|UNITED STATESSECURITIES
AND EXCHANGE COMMISSION Washington, D.C. 20549


FORM 10-K


|X| ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE  FISCAL YEAR ENDED
FEBRUARY 7, 2004


OR


|_| TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES 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)                          

|314/231-1575(Registrants
telephone number, including area code: )


Securities registered
pursuant to Section 12(b) of the Act:
|--------------------------------------------------------------------------------------------------------------------------------

|Title
      of each class         | Name
      of each exchange  
|--------------------------------- | -----------------------------
|
|Common
      Stock $.40 Par Value | New York
      Stock Exchange

|Securities registered
pursuant to Section 12(g) of the Act: None


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 (or such shorter period
that the registrant was required to file such reports), and [2] has been subject to such
filing requirements for the past 90 days.


|X| Yes |_| No


Indicate by check mark if disclosure
of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|


Indicate by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).


|X| Yes |_| No


The aggregate market value of the
voting stock held by non-affiliates of the registrant, based upon the closing price of the
New York Stock Exchange on April 16, 2004, of $18.00 was $141,969,402.


The number of shares outstanding of
each of the registrants classes of Common Stock, as of April 16, 2004 was: Common
Stock, par value  $.40  8,108,897


DOCUMENTS INCORPORATED BY
REFERENCE:


Portions of the Proxy Statement
relating to the Annual Meeting Of Shareholders to be held July 22, 2004 are incorporated
by reference into Part III of this Report.
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|(THIS PAGE LEFT
INTENTIONALLY BLANK)


Page 2
|---------------------------------------------

|TABLE OF CONTENTS
|-----------------

|               |                                                       |   
|-------------- | ----------------------------------------------------- | --
|PART
      I   |                                                       |   
|               |                                                       |   
|Item
      1   | Business                                              | 4 
|Item
      2   | Properties                                            | 10
|Item
      3   | Legal
      Proceedings                               | 11
|Item
      4   | Results
      of Votes of Security Holders            | 11
|              
|PART
      II 
|               |                                                      
|Item
      5   | Market
      for Registrants Common Stock and       
|               | Related
      Stockholder Matters                     | 14
|Item
      6   | Selected
      Consolidated Financial Data            | 16
|Item
      7   | Managements
      Discussion and Analysis of        
|               | Financial
      Condition and Results of Operations   | 20
|Item
      7A  | Quantitative
      and Qualitative Disclosures About 
|               | Market
      Risk                                     | 36
|Item
      8   | Financial
      Statements and Supplementary Data     | 37
|Item
      9   | Changes
      in and Disagreements with Accountants  
|               | on
      Accounting and Financial Disclosures         | 74
|Item
      9A  | Controls
      and Procedures                         | 74
|              
|PART
      III
|              
|Item
      10  | Directors,
      Executive Officers, Promoters and   
|               | Control
      Persons of the Registrant               | 75
|Item
      11  | Executive
      Compensation                          | 75
|Item
      12  | Security
      Ownership of Certain Beneficial Owners
|               | and
      Management                                  | 75
|Item
      13  | Certain
      Relationships and Related Transactions  | 75
|Item
      14  | Principal
      Accounting Fees and Services          | 75
|              
|PART
      IV 
|              
|Item
      15  | Exhibits,
      Financial Statement Schedules and    
|               | Reports
      on Form 8-K                             | 76
|               | Signatures                                            | 85

|Page 3
|------

|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, 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 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 ATTRACTION AND RETENTION OF QUALIFIED PERSONNEL AND
OTHER RISKS AS MAY BE DESCRIBED IN THE COMPANYS FILINGS WITH THE SECURITIES AND
EXCHANGE COMMISSION, INCLUDING THIS FORM 10-K FOR THE YEAR ENDED FEBRUARY 7, 2004.


PART I


Item 1. Business


An Overview of the Company


CPI Corp. (CPI, the
Company or we), a Delaware corporation formed in 1982, is a
long-standing leader 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, Roebuck and Co. (Sears). Our position in the top tier
of the estimated $1.2 billion pre-school photography market is based on our revenues,
which exceeded $301 million in fiscal year 2003, when our photographers captured
approximately 4.6 million sittings. Management has determined that the Company operates in
one segment offering similar products and services in all locations.


We have provided professional
portrait photography for Sears customers since 1959 and have been the exclusive Sears
portrait studio operator since 1986. Studios are located in all fifty states, Canada and
Puerto Rico. Operations in the United States and Puerto Rico are conducted through the
Companys subsidiaries, Consumer Programs Incorporated and CPI Images, LLC, and a
partnership, Texas Portraits, L.P. (owned by Consumer Programs Incorporated and another
subsidiary, Consumer Programs Partner, Inc.), pursuant to a license agreement with Sears.
Approximately $72.3 million of long-lived assets are used in our domestic operations as of
February 7, 2004.


In Canada, we operate 119 Sears
Portrait Studios through CPI Corp., which was originally organized under the laws of
Ontario and which we reorganized under Nova Scotia law at the end of fiscal 2002. With
2003 sales of $22.1 million generated from 448,000 sittings, Canadian studios accounted
for 7.3% of our revenues and 9.6% of annual sittings. Long-lived assets employed in the
Companys Canadian operations at February 7, 2004 amounted to $1.7 million.


In late February 2003, we launched
our Mexican portrait studio business. CPI Portrait Studios de Mexico, S. de R. L. de C.
V., a limited liability company owned by Consumer Programs Incorporated and Consumer
Programs Partner, Inc., was established to operate the Companys studios in Mexico.
As of February 7, 2004, our Mexican operations consisted of 18 portrait studios which
generated $731,000 from 18,000 sittings during 2003. Long-lived assets employed in the
Companys Mexican operations at February 7, 2004 amounted to $1.3 million.


During the first quarter of 2003, we
also launched our mobile photography operations through CPI Images, LLC, doing business as
Everyday Expressions, which currently offers mobile photography services to
childcare centers,



Page 4
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|youth sports associations and events
in 26 markets throughout the United States. Our mobile photography division generated
$1.9 million in revenues during 2003 from 53,000 sittings.



We sold our wall décor
business, operated by Prints Plus, Inc., to that companys management in July 2001.
In 2002, we continued our efforts to focus on maximizing the potential of our core
photography business by eliminating our technology development segment, which was launched
in 2001. Operating through a subsidiary, Centrics Technology, Inc., the segment offered
software development and systems consulting for third parties, in addition to continuing
the software development historically performed for the Sears Portrait Studios. Near the
end of 2002, we reintegrated the portion of the segment dedicated to software development
for the portrait studios with our corporate information technology function and
discontinued the sale of consulting and software development to third parties. Further
financial information on continuing and discontinued operations of the Company appears in
Part II, Item 7, Managements Discussion and Analysis of Financial Condition
and Results of Operations, and Part II, Item 8. Financial Statements and
Supplementary Data.


In addition, during 2002 we
integrated searsphotos.com, the online photofinishing service previously operated through
the technology development segment, with the studio operations. Our searsphotos.com team
is also engaged in developing other on-line products and services for portrait studio
customers and it supports the vehicle for sharing portraits via email and ordering
additional portraits and products. Information about our portrait studios and special
offers are available through the www.searsportraits.com website. In 2003, revenues from
on-line sales and services were approximately $2.5 million.


The Companys
Products and Services


We offer Sears Portrait Studio
customers a wide range of choices. They may select a package sitting or a
custom sitting. The package sitting includes a fixed number of portraits, all
of the same pose, for a fixed, relatively low price and a sitting fee of $9.99 per person
in the portrait. Package customers may purchase additional portrait sheets at an
additional cost. Mothers of very young children who need a lot of portraits often prefer
this kind of offer. A custom sitting offers portraits by the sheet, a variety of poses and
backgrounds, and an unlimited number of people in the portrait for a session fee of $14.99.
Families with two or more children or those who want a mix of group and individual
poses frequently prefer this offer. Customers who enroll in the Companys Smile
Savers Plan® for a one-time fee of $29.99 pay no sitting or session fees for two
years. We designed this plan to promote loyalty and encourage frequent return visits.


After the customer selects a package
or custom session and their preferred backgrounds, the photographer captures images of
multiple poses. Our Portrait Preview System allows customers to view each image as it is
captured and accept or reject each pose while they are still in the camera room. After the
image capture portion of the portrait session is completed, the images are transferred to
a monitor at a sales table where customers can view each image and order portraits in the
sizes they need, as well as other products, such as greeting cards. At the sales table, a
studio associate reviews the images captured with the customer and describes product
options, such as digitally enhanced products (black and white, sepia, color accents, etc.)
and digital collages featuring multiple poses and a customized message. Customers may take
the portrait collage home when they leave the studio on the day of the sitting. They may
also purchase a full color proof sheet to take home as soon as the sitting is completed.
Other products available from the studio are portraits on disk, passport photos and
accessories such as frames and photo albums.


The customers order is
transmitted electronically to one of our processing facilities in St. Louis, Missouri;
Thomaston, Connecticut or Brampton, Ontario, Canada and the film is then shipped to the
applicable processing facility. At the end of fiscal 2002, the Company closed a fourth
processing facility located in Las Vegas, Nevada, following a comprehensive review that
identified excess manufacturing capacity. We complete the customers orders to their
specifications and return them to the studio for pick-up approximately 2 1/2 weeks after
the order.


Our Mexican studio operations also
offer customers the choice of a package or a custom sitting. The
same products and services offered to our Sears Portrait Studios customers are offered to
our Mexican patrons. Everyday Expressions customers may choose from a variety of
package sittings as well as adding additional portrait sheets


Page 5
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|to their order at an additional cost
per sheet. Everyday Expressionscustomers images are also uploaded to our
website, everydayexpressions.com, where friends and family can also view and order
portraits. Personalized keepsakes and gifts, such as photo t-shirts, mugs, mouse pads,
magnets, etc. are also available to purchase on-line. As of February 7, 2004, in
approximately 630 studios, we can upload images captured in a Sears Portrait Studio
session to our searsphotos.com website. With a code and individualized passwords, our
customers can view the images from home and share them via email with friends and family.
Any recipient of the on-line images may place orders for additional portraits from home,
as well as other portrait related gifts such as personalized t-shirts, mugs, mouse pads
and more.


The Companys
Relationship with Sears


We have enjoyed a strong relationship
with Sears for more than 40 years under a series of license agreements. Over that period,
except in connection with Sears store closings, Sears has never terminated the operation
of any of our studios. While we are materially dependent on a continuing relationship with
Sears, we have no reason to believe that Sears will terminate or materially reduce the
scope of our license.


