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 JULY 23, 2005ORo
  TRANSITION REPORT PURSUANT
  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934Commission
  file number 1-10204 CPI Corp.(Exact name of
registrant as specified in its charter) Delaware
  
  43-1256674(State
  or other jurisdiction of incorporation or organization)
  
  (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  oNo
 Indicate by
check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). x Yes  oNo
 Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). o Yes  xNo
 As of August
29, 2005, the Registrant had 7,874,643 common shares outstanding.    CPI CORP.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
12 Weeks and 24 Weeks Ended July 23, 2005

PagePART 1.
  FINANCIAL INFORMATIONItem 1.
  Financial StatementsInterim Condensed Consolidated Balance
  SheetsJuly 23,
  2005 (Unaudited) and February 5, 2005
  1Interim Condensed Consolidated Statements
  of Operations (Unaudited)12 and 24 Weeks Ended July 23, 2005 and
  July 24, 2004
  3Interim Condensed Consolidated Statement of
  Changes in Stockholders Equity(Unaudited) 24 Weeks Ended July 23, 2005
  4Interim Condensed Consolidated Statements
  of Cash Flows (Unaudited)24 Weeks Ended July 23, 2005 and July 24,
  2004
  5Notes to Interim Condensed Consolidated
  Financial Statements (Unaudited)
  7Item 2.
  Managements Discussion and Analysis of
  Financial Condition and Results of Operations
  12Item 3.
  Quantitative and Qualitative Disclosures
  about Market Risk
  24Item 4.
  Controls and Procedures
  24PART II.
  OTHER INFORMATIONItem 4.
  Submission of Matters to a Vote of Security
Holders
  25Item 6.
  Exhibits
  25Signatures
  
  26Exhibit Index
  
  27CPI CORP.Interim Condensed Consolidated Balance Sheets  Assets

PART I. FINANCIAL INFORMATION

Item 1 Financial Statements

July 23,
  2005thousands
  
  (Unaudited)
  
  February
  5, 2005ASSETSCurrent assets:Cash and cash equivalents
  
  $
  14,824
  
  $
  33,883Restricted cash-collateral for outstanding
  letters of credit
  
  
  
  
  
  6,154Accounts receivable:Due from licensor stores
  
  
  8,407
  
  
  7,365Other
  
  
  144
  
  
  326Inventories
  
  
  10,098
  
  
  10,521Prepaid expenses and other current
assets
  
  
  5,663
  
  
  6,905Deferred tax assets
  
  
  9,001
  
  
  8,795Total current assets
  
  
  48,137
  
  
  73,949Property and equipment:Land
  
  
  2,765
  
  
  2,765Building improvements
  
  
  26,423
  
  
  26,684Leasehold improvements
  
  
  6,377
  
  
  6,005Photographic, sales and manufacturing
  equipment
  
  
  131,222
  
  
  183,979Total
  
  
  166,787
  
  
  219,433Less accumulated depreciation and
  amortization
  
  
  120,774
  
  
  177,775Property and equipment, net
  
  
  46,013
  
  
  41,658Assets of business transferred under
  contractual arrangements:Preferred Security
  
  
  7,000
  
  
  7,000Accrued dividends on preferred
security
  
  
  979
  
  
  689Impairment reserve related to preferred
  security interest
  
  
  (7,979
  )
  
  (7,689
  )Other investments - supplemental retirement
  plan
  
  
  6,141
  
  
  6,141Deferred tax assets
  
  
  14,029
  
  
  11,734Other assets, net of amortization of $1,359
  at both July 23, 2005 and February 5, 2005
  
  
  1,438
  
  
  1,618TOTAL ASSETS
  
  $
  115,758
  
  $
  135,100See accompanying notes.

1


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

July 23, 2005thousands, except share and per share data
  
  (Unaudited)
  
  February 5, 2005LIABILITIESCurrent liabilities:Current maturities of long-term debt
  
  $
  8,580
  
  $
  8,580Accounts payable
  
  
  11,659
  
  
  13,011Accrued employment costs
  
  
  12,160
  
  
  12,463Customer deposit liability
  
  
  20,882
  
  
  21,828Accrued severance
  
  
  4,290
  
  
  4,205Income taxes payable
  
  
  2,279
  
  
  2,872Sales taxes payable
  
  
  1,297
  
  
  1,886Accrued advertising expenses
  
  
  1,816
  
  
  1,568Accrued expenses and other liabilities
  
  
  5,024
  
  
  5,348Total current liabilities
  
  
  67,987
  
  
  71,761Long-term debt, less current maturities
  
  
  8,486
  
  
  17,050Accrued pension obligations
  
  
  14,705
  
  
  13,993Supplemental retirement plan obligations
  
  
  3,972
  
  
  4,512Customer deposit liability
  
  
  3,384
  
  
  4,334Other liabilities
  
  
  298
  
  
  564Total liabilities
  
  
  98,832
  
  
  112,214STOCKHOLDERS 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; 18,494,514 and 18,432,779 shares outstanding at July 23, 2005
  and February 5, 2005, respectively
  
  
  7,398
  
  
  7,373Additional paid-in capital
  
  
  54,415
  
  
  53,301Retained earnings
  
  
  199,240
  
  
  206,812Accumulated other comprehensive loss
  
  
  (10,244
  )
  
  (10,505
  )250,809
  
  
  256,981Treasury stock - at cost, 10,639,543 and
  10,672,236 at July 23, 2005 and February 5, 2005, respectively
  
  
  (233,541
  )
  
  (234,031
  )Unamortized deferred compensation-
  restricted stock
  
  
  (342
  )
  
  (64
  )Total stockholders equity
  
  
  16,926
  
  
  22,886TOTAL LIABILITIES AND STOCKHOLDERS
EQUITY
  
  $
  115,758
  
  $
  135,100See accompanying notes.

2


CPI CORP. 
Interim Condensed Consolidated Statements of Operations(Unaudited)

12 Weeks
  Ended
  
  24 Weeks
  Endedthousands, except share and per share
  data
  
  July 23,
  2005
  
  July 24,
  2004
  
  July 23,
  2005
  
  July 24,
  2004Net sales
  
  $
  54,724
  
  $
  48,621
  
  $
  110,528
  
  $
  103,546Cost and expenses:Cost of sales (exclusive of depreciation and
amortization shown below)
  
  
  7,880
  
  
  6,670
  
  
  15,345
  
  
  14,362Selling, general and administrative
expenses
  
  
  45,178
  
  
  42,561
  
  
  92,309
  
  
  88,238Depreciation and amortization
  
  
  4,776
  
  
  3,679
  
  
  9,049
  
  
  7,540Other charges and impairments
  
  
  1,467
  
  
  3,941
  
  
  1,576
  
  
  13,50459,301
  
  
  56,851
  
  
  118,279
  
  
  123,644Loss from continuing operations
  
  
  (4,577
  )
  
  (8,230
  )
  
  (7,751
  )
  
  (20,098
  )Interest expense
  
  
  409
  
  
  532
  
  
  860
  
  
  1,131Interest income
  
  
  145
  
  
  269
  
  
  320
  
  
  550Other income, net
  
  
  37
  
  
  105
  
  
  209
  
  
  150Loss from continuing operations before income
tax benefit
  
  
  (4,804
  )
  
