursuant to
  Rule 13a-14(a) Under the Securities and Exchange Act of 1934 by the President
  and Chief Operating Officer and Member of the Office of the Chief Executive31.3
  
  Certification Pursuant to
  Rule 13a-14(a) Under the Securities and Exchange Act of 1934 by the Chief
  Financial Officer and Member of the Office of the Chief Executive32.0
  
  Certification Pursuant to
  18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002 by Chairman of the Board of Directors, President
  and Chief Operating Officer and Chief Financial Officer, all Members of the
  Office of the Chief Executive32