As a Sears licensee, we enjoy the
benefits of using the Sears name, access to prime retail locations, Sears daily
cashiering and bookkeeping system, store security services and Sears assumption of
credit card fees and credit and check authorization risks. Our customers have the
convenience of using their Sears credit cards to purchase our products or services.


As of February 7, 2004, the Company
operated 854 studios in full-line Sears stores in the United States under a license
agreement that runs through December 31, 2008. Under this agreement, we pay Sears a
license fee of 15% of total annual net sales for studios located in Sears stores. The
agreement defines net sales as gross sales less customer returns, allowances and sales
taxes. We provide all studio furniture, equipment, fixtures, leasehold improvements and
advertising, and we are responsible for hiring, training and compensating our employees.
We have agreed to indemnify Sears against claims arising from our operation of Sears
Portrait Studios.


On August 14, 2003, the Company
announced the execution of an amendment to its agreement with Sears eliminating the then
existing exclusivity provision from that agreement which effectively precluded us from
providing other non-Sears portrait studios photography services in the United States. In
return for the removal of the exclusivity provision, the Company, upon certain conditions,
has agreed to provide Sears with certain commission adjustments (the Contingent
Payments) through 2008, the remaining term of the current agreement. The Contingent
Payments are triggered only if the Company operates more than 24 domestic
non-Sears portrait studios and the rate of growth in total contractual commissions paid to
Sears by the Company under the pre-existing agreement does not exceed Sears
same-store revenue growth rate by specified percentages, up to a maximum of 2%. If both of
the above mentioned conditions occur, the Contingent Payments are determined by a formula
included in the amendment to the agreement, however, in no event shall such payments
exceed $2.5 million annually or $7.5 million cumulatively over the remaining five-year
term of the agreement. No domestic non-Sears portrait studios were opened in 2003 and thus
no contingent payments were made.


As of February 7, 2004, we operated
45 freestanding studios in the United States under the Sears name in locations not within
a Sears store. The Company pays Sears a license fee of 7.5% of total annual net sales per
studio in these locations. We pay rent and utilities at each of these locations and
provide all studio furniture, equipment, fixtures, leasehold improvements and advertising.
We are also responsible for hiring, training and compensating our employees. These studios
benefit from the use of the Sears name and Sears payment for credit card fees and
check clearance systems.


All 119 Canadian studios operate
under a license agreement with Sears Canada, Inc., a subsidiary of Sears. Until January 1,
2003, an agreement negotiated in 1977 renewed automatically on a year-to-year basis but
was terminable by either party on 60 days notice. As of January 1, 2003, a
three-year agreement governs our Canadian studio operations. The license fee under the
former agreement was 15% of total annual net sales through December 31,


Page 6
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|2002. For 2003, the license fee is
the greater of $4.4 million or 13% of the first $30 million in Canadian dollars of annual net sales and 8% of
annual net sales above $30 million. In 2004 and 2005, the license fee will be 13% of the
first $30 million annual net sales and 8% for annual net sales greater than $30 million.
For 2003 through 2005, we will pay a commission equal to 5% of annual net sales for sales
made in the two Canadian studios that are not located in full-line Sears stores. The
Company provides all studio furniture, equipment, fixtures, leasehold improvements and
advertising and is responsible for hiring, training and compensating our employees. In
freestanding locations, we also pay rent and utilities and other common area charges.



Industry Background and
Competition


Through our relationship with Sears,
we have been in the forefront of developing the now highly competitive professional
portrait photography market. Although our primary portrait subjects are pre-school
children, we also attract families, school-age children and adults. Since approximately
1990, the mass-market professional portrait studio industry has grown increasingly
competitive in the United States as the number of permanent studios grew from
approximately 2,555 (including 867 Sears Portrait Studios) to approximately 4,805
(including 902 Sears Portrait Studios) in 1996. As of February 7, 2004, there were
approximately 4,363 studios. Despite the net decrease of approximately 442 studios from
the 1996 peak to the February 7, 2004 number of 4,363 studios, the competitive landscape
has intensified with the entrance during that time period of new competitors, including,
among others, Target Stores operated by Life Touch and the freestanding Picture People
studios. In addition, during the same time period, Wal-Mart studios operated by PCA, have
grown dramatically while there have been substantial declines in the number of K-Mart
studios (operated by PCA until late 1999 and then by Olan Mills continuing to date) and
Olan Mills freestanding studios.


The rapid expansion has been
supported by very competitive offers featuring large packages of portraits for a small,
fixed price. We responded initially with promotional pricing to maintain market share and
shortly thereafter with technological advances to distinguish our products and services
and studio expansion and remodeling. By the end of the nineties, we had invested
approximately $150 million, primarily to support new technology-based products and to
remodel and expand more than 600 studios in the U.S. from an average of 800 square feet to
approximately 1,400 square feet. Studios operated by competitors range from one camera
room with a small waiting and sales area to more spacious locations with multiple camera
rooms and sales areas, such as ours.


The four major participants in the
preschool portrait segment of the industry continue to compete on the basis of price,
service, quality, location and product mix. They commonly feature large, very low-priced
packages in weekly mass marketing campaigns. In addition to CPI, the largest players in
our industry are PCA, which operates studios principally in Wal-Mart stores, LifeTouch,
which provides portrait services in J.C. Penney and Target stores and Olan Mills, which
operates studios in Kmart. The Picture People and Olan Mills operate freestanding studios.
Independent photographers comprise most of the balance of the competition. Most of the
major competitors have eliminated any charge for the portrait capture (generally
characterized as a sitting fee or a shipping and handling fee). Except for targeted
promotions to new mothers, we have not followed this practice because we believe the
sitting or session fee is justified by the professionalism of our photographers and the
quality of our equipment and the studio environment. Further, we believe that our sitting
and session fees are a very good value that is recognized by our customers. Similarly,
while our products are competitively priced, they are not the lowest priced in the
industry.


With more than $301 million in sales
in 2003 and an average sale of $63.94 per customer sitting, we believe we are in the top
revenue tier of the estimated $1.2 billion preschool portrait industry.


To sustain our competitive position
in the industry, we are engaged in continuing efforts to improve the quality of the
customer experience, expand and enrich the products we offer to our customers and
diversify our customer base.


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|Seasonality and Inflation


Our business is seasonal, with the
largest volume occurring in the fourth fiscal quarter, between Thanksgiving and Christmas. For
fiscal years 2003, 2002 and 2001, fourth quarter sales accounted for 34%, 36% and 35%,
respectively, of total net sales for the year and all of the net earnings for the year. In
addition, the timing of Easter, a seasonally important time for portraiture sales,
has a significant impact on the timing of recognition of
sales revenues between the Companys first and second fiscal quarters. Most of the
Companys Easter-related sales in 2003, a late Easter, were recognized as revenues,
in accordance with the Companys revenue recognition policies reflected in Note 1 of
the Notes to the Consolidated Financial Statements, in the second fiscal quarter while
such sales in 2002 and 2001, both earlier Easters, were principally recognized in the
first fiscal quarter.


The moderate rate of inflation over
the past three years has not had a significant effect on the Companys revenues and
profitability.


Suppliers


To ensure consistent, high quality
finished portraits, we purchase photographic paper, film and portrait processing chemistry
from three major manufacturers. Eastman Kodak provides photographic paper and film for all
Sears Portrait Studios pursuant to an agreement in effect through December 31, 2004. Dye
sublimation paper used for proof sheets and portrait collages delivered at the end of a
sitting is provided by Sony, and we purchase portrait processing and finishing chemistry
from Fuji-Hunt. We purchase camera and lens components, monitors, computers, printers and
other equipment and materials from a number of leading suppliers, including Dell Inc. as
of January 30, 2004.


Historically, with the exception of
certain replacement parts for equipment utilized in our studios further discussed below,
we have not encountered difficulty in obtaining equipment and materials in the quantity
and quality we require and we do not anticipate any problems in obtaining our requirements
in the future. We enjoy good relationships with our vendors.


The aging equipment in our studios
has created difficulties in acquiring replacement parts and repairing those in the event
equipment fails. Parts for our film cameras, studio computers and printers are
increasingly difficult to find or are no longer produced. We have internalized most all
repairs for our studio equipment. Our expansion into Mexico combined with depleting
inventories of parts in 2003 has caused us to shut down low volume camera rooms in 2004 in
order to reclaim parts. We have continued to build an internal knowledge base and repair
capabilities to support our current studio equipment. To further address this situation,
the Company and its new Board of Directors are currently reviewing options to transition
to full digital technology.


Intellectual Property


We own numerous registered service
marks and trademarks, including Portrait Creations® and Smile Savers Plan®, which
have been registered with the United States Patent and Trademark Office. Our rights to
these trademarks in conjunction with our operation of Sears Portrait Studios will continue
as long as we comply with the usage, filing and other legal requirements relating to the
renewal of trademarks.


The Companys
Employees


As of February 7, 2004, we had
approximately 7,300 employees, including approximately 4,500 part-time and temporary
employees.


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|The Company Website and
Periodic Reports


Our Annual Reports on Form 10-K,
including this Form 10-K, as well as our Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K and any amendments to such reports are available, free of charge, on the
Investor Relations portion of our website, www.cpicorp.com. These reports are available as
soon as reasonably practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission. References to the Companys
website address do not constitute incorporation by reference of the information contained
on the website, and the information contained on the website is not part of this document.


Environmental Regulation


Our operations are subject to
commonly applicable environmental protection statutes and regulations. We do not expect
that compliance with federal, state and local provisions regulating the discharge of
materials into the environment or otherwise relating to the protection of the environment
will have a material effect on our capital expenditures, earnings, or competitive
position. At present, we have not been identified as a potentially responsible party under
the Comprehensive Environmental Responses, Compensation and Liability Act and have not
established any reserves or liabilities relating to environmental matters.