  (8,388
  )
  
  (8,082
  )
  
  (20,529
  )Income tax benefit
  
  
  1,787
  
  
  1,869
  
  
  3,007
  
  
  6,361Net loss from continuing operations
  
  
  (3,017
  )
  
  (6,519
  )
  
  (5,075
  )
  
  (14,168
  )Net loss from discontinued operations, net of
income tax benefit
  
  
  
  
  
  (2,588
  )
  
  
  
  
  (3,737
  )NET LOSS
  
  $
  (3,017
  )
  $
  (9,107
  )
  $
  (5,075
  )
  $
  (17,905
  )NET LOSS PER COMMON SHARENet loss per share from continuing operations -
diluted
  
  $
  (0.38
  )
  $
  (0.82
  )
  $
  (0.65
  )
  $
  (1.76
  )Net loss per share from discontinued operations
- diluted
  
  
  
  
  
  (0.32
  )
  
  
  
  
  (0.46
  )Net loss per share - diluted
  
  $
  (0.38
  )
  $
  (1.14
  )
  $
  (0.65
  )
  $
  (2.22
  )Net loss per share from continuing operations -
basic
  
  $
  (0.38
  )
  $
  (0.82
  )
  $
  (0.65
  )
  $
  (1.76
  )Net loss per share from discontinued operations
- basic
  
  
  
  
  
  (0.32
  )
  
  
  
  
  (0.46
  )Net loss per share - basic
  
  $
  (0.38
  )
  $
  (1.14
  )
  $
  (0.65
  )
  $
  (2.22
  )Dividends per share
  
  $
  0.16
  
  $
  0.16
  
  $
  0.32
  
  $
  0.32Weighted average number of common and common
equivalent shares
  outstanding-diluted
  
  
  7,849,938
  
  
  7,988,186
  
  
  7,829,773
  
  
  8,044,379Weighted average number of common and common
equivalent shares
  outstanding-basic
  
  
  7,849,938
  
  
  7,988,186
  
  
  7,829,773
  
  
  8,044,379See accompanying notes.

3


CPI CORP.
Interim Condensed Consolidated Statement of Changes in Stockholders Equity(Unaudited)

Twenty-four weeks ended July 23, 2005thousands,
  except share and
  per 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 5, 2005
  
  $
  7,373
  
  $
  53,301
  
  $
  206,812
  
  $
  (10,505
  )
  $
  (234,031
  )
  $
  (64
  )
  $
  22,886Net loss
  
  
  
  
  
  
  
  
  (5,075
  )
  
  
  
  
  
  
  
  
  
  
  (5,075
  )Foreign currency translation adjustment
  
  
  
  
  
  
  
  
  
  
  
  261
  
  
  
  
  
  
  
  
  261Total comprehensive loss
  
  
  
  
  
  
  
  
  (5,075
  )
  
  261
  
  
  
  
  
  
  
  
  (4,814
  )Issuance of common stock to employee benefit plans, restricted
stock
  awards and option exercises (94,428 shares)
  
  
  25
  
  
  1,114
  
  
  
  
  
  
  
  
  490
  
  
  (850
  )
  
  779Dividends ($.32 per common share)
  
  
  
  
  
  
  
  
  (2,497
  )
  
  
  
  
  
  
  
  
  
  
  (2,497
  )Amortization of deferred compensation - restricted
stock
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  572
  
  
  572Balance at July 23, 2005
  
  $
  7,398
  
  $
  54,415
  
  $
  199,240
  
  $
  (10,244
  )
  $
  (233,541
  )
  $
  (342
  )
  $
  16,926See accompanying notes.

4


CPI CORP. 
Interim Condensed Consolidated Statements of Cash Flows(Unaudited)

24 Weeks
  Endedthousands
  
  July 23,
  2005
  
  July 24,
  2004Reconciliation of net loss from continuing
  operations to cash flows (used in) provided by operating activities:Net loss from continuing operations
  
  $
  (5,075
  )
  $
  (14,168
  )Adjustments for items not requiring cash:Depreciation and amortization
  
  
  9,445
  
  
  7,546Loss on disposition of property, plant and
  equipment
  
  
  234
  
  
  90Deferred income taxes
  
  
  (2,501
  )
  
  (772
  )Deferred revenues and related costs
  
  
  (1,620
  )
  
  (650
  )Accrued interest on preferred security
  
  
  
  
  
  (290
  )Accelerated vesting of supplemental
  retirement plan benefits
  
  
  
  
  
  3,338Other impairment charges
  
  
  
  
  
  4,298Other
  
  
  938
  
  
  1,188(Increase) decrease in current assets:Receivables and inventories
  
  
  (438
  )
  
  617Refundable income taxes
  
  
  
  
  
  (5,575
  )Prepaid expenses and other current
assets
  
  
  1,105
  
  
  250(Decrease) increase in current liabilities:Accounts payable
  
  
  (1,352
  )
  
  (4,345
  )Accrued expenses and other liabilities
  
  
  (903
  )
  
  185Income taxes payable
  
  
  (592
  )
  
  Cash flows used in continuing operations
  
  
  (759
  )
  
  (8,288
  )Cash flows used in discontinued operations
  
  
  
  
  
  (2,692
  )Cash flows used in operating activities
  
  $
  (759
  )
  $
  (10,980
  )See accompanying notes.

5


CPI CORP. 
Interim Condensed Consolidated Statements of Cash Flows (continued)(Unaudited)

24 Weeks
  Endedthousands
  
  July 23,
  2005
  
  July 24,
  2004Cash flows used in operating activities
  
  $
  (759
  )
  $
  (10,980
  )Cash flows (used in) provided by financing
  activities:Repayment of long-term obligations
  
  
  (8,580
  )
  
  (8,580
  )Reduction in restricted cash-collateral for
  outstanding letters of credit
  
  
  6,154
  
  
  Proceeds from option exercises
  
  
  112
  
  
  920Cash dividends
  
  
  (2,497
  )
  
  (2,593
  )Purchase of treasury stock
  
  
  
  
  
  (6,008
  )Cash flows used in financing
activities
  
  
  (4,811
  )
  
  (16,261
  )Cash flows (used in) provided by investing
  activities:Additions to property and equipment
  
  
  (13,735
  )
  
  (7,525
  )Proceeds from sales of property and
  equipment
  
  
  64
  
  
  215Proceeds from sales of assets held for
sale
  
  
  35
  
  
  Changes in loan receivable:Borrowings
  
  
  
  
  
  (22,220
  )Repayments
  
  
  
  
  
  20,596Increase in assets held in Rabbi Trust
  
  
  (159
  )
  
  (456
  )Supplemental retirement payments funded by
  assets held in Rabbi Trust
  
  
  159
  
  
  405Cash flows used in investing
activities
  
  
  (13,636
  )
  
  (8,985
  )Effect of exchange rate changes on cash and
  cash equivalents
  
  
  147
  
  
  41Net decrease in cash and cash equivalents
  
  
  (19,059
  )
  