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|Item 2. Properties


The
following table sets forth certain information concerning the Companys principal
facilities:
|----------------------------------------------------------------------------------------------------------------------

| | LOCATION | APPROXIMATE
      AREA IN
      SQUARE FEET |         | PRIMARY
      USES | OWNERSHIP
      OR LEASE                 
| | -------- | ------------------------------------------- | ------- | ------------------ | -----------------------------------------
| |          | St.
      Louis, Missouri                   | 270,000 |                    | Administration
      and Photo processing
| |          | St.
      Louis, Missouri                   | 155,000 |                    | Parking
      Lots                       
| |          | St.
      Louis, Missouri                   | 57,574  |                    | Warehousing                              
| |          | St.
      Louis, Missouri                   | 16,000  |                    | Warehousing                              
| |          | Brampton,
      Ontario                     | 40,000  |                    | Administration,
      Warehousing and    
| |          |                                             |         |                    | Photo processing                         
| |          | Las
      Vegas, Nevada                     | 21,922  |                    | Former
      Photo processing            
| |          | Thomaston,
      Connecticut                | 25,000  |                    | Administration
      and Photo processing
| |          | St.
      Louis, Missouri                   | 14,000  |                    | Administration                           
| |          | Monterrey,
      Mexico                     | 2,500   |                    | Administrative
      and Warehouse       

| | (1) | Lease
term expires on June 30, 2005
| | --- | -----------------------------------

| | (2) | Lease
term expires on May 31, 2005  closed facility
| | --- | ----------------------------------------------------

| | (3) | Lease
term expired on February 29, 2004
| | --- | ---------------------------------------

| | (4) | Lease
term expires on February 28, 2006
| | --- | ---------------------------------------

|As of February 7, 2004, the Company
operated 854 portrait studios in Sears stores in the United States pursuant to the license
agreements with Sears and 119 studios in Canada under a separate license agreement with
Sears Canada, Inc. The Company pays Sears a license fee of 15% of total annual net sales
for studios located in Sears stores in the United States. Effective January 1, 2003, the
license fee for Canadian studios is 13% of the first $30 million in Canadian dollars in
annual net sales and 8% of annual net sales in excess of $30 million. For 2003 only, the
Company paid $4.4 million in Canadian dollars in license fees for Canadian sales, the
minimum called for under the revised agreement. This license fee covers the Companys
use of space in the Sears stores, the use of Sears name and related intellectual
property, and all services provided by Sears. No separate amounts are paid to Sears
expressly for the use of space. The Company operates 48 portrait studios in shopping
centers that do not have Sears stores, which are generally leased for at least three years
with some having renewal options. The Company also operates 18 portrait studios in Mexico.
The leased studio space in Mexico is generally under one year leases with renewal options.
See Part I, Item 1. BUSINESS, The Companys Relationship with Sears for
more information on the Sears license agreements.


The Company believes that the
facilities used in its operations are in satisfactory condition and adequate for its
present and anticipated future operations.


The Companys physical
properties owned or leased are all considered commercial property.


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|Item 3. Legal Proceedings


There are various suits pending
against the Company, none of which are material in nature. It is the opinion of management
that the ultimate liability, if any, resulting from such suits will not materially affect
the consolidated financial position or results of operations of the Company.


Item 4. Results of Votes
of Security Holders


On November 6, 2003, a group of
stockholders led by the Knightspoint Partners I, L.P. (the Knightspoint Group)
filed with the SEC preliminary consent materials relating to their 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. In addition, consent was also solicited for the following
actions: amend the Companys Amended By-Laws to authorize stockholders who own,
individually or in the aggregate, 25% or more of the Companys outstanding common
stock, to call a special meeting of stockholders; amend the Companys Amended By-Laws
to provide that any vacancies in the board of directors resulting from stockholder action
may be filled only by the stockholders, and may not be filled by the directors, until at
least 20 days after creation of such vacancy; and repeal any amendments, if any, to the
Companys Amended By-Laws adopted by the board of directors after September 1, 2003,
or adopted prior thereto but not publicly disclosed prior to November 1, 2003, and prior
to the effective date of the stockholder consents solicited by this Consent Statement.


Knightspoint Groups definitive
consent solicitation materials dated January 23, 2004 also stated the belief that, if
elected, the Knightspoint Groups nominees would consider taking the following
actions:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Implement new executive compensation policies that align the interests of the board of
directors and management with those of the Companys stockholders;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Reduce corporate overhead by decreasing headquarters and administrative headcount and seek
to enhance studio productivity and efficiency by, for example, formulating new operating
systems that reduce burdens on studio employees and consequently enable a greater focus on
the customer which could lead to higher sales revenue;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Explore ways to reduce and redirect advertising spending to seek to decrease the cost of
customer acquisition;
| | - | --------------------------------------------------------------------------------------------------------------

| |  | Formulate new merchandising and marketing strategies directed at addressing recent
declines in sittings volume, increasing the average sale, and enhancing utilization of
existing studios, including exploiting potential cross-selling opportunities;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Sharpen focus on the core Sears portrait studio business and, particularly, on the
deployment of emerging digital technologies and applications;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Seek to control capital spending by, among other things, establishing new return hurdle
rates and deploying digital technologies judiciously while harvesting past investments;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Establish new processes and procedures for testing and evaluating all significant programs
and technologies prior to full deployment in an effort to manage any associated execution
risk (by the term execution risk, Knightspoint Group means the risk that in
their implementation certain new initiatives may fail, significantly overrun budgeted
costs or disrupt existing operations);
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Page 11
|-------

| |  | Explore ways to enhance internal communication and implement targeted gain-sharing and
other incentive programs across all levels of the organization in order to seek to speed
decision-making, address the needs of field personnel as they arise, and strengthen the
alignment of interests between employees and stockholders; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Discharge substantial cash to shareholders through large-scale stock buybacks and/or a
special distribution.
| | - | ------------------------------------------------------------------------------------------------------------

|On November 24, December 10, December
23, 2003 and January 8, January 15 and January 20, 2004, the Knightspoint Group filed with
the SEC amended preliminary consent solicitation materials.


On January 23, 2004, Knightspoint
Group filed with the SEC definitive consent solicitation materials. Also on this date,
Knightspoint Partners I, L.P., as a record holder of the Companys common stock,
requested that the Companys board fix a record date for this consent solicitation.
The consent statement and white consent cards were first furnished to stockholders of the
Company on or about this date.


On February 2, 2004, the Company
announced that its Board of Directors set a record date in response to the Knightspoint
Groups request in connection with the consent solicitation. In accordance with CPI
bylaws and applicable law, the Board set February 12, 2004 as the record date.


On March 18, 2004, the Knightspoint
Group announced that it delivered to CPI Corp. written consents from holders of a majority
of CPIs outstanding common stock consenting to the election of the Knightspoint
Groups nominees for director of CPI and the adoption of the Groups proposals
included in such consents. On March 18, 2004, CPI Corp. appointed an independent inspector
of elections to review the consents and to make a determination as to their number and
validity. The Company received the independent inspectors determination on March 24,
2004.


Out of 8,067,735 shares of common
stock entitled to vote on Knightspoint Groups consent solicitation, 4,574,712 shares
were represented.


The results of voting on the
following items were as set forth below:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(a) | Remove all of the members of the Companys board of directors other than J.
          David Pierson and James R. Clifford. This would mean the removal of seven of the
          nine current members of the Companys board of directors and any person
          (other than those elected pursuant to this Consent Solicitation) elected or
          appointed to the Companys board of directors to fill any vacancy caused by
          removal or resignation of any director or any newly created directorships prior
          to the effective time of the consents solicited by this Consent Statement,
          retaining only J. David Pierson and James R. Clifford.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For (Consent) |  | Against (Withheld) |  | Abstain |  | Broker Non-Votes
| | ------------- |  | ------------------ |  | ------- |  | ----------------
| | 4,548,715     |  | 22,708             |  | 525     |  | N/A             

|This proposal was approved by the
stockholders.
|-----------------------------------------------

|(b) | Amend Article III of the Companys Amended By-Laws to set the size of the
          board of directors at eight members.
|--- | ------------------------------------------------------------------------------------------------------------------------

| | For (Consent) |  | Against (Withheld) |  | Abstain |  | Broker Non-Votes
| | ------------- |  | ------------------ |  | ------- |  | ----------------
| | 4,548,582     |  | 22,970             |  | 396     |  | N/A             

|This proposal was approved by the
stockholders.


Page 12
|---------------------------------------------------------

|(c) | Amend Article II of the Companys Amended By-Laws to authorize stockholders
          who own, individually or in the aggregate, 25% or more of the Companys
          outstanding common stock, to call a special meeting of stockholders.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For (Consent) |  | Against (Withheld) |  | Abstain |  | Broker Non-Votes
| | ------------- |  | ------------------ |  | ------- |  | ----------------
| | 4,548,629     |  | 22,843             |  | 476     |  | N/A             

|This proposal was approved by the
stockholders.
|-----------------------------------------------

|(d) | Amend Article III of the Companys Amended By-Laws to provide that any
          vacancies in the board of directors resulting from stockholder action may be
          filled only by the stockholders, and may not be filled by the directors, until
          at least 20 days after creation of such vacancy.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For (Consent) |  | Against (Withheld) |  | Abstain |  | Broker Non-Votes
| | ------------- |  | ------------------ |  | ------- |  | ----------------
| | 4,548,715     |  | 22,843             |  | 390     |  | N/A             

|This proposal was approved by the
stockholders.
|-----------------------------------------------

|(e) | Repeal any amendments, if any, to the Companys Amended By-Laws adopted by
          the board of directors after September 1, 2003, or adopted prior thereto but not
          publicly disclosed prior to November 1, 2003, and prior to the effective date of
          the stockholder consents solicited by this Consent Statement.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For (Consent) |  | Against (Withheld) |  | Abstain |  | Broker Non-Votes
| | ------------- |  | ------------------ |  | ------- |  | ----------------
| | 4,548,769     |  | 22,697             |  | 476     |  | N/A             

|This proposal was approved by the
stockholders.
|-----------------------------------------------

|(f) | Elect the Knightspoint groups six nominees for director, consisting of
          James J. Abel, Michael S. Koeneke, David M. Meyer, Mark R. Mitchell, Steven J.
          Smith and John Turner White IV, to serve until the 2004 annual meeting of
          stockholders.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                           | Results
      of Votes For Directors
|-------------------------- | ------------------------------------
|
|James
      J. Abel        |                                     
|Michael S.
      Koeneke   |                                     
|David M.
      Meyer       |                                     
|Mark R. Mitchell           |                                     
|Steven J.
      Smith      |                                     
|John Turner
      White IV |                                     

|This proposal was approved by the
stockholders.


Page 13
|---------------------------------------------------------

|PART II


Item 5. Market for
Registrants Common Stock and Related Stockholder Matters


Price Range of Common
Stock and Dividends


Since April 17, 1989, the
Companys common stock has been traded on the New York Stock Exchange under the
symbol CPY.