  (36,185
  )Cash and cash equivalents at beginning of
  period
  
  
  33,883
  
  
  51,011Cash and cash equivalents at end of period
  
  $
  14,824
  
  $
  14,826Supplemental cash flow information:Interest paid
  
  $
  959
  
  $
  1,278Income taxes paid
  
  $
  117
  
  $
  52Supplemental non-cash financing activities:Issuance of treasury stock under the
  employee profit sharing plan
  
  $
  490
  
  $
  554Issuance of restricted stock to employees
  and directors
  
  $
  850
  
  $
  Repayment of borrowings against cash
  surrender value of life insurance via liquidation of related policies
  
  $
  
  
  $
  1,548Executive retirement stock option
  modification
  
  $
  177
  
  
  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 1,034 professional portrait studios as of July 23, 2005 throughout the
United States, Canada and Puerto Rico principally under license agreements with
Sears, Roebuck and Co. (Sears).  The
Company also 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 July 23, 2005, the related Interim
Condensed Consolidated Statements of Operations for the 12 and 24 weeks ended
July 23, 2005 and July 24, 2004, the Interim Condensed Consolidated Statement
of Changes in Stockholders Equity for the 24 weeks ended July 23, 2005 and the
Interim Condensed Consolidated Statements of Cash Flows for the 24 weeks ended
July 23, 2005 and July 24, 2004, 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. 2004 Annual Report on
Form 10-K for its fiscal year ended February 5, 2005.  The results of operations for the interim periods should not be
considered indicative of results to be expected for the full year.

The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period.  Actual results could differ from those estimates.

  Certain reclassifications
    have been made to the 2004 financial statements to conform with the current
    year presentation.NOTE 2    INVENTORIES


  The following table sets forth the components of inventory:



*thousands*
    
    July 23, 2005
    
    February 5, 2005Raw materials - film, paper, chemicals
    
    $
    3,800
    
    $
    3,750Portraits
        in process
    
    
    1,210
    
    
    1,555Finished
        portraits pending delivery
    
    
    620
    
    
    496Frames
      and accessories
    
    
    1,374
    
    
    1,286Studio
        supplies
    
    
    2,218
    
    
    2,197Other
        supplies and parts
    
    
    876
    
    
    1,237Total
    
    $
    10,098
    
    $
    10,5217


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

NOTE 3 
  BORROWINGSOn April 15,
2005, the Company entered into a new $30.0 million (reducing to $25 million in
February 2006 and $20 million in February 2007) unsecured bank revolving credit
facility (the Revolving Facility), which will expire on April 13, 2007 and
carries a variable interest rate charged at either LIBOR or prime rate funds,
with an applicable margin added.

Concurrent
with the closing of the Revolving Facility, the Company amended its existing
Senior Note agreement to allow it to incur additional indebtedness without
violating the debt to equity ratio covenant included in the original
agreement.  The covenants of the amended
Senior Note Agreement now principally mirror those included in the Revolving
Facility.

At July 23,
2005, the Company had $17.1 million outstanding under its existing Senior Note
Agreement and no borrowings against its $30.0 million Revolving Facility.






NOTE 4 
  OTHER CHARGES AND IMPAIRMENTSOther charges
    and impairments for the half ended July 23, 2005 totaled $1.6 million and
    included the following:

Impairment Charges

During the second quarter of
2005, the Company recorded a reserve of $180,000 for repair parts related to
its film infrastructure determined to be obsolete due to the conversion of its
studios to the full digital format.  In
addition, the Company recorded $74,000 in costs to discard assets removed from
service during the 2004 hardware and printer upgrade and the ongoing digital
conversion.

Reserves for
Severance and Related Costs

In the first and second
quarters of 2005, the Company recognized $134,000 and $75,000, respectively, in
additional costs associated with the dismissal of certain executives in 2004.

Executive Retirements/Repositioning Costs

As part of the Board of Directors ongoing effort to realign the
executive management team following the proxy consent solicitation in early
2004, two senior executives agreed to retire during the second quarter of
2005.  During the quarter ended July 23,
2005, the Company recorded approximately $1.1 million in separation costs relating to
these two executives and for costs incurred as part of the Companys search
for a new CEO which was completed and announced on July 20, 2005.

Contract Terminations and Settlements

During the
first and second quarters of 2005, favorable settlements of professional
services billings were negotiated resulting in the reversals of $25,000 and
$11,000, respectively, of previous accruals.
The Company also recorded an additional $50,000 accrual relating to the
settlement of a compensation claim by a former consultant to the Company.  This former consultant is a relative of the
Companys Chairman of the Board.

8


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

NOTE 5 
  STOCK-BASED COMPENSATION PLANSAt July 23,
2005, the Company had various stock-based employee compensation plans, which
are described more fully in Note 8 of the Notes to Consolidated Financial
statements in the Companys 2004 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.  The fair value
recognition effect would have been additional costs of $0.01 and $0.02,
respectively, for the 12 and 24 weeks of the prior year, and no net effect in
the current year.

On
April 14, 2005, the Board of Directors approved a grant of 34,562 shares of
restricted stock to its Chairman of the Board who has been acting in an
executive officer capacity since October 6, 2004, when the Company formed its
Office of the Chief Executive.  The
compensation award included the grant, without restrictions, of 17,281 shares
of the Companys common stock and 17,281 shares of restricted stock that vest
ratably from April 2005 through September 2005.  The total fair value of the award at the date of the grant was
$519,121.  The fair value of the 17,281
shares awarded, without restrictions, amounted to $259,561, $175,000 of which
represented compensation for fiscal 2004 and was recorded as such in the
Companys Consolidated Financial Statements included in its Annual Report on
Form 10-K for the year ended February 5, 2005.
During the 12 and 24 weeks ended July 23, 2005, $130,000 and $256,000 of
compensation expense was recorded related to the remainder of the expense
pertaining to the unrestricted shares as well as the amortization related to
the restricted shares that vested through July 23, 2005.


9


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

NOTE 6 
  EMPLOYEE BENEFIT PLANSThe 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
tables set forth the components of net periodic benefit cost for the defined
benefit plans:

12
  Weeks EndedPension Plan
  
  Supplemental
  Retirement Planthousands
  
  July 23, 2005
  
  July 24, 2004
  
  July 23, 2005
  
  July 24, 2004Components of net periodic benefit
  cost:Service
cost
  
  $
  117
  
  $
  118
  
  $
  26
  
  $
  47Interest
cost
  
  
  651
  
  
  623
  
  
  57
  
  
  89Expected return
  on plan assets
  
  
  (644
  )
  
  (677
  )
  
  
  
  
  Amortization of
  prior service cost
  
  
  10
  
  
  10
  
  
  7
  
  
  9Amortization of
  net (gain) loss
  
  
  222
  
  
  101
  
  
  (4
  )
  
  Net periodic benefit cost
  
  $
  356
  
  $
  175
  
  $
  86
  
  $
  14524
  Weeks EndedPension Plan
  
  Supplemental
  Retirement Planthousands
  
  July 23, 2005
  
  July 24, 2004
  
  July 23, 2005
  
  July 24, 2004Components of net periodic benefit
  cost:Service
cost
  
  $
  234
  
  $
  471
  
  $
  52
  
  $
  83Interest
cost
  
  
  1,302
  
  
  1,247
  
  
  114
  
  
  174Expected return
  on plan assets
  
  
  (1,288
  )
  
  (1,354
  )
  
  
  
  
  Amortization of
  prior service cost
  
  
  20
  
  
  20
  
  
  14
  
  
  9Amortization of
  net (gain) loss
  
  
  444
  
  
  420
  
  
  (8
  )
  
  Accelerated
  vesting
  
  
  
  
  
  
  
  
  
  
  
  3,338Settlement
  expense
  
  
  
  
  
  
  
  
  
  
  
  86Curtailment
  expense
  
  
  
  
  
  
  
  
  
  
  
  230Net periodic benefit cost
  
  $
  712
  
  $
  804
  
  $
  172
  
  $
  3,920Based upon the results of its recently completed actuarial report for
the 2004 plan year, the Company now expects to make a voluntary contribution to
its pension plan in the amount of $2,050,000 on or prior to September 15, 2005.