The following tables set forth the
high and low sales prices of the common stock reported by the New York Stock Exchange and
the dividends declared for each full quarterly period during the Companys last two
fiscal years.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|FISCAL
      YEAR 2003
      (ending February 7, 2004) | HIGH |  | LOW |       | DIVIDEND |  
|------------------------------------------------------ | ---- |  | --- | ----- | -------- | -
|First
      Quarter                                    |      |  | $   | 13.65 |          | $
|Second Quarter                                         |      |  |     | 18.70 |          |  
|Third Quarter                                          |      |  |     | 22.95 |          |  
|Fourth Quarter                                         |      |  |     | 23.29 |          |  
|
|
|First Quarter                                          |      |  | $   | 18.17 |          | $
|Second Quarter                                         |      |  |     | 19.49 |          |  
|Third Quarter                                          |      |  |     | 17.72 |          |  
|Fourth Quarter                                         |      |  |     | 14.58 |          |  

|Shareholders of Record


As of April 16, 2004, the market
price of the Companys common stock was $18.00 per share with 8,108,897 shares
outstanding and 1,576 holders of record.


Dividends


The Company intends, from time to
time, to pay cash dividends on its common stock, as its Board of Directors deems
appropriate, after consideration of the Companys operating results, financial
condition, cash requirements, general business conditions and such other factors as the
Board of Directors deems relevant. On June 3, 2003, the Company announced that its Board
of Directors approved a 14% increase in 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.


Sales of Securities
Other Than Sales of Equity Securities


Between February 7, 1999 and June 28,
2001, the Company sold 206,070 shares of its common stock, par value $0.40 per share to an
aggregate of ten senior executives. No underwriter was involved in the sale. All shares
were issued for cash pursuant to the exercise of options granted under the CPI Corp.
Voluntary Stock Option Plan, which was approved by shareholders in 1993.


Page 14
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The options and shares were issued
pursuant to Rule 505 of Regulation D, to a group of executives who were primarily
accredited investors. The Company filed a Form D with the SEC in 1993. The options had a
term of eight years, with a three-year vesting period. During this period, 24,250 options
were exercised at $15.50 per share and 181,820 options were exercised at $18.375 per
share. The proceeds received by the Company from the option exercises during this period
totaled $3,716,818, which the Company used for general corporate purposes.


Options to purchase common shares of
the Company have been granted to employees under various stock-based compensation plans.
The following table summarizes the number of stock options issued, the weighted-average
exercise price and the number of securities remaining to be issued under all outstanding
equity compensation plans as of February 7, 2004.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Plan Category                    | Number of securities to be
issued upon  exercise of  outstanding options,
warrants and rights |  | Weighted-average exercise
price of outstanding options, warrants and rights |         | Number of securities remaining
available for future issuance under equity compensation plans |  
|-------------------------------- | --------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ------- | -------------------------------------------------------------------------------------------- | -
|Equity compensation plans        |                                                                                               |  |                                                                             |         |                                                                                              |  
|approved by security holders     |                                                                                               |  |                                                                             | 530,206 |                                                                                              | $
|Equity compensation plans not    |                                                                                               | 
|approved by security holders (2) |                                                                                               |  |                                                                             |        |                                                                                              |  
|                                 |                                                                                               |  |                                                                             |         |                                                                                              |  
|Total                            |                                                                                               |  |                                                                             | 530,206 |                                                                                              | $
|                                 |                                                                                               |  |                                                                             |         |                                                                                              |  

|(1) | Includes 686,951 shares reserved for issuance under the Companys stock
          option plan, 52,257 shares reserved for issuance under the Companys
          restricted stock plan and 9,439 shares reserved for issuance under the
          Companys employees profit sharing plan.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The only plan not approved by security holders is the Companys stock bonus
          plan. This plan was enacted in fiscal 1982 and is no longer active. The
          remaining awards granted under this plan vested in fiscal 2003.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Represents 81,123 shares reserved for issuance under the Companys inactive
          stock bonus plan.
|--- | -------------------------------------------------------------------------------------------------------

|On August 14, 2003, the Board of
Directors terminated the Companys voluntary stock option plan. The plan termination
includes provisions for the retirement and cancellation of all options authorized under
the plan not previously awarded. The plan originated in 1993 and options were granted
under the plan in 1993 and in 1994. As of February 7, 2004, all
previously awarded voluntary options had been exercised, had expired or had been
cancelled.


Page 15
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Item 6. Selected
Consolidated Financial Data



thousands except per
share data (1) (2)


The summary historical consolidated
financial data as of and for each of the fiscal years in the five-year period ended
February 7, 2004 set forth below have been derived from the Companys audited
consolidated financial statements. The information presented below should be read in
conjunction with Managements Discussion and Analysis of Financial Condition
and Results of Operations and the consolidated financial statements and related
notes included herein.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                          | 2003 |  | 2002 |         | 2001 |   | 2000    |   | 1999 |        
|------------------------------------------------------------------------- | ---- |  | ---- | ------- | ---- | - | ------- | - | ---- | -------
|STATEMENT
      OF OPERATIONS                                             |      |  |      |         |      |   |         |   |      |        
|Net
      sales                                                           |      |  | $    | 301,683 |      | $ | 308,644 |   | $    | 319,168
|Cost
      of sales                                                       |      |  |      | 40,865  |      |   | 40,297  |   |      | 42,974 
|Selling,
      general and administrative expenses                        |      |  |      | 235,790 |      |   | 229,023 |   |      | 234,100
|Depreciation
      and amortization                                       |      |  |      | 17,240  |      |   | 20,058  |   |      | 23,743 
|Other
      charges and impairments (10)                                  |      |  |      | 5,515   |      |   | 6,042   |   |      | 5,640  
|                                                                          |      |  |      |         |      |   |         |   |      |        
|                                                                          |      |  |      |         |      |   |         |   |      |        
|Income
      from operations                                              |      |  |      | 2,273   |      |   | 13,224  |   |      | 12,711 
|Interest
      expense, net                                               |      |  |      | 1,240   |      |   | 1,569   |   |      | 2,451  
|Other
      income (expense), net (3) (4) (5)                             |      |  |      | 850     |      |   | 111     |   |      | 303    
|Income
      taxes                                                        |      |  |      | 665     |      |   | 4,133   |   |      | 3,540  
|                                                                          |      |  |      |         |      |   |         |   |      |        
|                                                                          |      | 
|Income
      from continuing operations before                            |      | 
|cumulative
      effect of change in accounting
             principle    |      |  |      | 1,218   |      |   | 7,633   |   |      | 7,023  
|Cumulative
      effect of change in accounting principle                 |      |  |      |        |      |   |        |   |      |       
|Net
      income (loss) from discontinued operations (1)
             (2) |      |  |      |        |      |   | (1,093  | ) |      | (482   
|                                                                          |      |  |      |         |      |   |         |   |      |        
|                                                                          |      |  |      |         |      |   |         |   |      |        
|Net
      earnings (loss)                                                 |      |  | $    | 1,218   |      | $ | 6,540   |   | $    | 6,541  
|                                                                          |      |  |      |         |      |   |         |   |      |        
|                                                                          |      | 
|SHARE
      AND PER SHARE DATA (1) (2)                                    |      | 
|Net
      earnings from continuing operations - diluted (6)               |      |  | $    | 0.15    |      | $ | 0.94    |   | $    | 0.88   
|Net
      earnings from continuing operations - basic (6)                 |      |  |      | 0.15    |      |   | 0.95    |   |      | 0.90   
|Net
      earnings (loss) - diluted                                       |      |  |      | 0.15    |      |   | 0.80    |   |      | 0.82   
|Net
      earnings (loss) - basic                                         |      |  |      | 0.15    |      |   | 0.81    |   |      | 0.84   
|                                                                          |      |  |      |         |      |   |         |   |      |        
|Dividends                                                                 |      |  | $    | 0.60    |      | $ | 0.56    |   | $    | 0.56   
|Average
      shares outstanding - diluted                                |      |  |      | 8,148   |      |   | 8,086   |   |      | 7,939  
|Average
      shares outstanding - basic                                  |      |  |      | 8,082   |      |   | 8,040   |   |      | 7,841  
|                                                                          |      | 
|CASH
      FLOW DATA                                                      |      | 
|Net
      cash provided by operating activities                           |      | 
|(continuing
      operations only)                                        |      |  | $    | 24,013  |      | $ | 28,599  |   | $    | 28,701 
|Net
      cash used in investing activities                               |      |  | $    | (18,199 | )    | $ | (6,244  | ) | $    | (12,936
|Net
      cash used in financing activities (6)                           |      |  | $    | (13,319 | )    | $ | (10,082 | ) | $    | (7,278 

|Page 16
|-------

|Item 6. Selected Consolidated
Financial Data (continued)


thousands (1) (2)
|----------------------------------------------------------------------------

|                                                 | 2003 |            | 2002 |            | 2001 |            | 2000 |            | 1999
|------------------------------------------------ | ---- | ---------- | ---- | ---------- | ---- | ---------- | ---- | ---------- | ----
|OTHER
      FINANCIAL DATA                       |      |            |      |            |      |            |      |            |     
|                                                 |      |            |      |            |      |            |      |            |     
|Capital
      expenditures (9)                   |      | $  22,764  |      | $    8,991 |      | $  14,964  |      | $  11,753  |     
|EBITDA
      (11)                                |      | $  24,760  |      | $  40,297  |      | $  38,740  |      | $  43,916  |     
|                                                 |      |            |      |            |      |            |      |            |     
|Sittings                                         |      | 4,649      |      | 5,033      |      | 5,534      |      | 5,648      |     
|                                                 |     
|Average
      sales per customer sitting:        |     
|Custom                                           |      | $    74.80 |      | $    71.67 |      | $    69.59 |      | $    71.93 |     
|Package                                          |      | 44.19      |      | 44.67      |      | 43.49      |      | 42.53      |     
|Overall                                          |      | $    63.94 |      | $    61.06 |      | $    57.59 |      | $    56.44 |     
|                                                 |     
|BALANCE SHEET
      (1) (2)                      |     
|Cash
      and cash equivalents                  |      | $  51,011  |      | $  57,922  |      | $  46,555  |      | $  38,820  |     
|Current
      assets                             |      | 91,976     |      | 96,522     |      | 82,804     |      | 75,570     |     
|Net
      fixed assets                           |      | 52,735     |      | 47,502     |      | 63,708     |      | 72,603     |     
|Net
      assets of discontinued operations      |      |           |      |           |      |           |      | 16,011     |     
|Assets
      of business transferred under       |     
|contractual
      arrangements (7)               |      | 8,975      |      | 10,041     |      | 11,587     |      |           |     
|Assets
      of supplemental retirement plan (8) |      | 11,491     |      | 13,761     |      | 14,406     |      | 14,677     |     
|Other
      assets                               |      | 2,052      |      | 11,464     |      | 9,056      |      | 6,050      |     
|Total
      assets                               |      | 167,229    |      | 179,290    |      | 181,561    |      | 184,911    |     
|Current
      liabilities                        |      | 68,419     |      | 66,490     |      | 65,982     |      | 67,356     |     
|Other
      liabilities                          |      | 21,395     |      | 24,501     |      | 16,896     |      | 16,277     |     
|Long-term
      debt, less current maturities    |      | 25,589     |      | 34,116     |      | 42,639     |      | 51,142     |     
|Stockholders
      equity (6)                   |      | $  51,826  |      | $  54,183  |      | $  56,044  |      | $  50,136  |     

|(1) | In
2002, the Company classified its former Technology Development segment as a
          discontinued operation and reclassified the prior years consolidated
          financial statements to reflect this change.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | In
1999, the Company classified the Wall Decor segment as a discontinued           operation
and reclassified the prior years consolidated financial           statements to
reflect this change.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | In
1999, the Company recognized $3.2 million in other income from a noncompete
          agreement with Eastman Kodak Co.
|--- | -------------------------------------------------------------------------------------------------------------------------

|(4) | In 2001, 2000 and 1999, the Company, recognized $218,000 in income and $145,000
          and $3.5 million in expenses, respectively, in other income (expense), net for
          costs related to the termination of a merger agreement.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | In
2003, the Company recognized $503,000 in other income related to a           liquidating
distribution of the Companys membership interest in General           American Life
Insurance Co. (GA) when GAs stock was sold to           MetLife and
$118,000 in other income related to death benefits received from a           company
owned life insurance policy of a former executive.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | The
Company recorded the repurchase of 54,200 shares of common stock for           $935,000
in 2003, 1,211,124 shares of common stock for $28.3 million in 2000,           and
1,166,650 shares of common stock for $28.2 million in 1999.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Assets
of business transferred under contractual arrangements is the result of           the
sale of the discontinued Wall Décor operation.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

|(8) | In
2000, initial funding of a supplementary retirement benefit trust for key
          executives was established.
|--- | ------------------------------------------------------------------------------------------------------------------

|(9) | 2003
includes $7.3 million representing an accrued commitment for computer           equipment
and peripherals that were purchased in the fourth quarter of 2003 and           will be
paid for in 2004.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Page 17
|-------

|Item 6. Selected
Consolidated Financial Data (continued)


thousands (1) (2)
|----------------------------------------------------------------------------

|(10) | Other
charges and impairments:
|---- | ------------------------------

| |                                                                                                | 2003 |       | 2002 |   | 2001   |   | 2000 |       |  | 1999
| | ---------------------------------------------------------------------------------------------- | ---- | ----- | ---- | - | ------ | - | ---- | ----- |  | ----
| | Restructuring
      initiatives:                                                               |      |       |      |   |        |   |      |       |  |     
| | Executive
      management repositioning (a)                                                   | $    | 659   |      | $ | 380    |   | $    | 5,640 |  | $   
| | Exiting
      Technology Development segment (b)                                               |      |       |      |   | 1,046  |   |      |      |  |     
| | Production
      facility closure (c)                                                          |      | 121   |      |   | 982    |   |      |      |  |     
| | Corporate
      administrative support
            headcount reductions (d)                    |      | 687   |      |   | 509    |   |      |      |  |     
| | Other
      charges:                                                                          
| | Impairment
      losses (e)                                                                    |      |      |      |   | 4,171  |   |      |      |  |     
| | Professional
      fees  proxy consent solicitation (f)                                       |      | 1,663 |      |   |       |   |      |      |  |     
| | Pension
      curtailment loss (g)                                                             |      | 2,385 |      |   |       |   |      |      |  |     
| |                                                                                                |      |       |      |   |        |   |      |      
| |                                                                                                |      | 5,515 |      |   | 7,088  |   |      | 5,640 |  |     
| |                                                                                               
| | Less:                                                                                         
| | Exiting
      Technology Development segment  included
            in discontinued operations |      |      |      |   | (1,046 | ) |      |      |  |     
| |                                                                                                |      |       |      |   |        |   |      |      
| | Total
      other charges and impairments                                                      | $    | 5,515 |      | $ | 6,042  |   | $    | 5,640 |  | $   
| |                                                                                                |      |       |      |   |        |   |      |      

| | (a) | Consists
principally of expenses for executive severance and retirements.
| | --- | -------------------------------------------------------------------------

| | (b) | Consists
of expenses related to employee severance, asset abandonment write-offs and a remaining
             lease obligation accrual.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------

| | (c) | Consists
of expenses related to employee severance and retirement, asset abandonment write-offs
and a remaining              lease obligation accrual.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d) | Consists
of expenses for employee severance and retirement.
| | --- | -----------------------------------------------------------

| | (e) | Consists
of write-offs and write-downs of certain previously capitalized technology development
costs.
| | --- | ------------------------------------------------------------------------------------------------------

| | (f) | Consists
of professional fees relative to the proxy consent solicitation.
| | --- | -------------------------------------------------------------------------

| | (g) | Consists
of the charge related to the freeze of future benefit accruals under the pension plan.
| | --- | -----------------------------------------------------------------------------------------------

|Page 18
|-------

|Item 6. Selected Consolidated
Financial Data (continued)


thousands (1) (2)
|----------------------------------------------------------------------------

|(11) | EBITDA
represents net earnings from continuing operations before interest expense, income taxes,
depreciation and amortization        and other non-cash charges.  EBITDA is included
because it is one liquidity measure used by certain investors to determine a
       companys ability to service its indebtedness.  EBITDA is unaffected by the debt
and equity structure of the company.  EBITDA        does not represent cash flow from
operations as defined by generally accepted accounting principles (GAAP), is not
necessarily        indicative of cash available to fund all cash flow needs and should
not be considered an alternative to net income under GAAP         for purposes of
evaluating the Companys results of operations.  EBITDA is not necessarily comparable
with similarly-titled        measures for other companies.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2003                                                      |  | 2002 |        | 2001 |   | 2000   |  | 1999
| | --------------------------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | ----
| | EBITDA                                                    |  |      |        |      |   |        |  |     
| | Net
      earnings from continuing operations             |  | $    | 1,218  |      | $ | 7,633  |  | $   
| | Cumulative
      effect of change in accounting principle |  |      |       |      |   |       |  |     
| | Income
      tax expense                                  |  |      | 665    |      |   | 4,133  |  |     
| | Interest
      expense                                    |  |      | 2,949  |      |   | 3,578  |  |     
| | Depreciation
      and amortization                       |  |      | 17,240 |      |   | 20,058 |  |     
| | Other
      non-cash charges                              |  |      | 2,688  |      |   | 4,895  |  |     
| |                                                           |  |      |        |      |   |        |  |     
| | EBITDA                                                    |  | $    | 24,760 |      | $ | 40,297 |  | $   
| |                                                           |  |      |        |      |   |        |  |     

| | As
required by the SECs Regulation G, a reconciliation of EBITDA, a non-GAAP liquidity
measure, with the most directly        comparable GAAP liquidity measure, cash flow from
continuing operations follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                  |  | 2003 |        | 2002 |   | 2001   |   | 2000 |         | 1999 |  
| | ------------------------------------------------ |  | ---- | ------ | ---- | - | ------ | - | ---- | ------- | ---- | -
| | EBITDA                                           |  | $    | 24,760 |      | $ | 40,297 |   | $    | 38,740  |      | $
| | Income
      tax expense                         |  |      | (665   | )    |   | (4,133 | ) |      | (3,540  | )    |  
| | Interest
      expense                           |  |      | (2,949 | )    |   | (3,578 | ) |      | (4,229  | )    |  
| | Adjustments
      for items not requiring cash:  | 
| | Deferred
      income taxes                      |  |      | (2,504 | )    |   | (2,282 | ) |      | 4,965   |      |  
| | Deferred
      revenues and related costs        |  |      | (2,835 | )    |   | 154    |   |      | (494    | )    |  
| | Amortization
      of noncompete agreement       |  |      |       |      |   |       |   |      |        |      |  
| | Other,
      net                                 |  |      | (235   | )    |   | (2,767 | ) |      | (2,154  | )    |  
| | Decrease
      (increase) in current assets      |  |      | (310   | )    |   | (1,791 | ) |      | 4,128   |      |  
| | Increase
      (decrease) in current liabilities |  |      | 4,105  |      |   | 388    |   |      | 1,475   |      |  
| | Increase
      (decrease) in current taxes       |  |      | 4,646  |      |   | 2,311  |   |      | (10,190 | )    |  
| |                                                  |  |      |        |      |   |        |   |      |        
| | Cash
      flows from continuing operations      |  | $    | 24,013 |      | $ | 28,599 |   | $    | 28,701  |      | $
| |                                                  |  |      |        |      |   |        |   |      |        

|Page 19
|-------

|Item 7. 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 consolidated financial statements and related notes
thereto contained elsewhere in this document.


Unless otherwise noted, 2003 results
reflect a 53-week period while 2002 and 2001 results reflect a 52-week period. All
references to earnings per share relate to diluted earnings per common share.


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 last three
fiscal years, the Companys Sears Portrait Studio counts were:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2003                                    |  | 2002 |       | 2001 | 
| | --------------------------------------- |  | ---- | ----- | ---- | 
| | United
      States and Puerto Rico:    |  |      |       |      | 
| | Within
      full-line Sears stores     |  |      | 854   |      | 
| | Locations
      not within Sears stores |  |      | 45    |      | 
| |                                         |  |      |       |      | 
| | Canada                                  |  |      | 119   |      | 
| |                                         |  |      |       |      | 
| | Total                                   |  |      | 1,018 |      | 
| |                                         |  |      |       |      | 

|In early 2003, we commenced
operations of our Mexican portrait studio business and our mobile photography division
initially offering mobile photography services principally to child care centers. These
new businesses were launched as part of the Companys growth strategy announced in
June 2002 designed to diversify our revenue sources and reduce our total dependence on
Sears. We opened 18 Mexican portrait studios and entered 27 mobile photography
metropolitan markets throughout the United States. Most of the new Mexican studios and
mobile photography markets were opened during the second half of 2003. Accordingly, 2003
revenues related to these new ventures were minimal, approximately $731,000 and $1.9
million for Mexico and mobile photography, respectively. However, costs were incurred
throughout 2003 to establish these new operations resulting in significant operating
dilution of our overall consolidated results. Losses, net of associated tax benefits, for
Mexico and mobile photography operations in 2003 were $857,000 and $3.8 million,
respectively. While both operations produced results worse than what was initially
planned, the results of the mobile photography operation were substantially off plan,
driven principally by our inability to operationally and systems-wise support the
accelerated expansion into 27 markets in the first year of operations. This resulted in
higher costs and lower sales due to customer delivery and satisfaction issues.