10


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

NOTE 7 
  CONTINGENCIESStandby
Letters of Credit

As of July 23, 2005, the
Company had outstanding standby letters of credit in the principal amount of
$6.3 million used primarily in conjunction with the Companys self insurance
programs.  On May 17, 2005, the Company replaced all previously-held collateralized
standby letters of credit with new letters of credit issued under the Companys
new revolving credit facility.
Accordingly, the restricted cash which had been deposited as cash collateral
as of February 5, 2005 has been returned to the Company to be used for general corporate
purposes.

Litigation

The Company is a defendant in
various lawsuits.  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.

Contingent Lease Obligations

In July 2001,
the Company announced the completion of the sale of its Wall Décor segment
which included the ongoing guarantee of certain operating real estate leases of
Prints Plus.  As of July 23, 2005, the
maximum future obligation to the Company under its guarantee of these leases is
$4.2 million.  To recognize the risk
associated with these leases and based upon the Companys past experience with
renegotiating lease obligations, a $1.0 million reserve was established in 2001
at time of the sale.  As a result of the
significant deterioration in the financial performance of Prints Plus in the
third quarter of 2004, including its subsequent bankruptcy filing, all of which
is more fully described in Note 12 to the Companys Consolidated Financial
Statements included in its Annual Report on Form 10-K for the year ended
February 5, 2005, the Company recorded an additional $2.1 million of lease
obligation reserves bringing the total reserve at July 23, 2005 to $3.1
million. Based on the progress of the
bankruptcy case to-date, including Prints Plus receipt of debtor-in-possession
financing on May 18, 2005, and the continued operations of selected locations
of Prints Plus, the Company believes that the $3.1 million reserve is adequate
to cover the potential losses to be realized under the Companys operating
lease guarantees.

To assist
Prints Plus in obtaining the above-mentioned debtor-in-possession financing
facility, the Company guaranteed $300,000 of the facility by posting a letter
of credit with the lender.

11


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. The reader should 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 a single
studio opened by our predecessor company in 1942, we have grown to 1,034
studios throughout the United States (U.S.), Canada and Puerto Rico,
principally 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 second quarter in fiscal 2005 and
2004 the Companys studio counts were:

July 23, 2005
  
  July 24, 2004United States and Puerto
  Rico:Within full-line Sears stores
  
  
  860
  
  
  861Locations not within Sears stores
  
  
  40
  
  
  39Within Sears Essential/Grand stores
  
  
  18
  
  
  2Canada
  
  
  116
  
  
  117Total
  
  
  1,034
  
  
  1,019During the
second quarter of 2005, the Company continued its plan to transition a
substantial number of studios to full digital technology by converting an
additional 374 U.S. studios to full digital format, bringing the total number
converted to 645 U.S. studios as of July 23, 2005. As of September 1, 2005, the
number of converted U.S. studios has grown to 902.

Based on ongoing discussions
with Sears, the Company believes that Sears Portrait Studios will be in
approximately 32 new Sears Essential and/or Sears Grand stores by the end of fiscal 2005. As of
July 23, 2005, the Company has opened new portrait studios in 14 Sears
Essential stores and as of September 1, 2005, this number has grown to 24.

12


RESULTS OF OPERATIONS

A summary of
consolidated results of operations and key statistics were as follows:

12 Weeks
  Ended
  
  24 Weeks
  Endedthousands, except per share data
  
  July 23, 2005
  
  July 24, 2004
  
  July 23, 2005
  
  July 24, 2004Net sales
  
  $
  54,724
  
  $
  48,621
  
  $
  110,528
  
  $
  103,546Cost and
  expenses:Cost of sales
  
  
  7,880
  
  
  6,670
  
  
  15,345
  
  
  14,362(exclusive of depreciation and amortization shown below)Cost of
  sales as a percentage of net sales
  
  
  14.4
  %
  
  13.7
  %
  
  13.9
  %
  
  13.9
  %Gross
  margin as a percentage of net sales
  
  
  85.6
  %
  
  86.3
  %
  
  86.1
  %
  
  86.1
  %Selling, general and administrative
expenses
  
  
  45,178
  
  
  42,561
  
  
  92,309
  
  
  88,238Selling,
  general and administrative expenses as a percentage of net  sales
  
  
  82.6
  %
  
  87.5
  %
  
  83.5
  %
  
  85.2
  %Depreciation and amortization
  
  
  4,776
  
  
  3,679
  
  
  9,049
  
  
  7,540Other charges and impairments
  
  
  1,467
  
  
  3,941
  
  
  1,576
  
  
  13,50459,301
  
  
  56,851
  
  
  118,279
  
  
  123,644Loss from continuing operations
  
  
  (4,577
  )
  
  (8,230
  )
  
  (7,751
  )
  
  (20,098
  )Interest expense
  
  
  409
  
  
  532
  
  
  860
  
  
  1,131Interest income
  
  
  145
  
  
  269
  
  
  320
  
  
  550Other income, net
  
  
  37
  
  
  105
  
  
  209
  
  
  150Loss from continuing operations before income tax
benefit
  
  
  (4,804
  )
  
  (8,388
  )
  
  (8,082
  )
  
  (20,529
  )Income tax benefit
  
  
  1,787
  
  
  1,869
  
  
  3,007
  
  
  6,361Net loss from continuing operations
  
  
  (3,017
  )
  
  (6,519
  )
  
  (5,075
  )
  
  (14,168
  )Net loss from discontinued operations, net of income tax
benefit
  
  
  
  
  
  (2,588
  )
  
  
  
  
  (3,737
  )NET LOSS
  
  $
  (3,017
  )
  $
  (9,107
  )
  $
  (5,075
  )
  $
  (17,905
  )Net loss per share from continuing operations - diluted
  
  $
  (0.38
  )
  $
  (0.82
  )
  $
  (0.65
  )
  $
  (1.76
  )Net loss per share from discontinued operations -
diluted
  
  
  
  
  
  (0.32
  )
  
  
  
  
  (0.46
  )Net loss per share - diluted
  
  $
  (0.38
  )
  $
  (1.14
  )
  $
  (0.65
  )
  $
  (2.22
  )12 weeks ended July 23, 2005 compared to 12
weeks ended July 24, 2004

The Company
reported a net loss for the 12-week second quarter ended July 23, 2005 of $3.0
million or $0.38 per diluted share compared to a net loss of $9.1 million or
$1.14 per diluted share for the comparable quarter of fiscal 2004. The overall
results for the second quarter of 2005 were impacted by the recording of other
charges and impairments totaling $921,000 on an after-tax basis related
principally to executive retirements. The second quarter of fiscal 2004 was
significantly impacted by the recording of other charges and impairments
totaling $2.9 million on an after-tax basis and $2.6 million of after-tax
charges recorded as net losses from discontinued operations. The other charges
and impairments consist principally of costs incurred by the Company in the
second quarter of 2004 for severance accruals related to corporate headquarters
staff reductions, asset write-downs and write-offs resulting from on going
changes in strategic technology direction and accruals related to early
contract terminations and settlements. The discontinued operations presentation
resulted from the Companys decision to exit its Mexican and mobile photography
operations in the second quarter of 2004.