Page 20
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Competitive
Factors/Trends/Challenges


During the last several years, we
have experienced a continuation of the increasing competition that began in the
mass-market professional studio industry in the early-to-mid 1990s. This increased
competition was marked by an increase in the number of permanent studios in the United
States from approximately 2,555 in 1990 to approximately 4,363 at the end of our 2003
fiscal year. During the same time period, the number of our Sears Portrait Studios has
increased slightly from 867 to 899. In addition, in recent years a significant portion of
the growth in industry studio count has been in non mall-based formats, which has been a
preference to the consumer over the mall-based format, which accounts for a substantial
portion of our studios.


This increased number of competitive
locations, coupled in part with a relatively flat U.S. birthrate and a general lack of
perceived differentiation of product or service by consumers, has resulted in intense
price competition as competitors attempt to protect or gain market share through
aggressive pricing strategies.


In addition, we believe that the
continued proliferation of amateur digital photography may be starting to negatively
impact the frequency of portrait studio visits.


The competitive and other external
factors cited above, coupled with the likely less than optimal experience that certain of
our customers have experienced over the past several years due to ongoing technology and
support challenges caused by an aging studio infrastructure, have resulted in a declining
sittings trend in our Sears Portrait Studios. Our sittings have declined from 5.5 million
in 2001 to 4.6 million in 2003. Although a portion of the sittings decline has been offset
by increases in our average customer sales, overall net sales over the same time period
have declined from $319.2 million in 2001 to $301.7 million in 2003.


Overall, the Companys operating
results for 2003 reflect:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
challenging, competitive sales environment of the mass-market             portrait
photography industry,
| | - | ------------------------------------------------------------------------------------------------------------

| |  | the internal challenges faced by the Company, and related customer impact, in addressing
its ongoing technology and support challenges caused by our aging studio infrastructure,
and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
significant operating dilution attributable to the Companys new             Mexican and
mobile photography operations in 2003.
| | - | -----------------------------------------------------------------------------------------------------------------------------------

|On March 24, 2004, the Knightspoint
Group successfully completed their consent solicitation resulting in, among other things,
the replacement of all but two of the Companys then-existing directors with the
slate proposed by the Knightspoint Group. Accordingly, the Companys new Board is in
the process of conducting their review of all relevant information related to the
Companys strategy going forward. Upon completion of this review, it is likely that
certain previously announced strategies, or tactics for achievement of those strategies,
may change. Pending completion of this review process, our new strategies, which are
intended to return the Company to a more profitable growth path and enhance shareholder
value, are expected to include the following measures all of which are contained within
the Knightspoint Groups definitive consent solicitation filed with the SEC on
January 23, 2004:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Implementing new executive compensation policies that align the interests of the board of
directors and management with those of the Companys stockholders,
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Reducing corporate overhead by decreasing headquarters and administrative headcount and
seeking to enhance studio productivity and efficiency by, for example, formulating new
operating systems that reduce burdens on studio employees and consequently enable a
greater focus on the customer which could lead to higher sales revenue,
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Exploring ways to reduce and redirect advertising spending to seek to decrease the cost of
customer acquisition,
| | - | ----------------------------------------------------------------------------------------------------------------

|Page 21
|-------

| |  | Formulating new merchandising and marketing strategies directed at addressing recent
declines in sittings volume, increasing the average sale, and enhancing utilization of
existing studios, including exploiting potential cross-selling opportunities,
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Sharpening focus on the core Sears Portrait Studio business and, particularly, on the
deployment of emerging digital technologies and applications,
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Seeking to control capital spending by, among other things, establishing new return hurdle
rates and deploying digital technologies judiciously while harvesting past investments,
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Establishing new processes and procedures for testing and evaluating all significant
programs and technologies prior to full development in an effort to manage any associated
execution risk (by the term execution risk, we mean the risk that in their
implementation certain new initiatives may fail, significantly overrun budgeted costs or
disrupt existing operations),
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Exploring ways to enhance internal communication and implementing target gain-sharing and
other incentive programs across all levels of the organization in order to seek to speed
decision-making, address the needs of field personnel as they arise, and strengthen the
alignment of interests between employees and shareholders, and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Discharging substantial cash to shareholders through large-scale stock buybacks and/or a
special distribution.
| | - | --------------------------------------------------------------------------------------------------------------

|Page 22
|-------

|RESULTS OF OPERATIONS


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

|thousands,
      except share and per share data and average sales per customer sitting | 2003 |   | 2002    |   | 2001 |        
|--------------------------------------------------------------------------------------- | ---- | - | ------- | - | ---- | -------
|                                                                                        |      |   |         |   |      |        
|Net
      sales                                                                         |      | $ | 301,683 |   | $    | 308,644
|                                                                                        |     
|Cost
      and expenses:                                                                |     
|Cost
      of sales                                                                     |      |   | 40,865  |   |      | 40,297 
|(exclusive
      of depreciation and amortization shown below)                          |      |   |         |   |      |        
|Cost
      of sales as a percentage of net sales                                        |      |   | 13.5    | % |      | 13.1   
|Gross
      margin as a percentage of net sales                                         |      |   | 86.5    | % |      | 86.9   
|Selling,
      general and administrative expenses                                      |      |   | 235,790 |   |      | 229,023
|Selling,
      general and administrative expenses as a percentage of sales             |      |   | 78.2    | % |      | 74.2   
|Depreciation
      and amortization                                                     |      |   | 17,240  |   |      | 20,058 
|Other
      charges and impairments                                                     |      |   | 5,515   |   |      | 6,042  
|                                                                                        |      |   |         |   |      |        
|                                                                                        |      |   | 299,410 |   |      | 295,420
|                                                                                        |      |   |         |   |      |        
|                                                                                        |      |   |         |   |      |        
|Income
      from operations                                                            |      |   | 2,273   |   |      | 13,224 
|                                                                                        |      |   |         |   |      |        
|Interest
      expense                                                                  |      |   | 2,949   |   |      | 3,578  
|Interest
      income                                                                   |      |   | 1,709   |   |      | 2,009  
|Other
      income, net                                                                 |      |   | 850     |   |      | 111    
|                                                                                        |      |   |         |   |      |        
|Earnings
      from continuing operations before income tax expense                     |      |   | 1,883   |   |      | 11,766 
|                                                                                        |      |   |         |   |      |        
|Income
      tax expense                                                                |      |   | 665     |   |      | 4,133  
|                                                                                        |      |   |         |   |      |        
|Net
      earnings from continuing operations                                           |      |   | 1,218   |   |      | 7,633  
|                                                                                        |     
|Net
      loss from discontinued operations, net of income tax benefit                  |     
|of
      $578 and $259, respectively                                                    |      |   |        |   |      | (1,093 
|                                                                                        |      |   |         |   |      |        
|                                                                                        |      |   |         |   |      |        
|NET
      EARNINGS                                                                      |      | $ | 1,218   |   | $    | 6,540  
|                                                                                        |      |   |         |   |      |        
|                                                                                        |      |   |         |   |      |        
|Net
      earnings per share  diluted                                                  |      | $ | 0.15    |   | $    | 0.80   
|                                                                                        |      |   |         |   |      |        
|                                                                                        |      |   |         |   |      |        
|Sittings                                                                                |      |   | 4,649   |   |      | 5,033  
|                                                                                        |      |   |         |   |      |        
|Average
      sales per customer sitting                                                |     
|Custom                                                                                  |      | $ | 74.80   |   | $    | 71.67  
|Package                                                                                 |      | $ | 44.19   |   | $    | 44.67  
|Overall                                                                                 |      | $ | 63.94   |   | $    | 61.06  

|Net sales totaled $301.7 million,
$308.6 million and $319.2 million in 2003, 2002 and 2001, respectively.
|---------------------------------------------------------------------------------------------------------

| | Net
sales in 2003 were $301.7 million down 2.3% to prior years net sales of $308.6
million, despite the benefit received from the 53rd week. The 53rd week favorably
impacted net sales by approximately $ 3.6 million or 1.2%. The decline in revenues was
primarily due to a reduced number of sittings within the Sears Portrait Studios partially
offset by an increase in the average sales per customer sitting. The decrease in 2003
reflects an 8% decrease in sittings to 4,630,000 from the 5,033,000 sittings generated in
the prior year only partially offset by a 4.9% increase in the average sale per customer
sitting to $64.03 from the $61.06 realized in 2002.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Page 23
|-------

| | Net
sales in 2002 were $308.6 million, representing a 3.3% decrease from the $319.2 million
reported in 2001. The decline in revenues was primarily due to a reduced number of
sittings within the Sears Portrait Studios. These reduced sitting levels were partially
offset by an increase in the average sale per customer. In 2002, sittings were 5,033,000,
down 9.1% from the 5,534,000 sittings generated in 2001. The average sale per customer in
2002 was $61.06 or 6.0% higher than the $57.59 realized in 2001.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
decrease in sittings between 2002 and 2003 was attributable to a number of external as
well as internal factors. Among the external factors are the impacts of continuing
competitive pressures, including the opening of new competitor locations and severe
competitor discounting, especially at the beginning of the 2003 holiday season. In
addition, the overall decline was exacerbated by the negative impacts of the inclement
weather experienced in February and March 2003 in a large portion of the country. Finally,
the rate at which customers continue to adopt amateur digital photography technologies has
accelerated which may be impacting the frequency of studio visits. Internal factors
potentially negatively impacting sittings include the Companys decision to
substantially reduce television advertising and studio employment costs in the second half
and fourth quarter of 2003 in response to weaker than anticipated sales performance during
the first three quarters of 2003. In addition, it is likely that some customers visiting
our studios are receiving a less than optimal experience as a result of ongoing technology
and support challenges caused by our aging studio infrastructure.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
decrease in sittings between 2002 and 2001 was principally attributable to an increase in
the number of competitor locations and the effects of competitors with lower priced
package offers, coupled with a soft economic environment in 2002 driven by declining
consumer confidence. In addition, it is likely that some of our customers studio
experiences were also being negatively impacted in 2002 as a result of ongoing technology
and support challenges caused by an aging studio infrastructure.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
increase in average sales per customer between 2002 and 2003 was primarily attributable to
a continued mix shift toward the higher value custom sittings as the decline in package
sittings accounted for a substantial portion of the reported decline in overall sittings,
an increase in the percentage of sales related to the March 2003 rollout of digitally
enhanced products and the Companys decision late in the second quarter of 2002 to
begin selling custom proof sheets which had previously been provided free of charge as
part of the custom offer.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
increase in average sales per customer between 2002 and 2001 was primarily attributable to
a continued mix shift toward the higher value custom sittings as the decline in package
sittings accounted for substantially all of the reported decline in overall sittings, the
Companys decision late in the second quarter of 2002 to begin selling custom proof
sheets which had previously been provided free of charge as part of the custom offer and
selected price increases.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Costs and expenses were
$299.4 million in 2003, compared with $295.4 million in 2002 and
$306.5 million in 2001.