13


Net sales
totaled $54.7 million and $48.6 million in the second quarter of fiscal 2005
and 2004, respectively.


  Net sales
  for the second quarter of 2005 increased $6.1 million, or approximately 13%,
  to $54.7 million from the $48.6 million reported in the second quarter of
  2004. The comparability of the sales comparisons for the second quarter of
  2005 versus 2004 was not significantly impacted by the opening of portrait
  studios in new Sears Essential stores during the quarter. Although there were
  14 new studios operating inside Sears Essential stores as of the quarter end,
  substantially all of them were opened between late May and late July. Based
  on the latest available information, the Company currently expects to have a
  total of 32 new studios operating in Sears Essential and/or Sears Grand
  stores by the end of fiscal 2005.The increase in second quarter sales is due principally
          to an increase in average sale per customer sitting of approximately
          20%, offset only partially by a 7% decline in overall sittings versus
          the same period last year. Significantly, sales for the quarter were
          positively impacted by $2.1 million due to a reduced backlog of portraits
          in process or pending delivery to customers at the end of the second
          quarter. This reduction in backlog is primarily attributable to the
          increasing number of digital studios which, due to their faster processing
          and quicker turnaround to customers, both through central and on-site
          fulfillment, have lower levels of undelivered portraits. The impact
          of the reduction in backlog discussed above is also reflected in the
          reported decline in sittings which would be significantly greater than
          7% absent the material change in backlog. The Company attributes the
          sittings decline to a number of internal and external factors. Significantly,
          the Companys marketing program has undergone extensive change
          designed to simplify pricing, eliminate most coupons, and prepare the
          way for a significant repositioning of the Sears Portrait Studio brand
          in conjunction with completion of the digital rollout. At the same time,
          as preparation for the relaunch of the brand, the Company has broadly
          tested various offer changes to reflect the differentiated value proposition
          offered by its digital studios. While having a positive impact on both
          the average sale and total sales, these offer changes have resulted
          in the loss of more price-sensitive customers to lower priced competitors.
          In addition, the Company believes that the continuing proliferation
          of amateur digital photography may be reducing portrait activity overall,
          especially during periods such as the Companys second quarter,
          which are marked by the absence of significant holidays and life cycle
          events.Costs and
  expenses were $59.3 million in the second quarter of 2005, compared with
  $56.9 million in the comparable prior year period.
  Cost of sales, excluding depreciation and amortization
          expense, was $7.9 million in the second quarter of 2005 compared with
          $6.7 million in the comparable prior year period. Cost of sales as a
          percentage of net sales was 14.4% in the second quarter of 2005, compared
          to 13.7% in the comparable quarter in 2004. Correspondingly, gross margin
          rates were 85.6% and 86.3% in the second quarter of 2005 and 2004, respectively.
          The increase in cost of sales resulted significantly from continuing
          start-up costs and inefficiencies (both in-studio and central lab) in
          connection with the ongoing digital conversion, including
          waste associated with the operation of onsite printers in the digital
          studios, higher overall print media costs associated with onsite-fulfilled
          product, and inefficiencies related to the transition from a film-based
          to a central digital manufacturing system. In addition, the decrease
          in the backlog discussed above added approximately $300,000 to cost
          of sales in the second quarter of 2005. The increase is also due in
          part to increased sales of specialty portrait products. These increases
          were partially offset by declines in film purchases and associated shipping
          costs due to the digital conversion and lower costs resulting from reduced
          production of traditional portrait sheets.14



  Selling,
  general and administrative (SG&A) expenses were $45.2 million and $42.6
  million for the second quarter of 2005 and 2004, respectively. As a
  percentage of sales, these expenses were 82.6% in 2005 and 87.5% in 2004.
  Selling, general and administrative costs increased primarily as a result of
  increases in studio employment costs totaling $2.2 million, including
  $529,000 of additional costs related to the reduction in the backlog, sales
  commissions paid to Sears resulting from higher sales ($884,000), travel and
  training costs related to the digital conversion of studios ($425,000) and
  restricted stock amortization related to employee grants ($227,000). These
  increases were partially offset by lower corporate employment costs resulting
  from previous staff reductions ($546,000), reduced employee medical insurance
  costs driven principally by plan design changes made at the beginning of 2005
  and reduced participation ($733,000) and reduced supplemental executive
  retirement benefit costs resulting from changes to the underlying funding
  mechanisms and a reduction in the number of participants through early,
  discounted lump sum settlements ($312,000).The increase
  in studio employment costs resulted from the Companys ongoing initiative to
  restore studio coverage and training hours that had been reduced
  substantially beginning in the second half of 2003 and continuing through the
  middle of last years second quarter in response to then-declining sales
  trends. Studio labor also reflects increased labor and training investments
  in connection with the start-up operations of the Companys digital studios. Studio
  employment cost comparisons to the prior year improved through the end of the
  quarter both due to increasingly easier comparisons as well as the impact of
  various initiatives launched late in the first quarter of 2005 to improve
  labor scheduling and productivity.
  Depreciation
  and amortization was $4.8 million in the second quarter of 2005, compared to
  $3.7 million in the comparable quarter of 2004. The increase in depreciation
  and amortization is principally attributable to significant investments that
  have been made in connection both with a studio-wide hardware and printer
  upgrade in 2004 as well as the ongoing digital conversion.
  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 second
          quarter of 2005 and 2004, the Company recognized $1.5 million and $3.9
          million, respectively, in other charges and impairments. As more fully
          discussed in Managements Discussion and Analysis in the Companys
          Annual Report on Form 10-K for the year ended February 5, 2005, the
          second quarter of 2004 included reserves for severance and related costs
          ($1.1 million), impairment charges ($2.1 million), contract terminations
          and settlements ($640,000) and guaranteed bonus accruals ($76,000).
          In the second quarter of 2005, other charges and impairments consisted
          of the following:o
  Executive Retirements/Repositioning CostsAs part of
  the Board of Directors ongoing effort to realign the executive management
  team following the proxy consent solicitation in early 2004, two senior
  executives agreed to retire during the second quarter of 2005. During the
  quarter ended July 23, 2005, the Company recorded approximately $1.1 million
  in separation costs relating to these two executives and for costs incurred as part of
  the Companys search for a new CEO which was completed and announced on July
  20, 2005.15


o
  Reserves for
  Severance and Related CostsIn the
  second quarter of 2005 the Company recognized $75,000 in additional costs
  associated with the dismissal of certain executives in 2004.o
  Impairment ChargesDuring the
  second quarter of 2005, the Company recorded a reserve of $180,000 for repair
  parts related to its film infrastructure determined to be obsolete due to the
  conversion of its studios to the full digital format. In addition, the Company
  recorded $74,000 in costs to discard assets removed from service during the
  2004 hardware and printer upgrade and the ongoing digital conversion.o
  Contract
  Terminations and SettlementsDuring the
  second quarter of 2005, the Company recorded an additional $50,000 accrual
  relating to the settlement of a compensation claim by a former consultant to
  the Company. This former consultant is a relative of the Companys Chairman
  of the Board. In addition, a favorable settlement of a professional services
  billing was negotiated resulting in the reversal of $11,000 of a previous
  accrual.
  Interest
  expense was $409,000 in the second quarter of 2005 compared to $532,000 in
  the comparable prior year quarter. The reduction in interest expense is the
  result of scheduled annual principal payments totaling $8.6 million made in
  June 2005 reducing the outstanding balance of the Senior Notes.
  Interest income was
  $145,000 in the second quarter of 2005 compared to $269,000 in the second
  quarter of 2004. The second quarter of 2004 included $145,000 of accrued
  preferred security dividends that were subsequently fully reserved in the
  third quarter of 2004 as a result of the deteriorating financial performance
  of Prints Plus, the Companys former Wall Décor segment. Excluding these
  accrued dividends, interest income increased between 2004 and 2005 due to the
  impact of higher interest rates earned on average invested cash balances
  partially offset by lower average balances.
  Income tax
  benefits on losses from continuing operations were $1.8 million and $1.9
  million in the second quarter of 2005 and 2004, respectively. These benefits
  resulted in effective tax rates of 37.2% in 2005 and 22.3% in 2004. The lower
  effective income tax rate in the second quarter of 2004 was attributable to
  permanent differences associated with taxable gains primarily resulting from
  the surrender of company-owned life insurance policies held by a Rabbi Trust
  as funding vehicles for the Companys supplemental executive retirement plan
  and non-deductible expenditures related to the termination of certain Company
  executives.16


24 weeks ended July 23, 2005 compared to 24
weeks ended July 24, 2004

The Company
reported a net loss for the 24-week first half of 2005 of $5.1 million or $0.65
per diluted share, compared to a net loss of $17.9 million or $2.22 per diluted
share for the comparable first half of fiscal 2004. The first half of 2005 was
impacted by the recording of other charges and impairments totaling $1.6
million, $989,000 on an after-tax basis or $0.13 per diluted share relating
principally to repositioning of the executive management team, including separation costs associated with two
executive retirements. The overall results of the first half of 2004
were significantly impacted by the $3.7 million net after-tax loss recorded on
the discontinuation of the Mexico and mobile photography operations and by the
recording of other charges and impairments. Other charges and impairments
during the first half of 2004 totaled $13.5 million, $9.1 million on an
after-tax basis or $1.14 per diluted share. The other charges and impairments
consist principally of additional costs incurred by the Company in the first
half of 2004 related to the then-ongoing consent solicitation contest, accruals
triggered by various change of control provisions included in certain executive
employment contracts and accruals, and reserves and charges resulting from
personnel and strategic direction decisions made by the Companys
reconstituted Board of Directors.

Net sales totaled
$110.5 million and $103.5 million in the first half of fiscal 2005 and 2004,
respectively.


  Net sales
  for the first half of 2005 increased $7.0 million, or 7%, to $110.5 million
  from the $103.5 million reported in the first half of 2004. For the reasons
  discussed in the preceding section related to 12-week results, the
  comparability of the sales comparisons for the first half of 2005 versus 2004
  was not significantly impacted by the opening of portrait studios in new
  Sears Essential stores during the first half of 2005.The increase
  in first half 2005 sales is due principally to an increase in average sale
  per customer sitting of approximately 16% offset only partially by an 8%
  decline in overall sittings. The Company attributes the increase in first
  half sales to the impacts of the following initiatives undertaken throughout
  the second half of 2004 and continuing to date:
  The
  implementation of a significant computer hardware and printer upgrade which
  improved the performance of legacy systems while laying the foundation for a
  transition to digital.
  The
  successful conversion of 645 U.S. studios to full digital format as of the
  end of the second quarter of 2005. The converted studios significantly
  outperformed the analog film studios in the first half of 2005.
  The
  restoration of coverage and training hours in the studios that had been
  significantly reduced in the first half of 2004 in response to then-declining
  sales trends.
  The
  effectuation of various offer changes and targeted price increases as well as
  the utilization of more efficient advertising vehicles.In addition,
  as previously discussed in the preceding discussion of 12-week results, sales
  for the first half were positively impacted by approximately $1.0 million
  resulting from a reduction of the backlog of portraits in process or pending
  delivery to customers at the end of the second quarter of 2005. Finally, the
  Company believes that first half sales growth was moderated somewhat by a
  lower level of marketing intensity in the early part of the first quarter as
  well as the possible negative effects of an early Easter, a
  seasonally-important time for portraiture sales. Historically, the Company
  has generally recognized lower Easter-related sales in those years when
  Easter falls earlier on the calendar.17


Costs and
expenses were $118.3 million in the first half of 2005, compared with
$123.6 million in the comparable prior year.


  Cost of sales, excluding depreciation and amortization
          expense, was $15.3 million in the first half of 2005 compared with $14.4
          million in the comparable prior year. Cost of sales as a percentage
          of net sales was 13.9% in both the first half of 2005 and 2004. Correspondingly,
          gross margin rates were 86.1% in both the first half of 2005 and 2004.
          The increase in cost of sales resulted significantly from continuing
          start-up costs and inefficiencies (both in-studio and central lab) in connection with the ongoing digital conversion, including
          waste associated with the operation of onsite printers in the digital
          studios, higher overall print media costs associated with onsite-fulfilled
          product, and inefficiencies related to the transition from a film-based
          to a central digital manufacturing system. The increase is also due
          in part to increased sales of specialty portrait products. These increases
          were partially offset by declines in film purchases and associated shipping
          costs due to the digital conversion and lower costs resulting from reduced
          production of traditional portrait sheets.
  Selling,
  general and administrative (SG&A) expenses were $92.3 million and $88.2
  million for the first half of 2005 and 2004, respectively. As a percentage of
  sales, these expenses were 83.5% in 2005 and 85.2% in 2004.Selling,
  general and administrative costs increased primarily as a result of an
  increase in studio employment costs totaling $4.4 million, including $445,000
  of additional costs due to the reduction in backlog at the end of the second
  quarter of 2005, sales commissions paid to Sears resulting from higher sales
  ($1.1 million), travel and training costs related to the digital conversion
  of studios ($609,000) and restricted stock amortization related to employee
  grants ($391,000). These increases were partially offset by planned
  reductions in advertising costs ($955,000), reduced employee medical
  insurance costs driven principally by plan design changes made at the
  beginning of 2005 and reduced participation ($1.0 million) and reduced
  corporate employment costs resulting from various net headcount reductions
  effected as part of the Companys efforts to reduce such costs ($1.0
  million).The increase
  in studio employment costs resulted from the Companys ongoing initiative to
  restore studio coverage and training hours that had been substantially
  reduced beginning in the second half of 2003 and continuing through the
  middle of last years second quarter in response to then-declining sales
  trends. Studio labor also reflects increased labor and training investments
  in connection with the start-up operations of the Companys digital studios.
  Studio employment cost comparisons to the prior year improved through the end
  of the first half due to increasingly easier comparisons as well as the
  impact of various initiatives launched late in the first quarter of 2005 to
  improve labor scheduling and productivity.
  Depreciation
  and amortization was $9.0 million in the first half of 2005, compared to $7.5
  million in the comparable half of 2004.The increase
  in depreciation and amortization is principally attributable to significant
  investments that have been made in connection both with a studio-wide
  hardware and printer upgrade in 2004 as well as the ongoing digital
  conversion.18