| | Cost
of sales, excluding depreciation and amortization expense, as a percentage of net sales
was 13.5% in 2003, compared to 13.1% in 2002 and 13.5% in 2001. Correspondingly, gross
margin rates were 86.5% in 2003, 86.9% in 2002 and 86.5% in 2001. The increase in cost of
sales, as a percentage of sales, from 2002 to 2003 was primarily a result of reduced
sitting levels as well as increased costs associated with producing and shipping the new
digitally enhanced product introduced in 2003 referred to as Portrait Creations®. The
Company expects costs related to digitally enhanced portraits will be reduced in 2004, as
efficiencies are expected to be generated through improved processes surrounding the
second year of production of this product line. While not substantially impacting the
overall cost of sales as a percentage of sales, 2003 cost of sales were positively
impacted in the third quarter by the reversal of a previously-accrued liability amounting
to approximately $600,000 related to minimum usage requirements under a supply contract.
This reversal related to the favorable renegotiation of the Companys supply
contract with a vendor. In addition, in the fourth
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Page 24
|-------

| | quarter
of 2003, cost of sales increased by approximately $2.3 million, despite a substantial
decline in sittings, resulting principally from manufacturing inefficiencies in the
Companys St. Louis production facility. These inefficiencies related to integrating
production previously handled by the Companys Las Vegas production facility which
was closed after the fiscal 2002 holiday season and production issues pertaining to the
first busy season of producing both film and new digitally enhanced products discussed
above.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
reduction in cost of sales in 2002 from 2001 was primarily due to the positive impact of
more favorable pricing terms under a new supply contract with our primary raw material
supplier which was partially offset by the increased costs, as a percentage of sales, due
to lower sitting volumes.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Selling,
general and administrative expenses were $235.8 million, $229.0 million and $234.1
million for fiscal years 2003, 2002 and 2001, respectively. As a percentage of sales,
these expenses were 78.2% in 2003, 74.2% in 2002 and 73.3% in 2001.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Selling,
general and administrative expenses increased $6.8 million in 2003 compared to 2002. This
increase resulted primarily from $8.1 million in additional costs in 2003 associated with
commencement of operations of the Companys new ventures in mobile photography and
its Mexican studio operations. Exclusive of these costs, selling, general and
administrative expenses decreased $1.3 million compared to the prior year. The second half
of 2003 reflected the Companys efforts to reduce costs in response to declining
revenues. In 2003, when compared to 2002, the Company realized $3.3 million in savings
from reduced advertising expense and there was a $1.4 million decrease in
commissions due to lower sales volumes. In addition, during the third and fourth quarters
of 2003, reductions in studio employment costs of $1.4 million substantially offset
comparable increases in such amounts in the first two quarters of 2003. The reductions in
the third and fourth quarters of 2003 were the result of the Companys response to
bring studio employment costs as a percentage of sales back into line with the lower level
of sales than originally planned. These savings more than offset 2003 increases compared
to the prior year in studio supplies and telephone expense, travel and meeting costs and
pension expense of $1.4 million, $1.1 million and $1.0 million, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
$5.1 million decrease in 2002 from 2001 was primarily attributable to planned reductions
in advertising, reduced merchant discount fees related to credit card sales resulting from
processing our credit card sales through Sears in 2002, reduced sales commissions to Sears
resulting from reduced sales levels and various other reductions resulting from the
Companys continued emphasis on cost controls. These reductions were partially offset
by an increase in studio employment costs as a result of an increase in the average hourly
rate paid to our associates.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Depreciation
and amortization was $17.2 million in 2003, compared to $20.1 million in 2002 and
$23.7 million in 2001. The decrease in depreciation expense is primarily the result of a
portion of the Companys photographic equipment installed in 1993 and 1994 becoming
fully depreciated in 2001 and 2002.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 2003, the
Company recognized $5.5 million in other charges and impairments relating to a pension
plan curtailment, severance costs resulting from an executive retirement and other
administrative headcount reductions as well as certain professional fees associated with
the recently completed consent solicitation. Other charges and impairments amounted to
$6.0 million in 2002 and $5.6 million in 2001. The actions taken over the past three
years are as follows:
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Page 25
|-------

| | * | Executive
Management Repositioning
| | - | ----------------------------------

| | During
the fourth quarter of 2003, the Company recognized $659,000 and $380,000, respectively, in
expense consisting principally of severance pay and supplemental retirement plan benefits
related to the early retirement of senior executives.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2001, the Company announced it had hired J. David Pierson as Chairman and Chief
Executive Officer to replace the retiring Alyn V. Essman. The Company incurred $1.7
million in 2001 in special charges related to the severance pay, recognition of
unamortized supplemental employee retirement plan benefits and other costs associated with
the retirement of Mr. Essman and recruitment of Mr. Pierson.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, in December 2001, the Company announced that Russ Isaak, President, and Pat
Morris, Senior Executive Vice President and President of the Companys Portrait
Studio division, would retire from their respective positions and resign from the
Companys Board of Directors effective the end of the fiscal year. The Company
incurred $2.8 million in 2001 in expenses for severance pay, recognition of unamortized
supplemental employee retirement plan benefits and other costs related to these and other
administrative retirements at year-end.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Throughout
2001, the Company reviewed its administrative employee structure in an effort to more
efficiently support the operating divisions, which resulted in $1.1 million in severance
pay and recognition of unamortized supplemental employee retirement plan benefits.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | * | Exiting
Technology Development Segment
| | - | --------------------------------------

| | During
the third quarter of 2002, management completed a review of the infrastructure and
platform from which it delivers technology development and support services. The
objectives of the review were to 1) improve focus on and support for the Companys
core portraiture business, 2) improve organizational functionality and systems
flexibility, and 3) eliminate duplicative cost structures.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Consequently,
during the fourth quarter of 2002, final decisions were made and implemented regarding the
elimination of the Companys separate technology segment. To achieve the
aforementioned objectives, the Company transferred the technology development activities
for its portrait studios, previously performed by its subsidiary Centrics Technology, Inc.
(Centrics), back into a newly reorganized corporate technology function. In
addition, the Company decided to no longer pursue the sale of consulting and software
development to third parties.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2002, through the elimination of the Companys separate technology segment and the
transfer of activities to the corporate technology function, the Company incurred certain
fourth quarter charges related to the discontinued operations, including approximately
$537,000 in employee severance pay, $243,000 in remaining lease obligation accruals and
$266,000 in asset abandonment write-offs.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
financial reporting purposes, in 2002 the Company has classified its former Technology
Development segment as a discontinued operation and has reclassified prior year amounts to
conform to the current presentation.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | * | Production
Facility Closure
| | - | ---------------------------

| | During
the fourth quarter of 2003, the Company recorded an additional charge of $121,000 relating
to the closure of its Las Vegas manufacturing facility that occurred in the fourth quarter
of 2002. This charge resulted principally from the Companys inability to realize the
expected sublease income on the facility recorded in 2002 as an offset to the remaining
lease obligation accrual.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Page 26
|-------

| | During
the fourth quarter of 2002, management completed a review of its manufacturing capacity.
As a result, the Companys Las Vegas manufacturing facility was closed. This action
resulted in charges of approximately $407,000 in employee severance, $270,000 in accruals
relating to the remaining lease obligations and $305,000 in asset abandonment write-offs.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | * | Corporate
Administrative Support Reductions
| | - | -------------------------------------------

| | During
the fourth quarters of 2003 and 2002, management reviewed its overall level of corporate
support expenses. Consequently, a number of support positions in the Companys
corporate headquarters were eliminated resulting in employee severance accruals of
approximately $687,000 and $509,000, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | * | Impairment
Losses
| | - | -----------------

| | In
the third quarter of fiscal 2002, as part of the ongoing transfer and reorganization
activities discussed above relating to the Companys then existing Technology
Development segment, certain strategic technology decisions were made that either reduced
or eliminated the future utility of certain historic capitalized technology development
costs necessitating a write-down or write-off of these costs, thus resulting in a pre-tax,
non-cash, charge of $4.2 million. The impacted development activities included a
proprietary digital camera project ($2.9 million, including $2.5 million in equipment
costs), a digital manufacturing system ($445,000) and, a portion of the store automation
system platform ($863,000). In the case of both the digital camera project and the digital
manufacturing system, the Company has made the decision to prospectively utilize
commercially-available cameras and digital manufacturing software. The Companys
change in technology direction and its decision to no longer pursue the sale of technology
services to third parties resulted in the need to write-off a portion of its store
automation system capitalized software code.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | * | Consent
Solicitation
| | - | --------------------

| | In
the third and fourth quarters of fiscal 2003, the Company incurred professional services
costs of $480,000 and $1.2 million, respectively related to a consent solicitation
initiated by a group of shareholders.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | * | Pension
Plan Curtailment
| | - | ------------------------

| | During
2003, the Company completed a comprehensive analysis of its retirement plan practices and
their projected costs, especially as they compare to other retail industries. The Company
determined that very few companies like CPI Corp. provide defined benefit pension plans.
With regard to the CPI Corp. Retirement Plan (the Retirement Plan), the
Company has seen the required pension accounting costs increase sharply over the past few
years. As a result, on February 3, 2004, the Company implemented a freeze of future
benefit accruals under the Retirement Plan effective April 1, 2004, except for those
employees with ten years of service and who have attained age 50 who were grandfathered
and whose benefits will continue to accrue. The Company incurred a charge of $2.4 million
related to the pension plan curtailment.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interest
expense was $2.9 million in 2003, compared to $3.6 million in 2002 and $4.2 million
in 2001. The reduction in interest expense is primarily a result of scheduled principal
payments made in June 2003 and June 2002 reducing the outstanding balance of the Senior
Notes. The principal due on these notes at the end of 2003 was $34.2 million down from
$42.7 million in 2002 and $51.2 million in 2001.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Page 27
|-------