  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 first half of 2005 and 2004, the Company
  recognized $1.6 million and $13.5 million, respectively, in other charges and
  impairments. As more fully discussed in Managements Discussion and Analysis
  in the Companys Annual Report on Form 10-K for the year ended February 5,
  2005, the first half of 2004 included reserves for severance and related
  costs ($3.2 million), impairment charges ($5.1 million), contract
  terminations and settlements ($840,000), accruals related to accelerated
  vesting of supplemental retirement plan benefits and guaranteed bonuses for
  2004 ($3.5 million) and consent solicitation costs ($846,000). In the first
  half of 2005, other charges and impairments consisted of the following:o
  Executive
  Retirements/Repositioning CostsAs part of
  the Board of Directors ongoing effort to realign the executive management
  team following the proxy consent solicitation in early 2004, two senior
  executives agreed to retire during the second quarter of 2005. During the
  quarter ended July 23, 2005, the Company recorded approximately $1.1 million
  in separation costs relating to these two executives and for costs incurred as part of
  the Companys search for a new CEO which was completed and announced on July
  20, 2005.o
  Reserves for Severance and Related CostsIn the first
  half of 2005, the Company recognized $209,000 in additional costs associated
  with the dismissal of certain executives in 2004.o
  Impairment
  ChargesDuring the
  second quarter of 2005, the Company recorded a reserve of $180,000 for repair
  parts related to its film infrastructure determined to be obsolete due to the conversion of its studios to the
  full digital format. In addition, the Company recorded $74,000 in costs to
  discard assets removed from service during the 2004 hardware and printer
  upgrade as well as the ongoing digital conversion.o
  Contract
  Terminations and SettlementsDuring the
  first half of 2005, favorable settlements of professional services billings
  were negotiated resulting in reversals of $36,000 of a previous accrual. The
  Company also recorded an additional $50,000 accrual relating to the
  settlement of a compensation claim by a former consultant to the Company.
  This former consultant is a relative of the Companys Chairman of the Board.
  Interest
  expense was $860,000 in the first half of 2005 compared to $1.1 million in
  the comparable half 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 2005 reducing the outstanding balance of the Senior
  Notes.
  Interest income was
  $320,000 in the first half of 2005 compared to $550,000 in the first half of
  2004. The first half of 2004 included $290,000 of accrued preferred security
  dividends that were subsequently fully reserved in the third quarter of 2004
  as a result of the deteriorating financial performance of Prints Plus, the
  Companys former Wall Décor segment. Excluding these accrued dividends,
  interest income increased due to the impact of higher interest rates earned
  on average invested cash balances partially offset by lower average balances.19



  Income tax
  benefits on losses from continuing operations were $3.0 million and $6.4
  million in the first half of 2005 and 2004, respectively. These benefits
  resulted in effective tax rates of 37.2% in 2005 and 31.0% in 2004. The lower
  effective income tax rate in the first half of 2004 was attributable to
  permanent differences associated with 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 expenditures related to the
  termination of certain Company executives.20


LIQUIDITY AND CAPITAL
RESOURCES

The following
table presents a summary of our cash flows for first half of 2005 and 2004.

24 Weeks
  Endedthousands
  
  July 23, 2005
  
  July 24, 2004Net cash (used in)
  provided by:Operating activities
  
  $
  (759
  )
  $
  (10,980
  )Investing activities
  
  
  (13,636
  )
  
  (8,985
  )Financing activities
  
  
  (4,811
  )
  
  (16,261
  )Effect of exchange rate
  changes on cash
  
  
  147
  
  
  41Net decrease in cash
  
  $
  (19,059
  )
  $
  (36,185
  )Net Cash Used In
Operating Activities

  Net cash used in operating activities was $759,000
    in the first half of 2005 compared to $11.0 million in the first half of 2004.
    Cash flows used in discontinued operations were $2.7 million in 2004 and zero
    in 2005. During 2004, expenses and charges related to the change of control
    of the Companys Board of Directors and strategic leadership changes
    were incurred. A decrease in related payments in first half 2005 as compared
    to first half 2004 increased cash flow by approximately $2.9 million. The
    remaining change of approximately $4.6 million is primarily attributable to
    improved operating results year to date 2005 over the same period of 2004.

Net Cash Used In Investing Activities

  Net cash used in investing activities during the
    first half of 2005 was $13.6 million compared to $9.0 million in the first
    half of 2004. The $4.6 million increase in cash used for investing activities
    is primarily related to a $6.3 million increase in capital expenditures during
    the first half of 2005, partially offset by a decrease of $1.6 million in revolving loans outstanding from Prints Plus between 2004 and 2005.  The increase in capital expenditures is primarily
    the result of the Companys ongoing implementation of its plan to convert
    its studios to digital technology, while the decrease in the revolving loans outstanding to Prints Plus is the result of the repayment of such loans and the concurrent termination of the revolving credit agreement with them.

Net Cash Used In Financing Activities

Net cash used in financing activities was $4.8 million in the first
half of 2005 compared to $16.3 million in the comparable half of 2004. The
$11.5 million decrease in net cash used was primarily related to a reduction of
$6.2 million in restricted cash representing collateral for outstanding letters of credit in
the first half of 2005 and a $6.0 million repurchase of Company shares in a
negotiated transaction in the first half of 2004. This was partially offset by an
$808,000 decrease in cash proceeds from option exercises. In the second quarter of
2005, the Company replaced all of the outstanding collateralized standby
letters of credit with new letters of credit issued under the Companys new
revolving credit facility. Accordingly, the restricted cash which had been
deposited as cash collateral has been returned to the Company for general
corporate purposes.

Debt Covenants

On April 15,
2005, the Company entered into a new $30.0 million (reducing to $25 million in
February 2006 and $20 million in February 2007) unsecured bank revolving credit
facility (the Revolving Facility), which will expire on April 13, 2007 and
carries a variable interest rate charged at either LIBOR or prime rate funds,
with an applicable margin added.

21


Concurrent
with the closing of the Revolving Facility, the Company amended its existing
Senior Note agreement to allow it to incur additional indebtedness without
violating the debt to equity ratio covenant included in the original agreement.
The covenants of the amended Senior Note Agreement now principally mirror those
included in the Revolving Facility.

At July 23,
2005, the Company had $17.1 million outstanding under its existing Senior Note
Agreement and no borrowings against its $30.0 million Revolving Facility. The Company
was in compliance with all the covenants under its Senior Note Agreement and
its Revolving Facility as of July 23, 2005.

Off-Balance Sheet
Arrangements

Other than
stand-by letters of credit to support 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.
As of July 23, 2005, the Company had standby letters of credit outstanding in
the principal amount of $6.3 million.


In July 2001,
the Company announced the completion of the sale of its Wall Décor segment
which included the ongoing guarantee of certain operating real estate leases of
Prints Plus. As of July 23, 2005, the maximum future obligation to the Company
under its guarantee of these leases is $4.2 million. To recognize the risk
associated with these leases and based upon the Companys past experience with
renegotiating lease obligations, a $1.0 million reserve was established in 2001
at time of the sale. As a result of the significant deterioration in the
financial performance of Prints Plus in the third quarter of 2004, including
its subsequent bankruptcy filing, all of which is more fully described in Note
12 to the Companys Consolidated Financial Statements included in its Annual
Report on Form 10-K for the year ended February 5, 2005, the Company recorded
an additional $2.1 million of lease obligation reserves bringing the total
reserve at July 23, 2005 to $3.1 million. Based on the progress of the
bankruptcy case to-date, including Prints Plus receipt of debtor-in-possession
financing on May 18, 2005, and the continued operations of selected locations
of Prints Plus, the Company believes that the $3.1 million reserve is adequate
to cover the potential losses to be realized under the Companys operating
lease guarantees.

To assist
Prints Plus in obtaining the above-mentioned debtor-in-possession financing
facility, the Company guaranteed $300,000 of the facility by posting a letter
of credit with the lender.

Liquidity

Cash flows
from operations, cash and cash equivalents on hand and the borrowing capacity
under the Companys new Revolving Facility represent the expected sources of
funds in 2005 to meet its obligations and commitments, including debt service,
annual dividends to shareholders, planned capital expenditures which are
estimated to be approximately $25 million in fiscal 2005 and normal operating
needs. Estimated capital expenditures are down $2.0 million from the original estimate of $27 million due principally to the reduction in the number of planned new studios in Sears Essential stores in 2005.

22


ACCOUNTING PRONOUNCEMENTS AND POLICIES

Adoption of New
Accounting Standards

In December 2004, FASB issued FASB Staff Position (FSP) No. 109-2, Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creations Act of 2004 (FSP 109-2), which
provides guidance under FASB Statement No. 109, Accounting for Income Taxes, with respect to  recording the potential impact of
the repatriation provisions of the American Jobs Creation of Act of 2004 (the Jobs Act) on enterprises income tax expense and deferred
tax liability. The Jobs Act was enacted on October 22, 2004. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting
period of enactment to evaluate the effect of the Jobs Act  on its plan for reinvestment or repatriation of
foreign earnings for purposes of applying FASB Statement No. 109. We expect to make our repatriation determination during the third quarter
of 2005. Accordingly, as provided for in FSP 109-2, we have not adjusted our tax expense or deferred tax liability to reflect the repatriation provisions of the Jobs Act.

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 2004 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
2004 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 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, reserves for charges and
impairments 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 impact of the Kmart/Sears merger, fluctuations in operating
results, the ultimate impact of the Prints Plus bankruptcy, the attraction and
retention of qualified personnel, unforeseen difficulties arising from
installation and operation of new equipment in its portrait studios, the Companys conversion to a full digital format 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 5,
2005. The Company does not undertake any obligation to update any of these forward-looking statements.

23


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 long-term debt
obligations have 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 11.0% of the Companys total assets at July 23,
2005 and 7.0% of the Companys total net sales for the 24 weeks then ended.

Item 4. 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 covered by this report.
Based on this evaluation, 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 July 23, 2005, the Company did not make any changes to its internal
controls over financial reporting that have reasonably affected, or are
reasonably likely to affect, the Companys internal control over financial
reporting. 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.

24


PART II.
  OTHER INFORMATIONItem 4. Submission of Matters to a Vote of
Security Holders

The 2005
Annual Meeting of Stockholders was held in St. Louis, Missouri on
Thursday, June 23, 2005. The following items were voted on and the results are
listed below:

1.
  The
  following individuals were elected to the Companys Board of Directors:Name
  
  
  Shares For
  
  
  Shares WithheldJames J. Abel
  
  
  7,116,133
  
  
  391,950Michael S. Koeneke
  
  
  7,128,769
  
  
  379,314David M. Meyer
  
  
  7,223,725
  
  
  284,358Mark R. Mitchell
  
  
  7,373,595
  
  
  134,488John Turner White IV
  
  
  7,111,133
  
  
  396,9502.
  The Board of Directors
  appointment of KPMG LLP to audit the Companys financial statements for the
  2005 fiscal year:For
  
  
  Against
  
  
  Abstain7,501,368
  
  
  6,175
  
  
  5403.
  Modifications to the CPI
  Corp. Restricted Stock Plan:For
  
  
  Against
  
  
  Abstain5,036,541
  
  
  589,564
  
  
  3,230Item 6. Exhibits

a.
  ExhibitsAn Exhibit
  Index has been filed as part of this Report on Page E-1.25


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(Principal Financial Officer)Dated: September 1, 2005By:
    /s/ Dale HeinsDale HeinsVice President, Corporate Controller(Principal Accounting Officer)Dated: September 1, 200526


CPI CORP.

E-1EXHIBIT
INDEX

  10.98
    
    Retirement and Release Agreement
        by and between Stephen A. Glickman and CPI Corp.10.99
    
    Consulting Agreement by and
        between Stephen A. Glickman and CPI Corp.10.100
    
    Retirement and Release Agreement
        by and between Jack Krings and CPI Corp.10.101
    
    Consulting Agreement by and
        between Jack Krings and CPI Corp.10.102
    
    Employment Agreement by and
        between Renato Cataldo and CPI Corp.10.103
    
    Stock Award and Restriction
        Agreement by and between Renato Cataldo and CPI Corp.10.104
    
    Confidentiality, Noncompetition
        and Nonsolicitation Agreement by and between Renato Cataldo and CPI Corp.10.105
    
    Stock Award and Restriction
        Agreement by and between Paul Rasmussen and CPI Corp.10.106
    
    Confidentiality, Noncompetition
        and Nonsolicitation Agreement by and between Paul Rasmussen and CPI Corp.11.1
    
    Computation of Per Common Share
        Earnings (Loss) - Diluted - for the 12 and 24 weeks ended July 23, 2005
        and July 24, 200411.2
    
    Computation of PerCommonShare Earnings (Loss) - Basic - for the
        12 and 24 weeks ended July 23, 2005 and July 24, 200431.1
    
    Certification Pursuant to Rule
        13a-14(a) Under the Securities and Exchange Act of 1934 by the Chief Executive
        Officer31.2
    
    Certification Pursuant to Rule
        13a-14(a) Under the Securities and Exchange Act of 1934 by the Executive
        Vice President, Finance and Chief Financial Officer32.0
    
    Certification Pursuant to 18
        U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley
        Act of 2002 by Chief Executive Officer and Executive Vice President, Finance
        and Chief Financial Officer27