| | Interest
income was $1.7 million in 2003, as compared to $2.0 million in 2002 and $1.8
million in 2001. The decrease in interest income in 2003 compared to 2002 is principally
due to the substantial declines in interest rates during 2003 as well as slightly
decreased average cash balances during the year. The increased interest income in 2002
was generated from increased average cash balances partially offset by the impact of
declining interest rates earned on these cash balances during 2002. The balance of cash
and cash equivalents at the end of fiscal years 2003, 2002 and 2001 was $51.0 million,
$57.9 million and $46.6 million, respectively.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
provision for income taxes totaled $665,000, $4.1 million and $3.5 million in 2003, 2002
and 2001, respectively. These provisions resulted in effective tax rates of 35.3% in
2003, 35.1% in 2002 and 33.5% in 2001. The higher effective income tax rates in 2003 and
2002 were attributable to higher state and local income tax expense.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Net
losses from discontinued operations were $1.1 million and $482,000 in 2002 and 2001.
These discontinued operations relate to the Companys previously existing Technology
Development and Wall Décor segments and are further discussed below.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the third quarter of fiscal 2002, management completed its previously announced review of
the infrastructure and platform from which it delivers technology development and support
services. The objectives of the review were to 1) improve focus on and support for the
Companys core portraiture business, 2) improve organizational functionality and
systems flexibility, and 3) eliminate duplicative cost structures.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Consequently,
during the fourth quarter of fiscal 2002, final decisions were made and implemented
regarding the elimination of the Companys separate technology development segment.
To achieve the aforementioned objectives, the Company transferred the technology
development activities, previously performed by its subsidiary Centrics Technology, Inc.
(Centrics), back into a newly reorganized corporate technology function. In
addition, the Company decided not to continue to pursue the sale of consulting and
software development to third parties.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2002, through the elimination of the Companys separate technology development
segment and the transfer of activities to the corporate technology function, the Company
incurred certain fourth quarter charges related to the discontinued operations. The
Company incurred approximately $537,000 in employee severance pay, $243,000 in remaining
lease obligation accruals and $266,000 in asset abandonment write-offs.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Page 28
|-------

|LIQUIDITY AND CAPITAL
RESOURCES


The following table presents a
summary of our cash flows for each of the last three fiscal years:
|-----------------------------------------------------------------------------------------------------------------------------------

| | thousands                                     |  | 2003 |         | 2002 |   | 2001    |  
| | --------------------------------------------- |  | ---- | ------- | ---- | - | ------- | -
| | Net
      cash provided by (used in):         |  |      |         |      |   |         |  
| | Operating
      activities (1)                |  | $    | 24,013  |      | $ | 27,506  |  
| | Investing
      activities                    |  |      | (18,199 | )    |   | (6,244  | )
| | Financing
      activities                    |  |      | (13,319 | )    |   | (10,082 | )
| | Effect of
      exchange rate changes on cash |  |      | 594     |      |   | 187     |  
| |                                               |  |      |         |      |  
| | Net increase
      (decrease) in cash         |  | $    | (6,911  | )    | $ | 11,367  |  
| |                                               |  |      |         |      |  

| | (1) | Includes
cash flows used in discontinued operations of $1,093 and $482 in 2002           and 2001,
respectively.
| | --- | ----------------------------------------------------------------------------------------------------------------

|Net Cash Provided By
Operating Activities


Net cash provided by operating
activities, excluding discontinued operations, was $24.0 million in 2003 as compared to
$28.6 million and $28.7 million in 2002 and 2001, respectively. The decrease in
cash provided in 2003 as compared to 2002 resulted primarily from lower earnings in 2003
and a $4.2 million impairment charge recorded in 2002 partially offset by a $4.4 million
tax refund received in the first quarter of 2003 and the $7.3 million accrued purchase
commitment for computer equipment and peripherals that was recorded in the fourth quarter
of 2003. The decrease in cash provided in 2002 resulted primarily from the growth in
accounts receivable in the amount of $3.1 million resulting from a change in our credit
card processing agreement with Sears.


Net Cash Used In
Investing Activities


Net cash used in investing activities
during 2003 was $18.2 million. This compares with cash used in investing activities of
$6.2 million and $12.9 million in 2002 and 2001, respectively. The increase in cash used
for investing activities in 2003 as compared to 2002 is primarily the result of increased
capital expenditures of $13.8 million, partially offset by increases in net cash provided
by sales of investment securities in a Rabbi Trust the net proceeds of which were used to
fund retirement obligations under the Companys supplemental retirement plan. The
2003 total capital expenditure amount of $22.8 million includes a $7.3 million accrued
purchase commitment recorded in our balance sheet at February 7, 2004 for computer
equipment and peripherals that were purchased in the fourth quarter of 2003 to replace
aging systems in our studios and will be paid for in 2004. The decrease in cash used for
investing activities in 2002 as compared with 2001 is the result of reduced capital
expenditures as well as a reduction in the amounts invested in the Rabbi Trust.


Net Cash Used In
Financing Activities


Net cash used in financing activities
was $13.3 million in 2003 compared to $10.1 million in 2002 and $7.3 million in 2001. The
increase in net cash used in 2003 was primarily a result of a $1.3 million decrease in
proceeds from borrowing against cash surrender value of life insurance and $935,000 used
for open market share repurchases. The increase in net cash used in 2002 was primarily a
result of $4.2 million less being collected for the exercise of stock options in 2002
compared to 2001.


The Company has a $60.0 million
Senior Note Agreement (the Note Agreement) privately placed with two major
insurance companies. The Note Agreement was entered into in June 1997. The notes issued
pursuant to the Note Agreement mature over a ten-year period with an average maturity of
seven years and call for annual principal


Page 29
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|payments beginning in 2001 with the
final payment due in 2007. Interest on the notes is payable semi-annually, in June and
December, at an average effective fixed rate of 7.46%. As of February 7, 2004, the
outstanding principal balance due under the Note Agreement was $34.2 million.



The Note Agreement contains a number
of covenants imposing certain restrictions on our business. The most significant of these
covenants require that:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
ratio of consolidated debt to earnings before interest, taxes, depreciation and
amortization (EBITDA) must be less than 300% of EBITDA;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
ratio of consolidated earnings before interest, taxes, depreciation, amortization and
lease rental expense (EBITDAR) to fixed charges (income taxes, dividends,
interest expense, current maturities of debt and lease expenses) must be greater than
200%, and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
ratio of consolidated debt to consolidated capitalization must be less than 55%.
| | - | ------------------------------------------------------------------------------------

|In addition, the Company has a $15.0
million revolving credit facility (the Revolving Facility) which will expire
June 20, 2004 and has a variable interest rate charged at either LIBOR or prime rate
funds, with an applicable margin added. A commitment fee of 0.200% to 0.375% per annum is
payable on the unused portion of the Revolving Facility.


As of February 7, 2004, there were no
borrowings under the Revolving Facility other than the need to support the principal
amount of $6.9 million in outstanding standby letters of credit used in conjunction with
the Companys self insurance programs.


The agreement governing our Revolving
Facility contains the following significant covenants requiring that the Company maintain:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Minimum
consolidated fixed charge coverage ratio of 0.81 to 1.00
| | - | ----------------------------------------------------------------

| |  | Maximum
consolidated adjusted liabilities to consolidated                   EIBTDA ratio of 4.18
to 1.00; and
| | - | -------------------------------------------------------------------------------------------------------------

| |  | A
minimum consolidated tangible net worth of $26 million.
| | - | ---------------------------------------------------------

|As of February 7, 2004, the Company
was in compliance with all debt covenants, as amended, and although dependent on attaining
certain levels of operating performance and profitability in the future, anticipates
complying with these covenants in the next year. In addition, the Company is currently in
negotiations to establish a new revolving credit facility and expects to have an agreement
in place prior to the expiration of the existing Revolving Facility.


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 Other Commitments table below, the Company has no additional
off-balance sheet arrangements.



Page 30
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Future Cash Flows


To facilitate an understanding of the
Companys contractual obligations and other commitments, the following information is
provided:
|---------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                         | PAYMENTS DUE BY
      YEAR (in thousands)
|------------------------------------------------------------------------ | -----------------------------------------
|
|Contractual
      obligations:                                           |                                          
|                                                                         |                                          
|Long-term
      debt                                                     |                                          
|                                                                         |                                          
|Operating
      leases                                                   |                                          
|                                                                         |                                          
|Purchase
      obligations for 
              materials and services (1) |                                          
|                                                                         |                                          
|Commitments
      for 
              capital expenditures (2)            |                                          
|                                                                         |                                          
|Other
      liabilities (3)                                              |                                          
|                                                                         |                                          
|                                                                         |                                          
|TOTAL                                                                    |                                          
|                                                                         |                                          

|                                       | AMOUNT OF COMMITMENT
      EXPIRATION PER YEAR
      (in thousands)
|-------------------------------------- | -------------------------------------------------------------------
|
|Other
      commitments:               |                                                                    
|                                       |                                                                    
|Standby
      letters of credit (4)    |                                                                    
|                                       |                                                                    
|Contingent
      lease obligations (5) |                                                                    
|                                       |                                                                    
|                                       |                                                                    
|TOTAL                                  |                                                                    
|                                       |                                                                    

|(1) | Amount
represents purchase commitments that include $3.9 million of future           services to
be provided by advertising agencies and other promotional vendors in
          conjunction with the Companys marketing initiatives, $2.9 million in
          purchase commitments for computer equipment, printers and peripherals, $869,000
          for film, $626,000 in database maintenance fees, $450,000 in fees for the
          Companys long-distance services and $301,000 in purchase commitments for
          accessories inventory. The purchase obligations also include $275,000
          representing variable price provisions based on minimum purchase quantities of
          photographic paper, as contractually arranged with certain suppliers and
          $274,000 for business continuity services.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Amount
represents an accrued purchase commitment recorded in our balance sheet           at
February 7, 2004 for computer equipment and peripherals that were purchased           in
the fourth quarter of 2003 to replace aging systems in our studios and will           be
paid for in 2004.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Page 31
|-------

|(3) | Amounts
consist primarily of severance accruals of $816,000, remaining lease
          obligations on a closed production facility of $214,000 and deferred
          compensation and other benefit plan accruals of $1.4 million recorded in our
          February 7, 2004 balance sheet. The accruals for deferred compensation and
other           benefits represent amounts paid in early 2004 primarily to former
directors as a           result of the completion of the consent solicitation whereby
these directors           were removed from the Board.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
table does not include our deferred income tax liability, accruals for self-insured losses
and pension benefits because it is not certain when these liabilities will become due. We
did not make any contributions to our pension plan in 2003 and do not expect to do so in
2004. Future contributions to our pension plan will be dependent upon recently passed
legislation, future changes in discount rates and the earnings performance of our plan
assets.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
indicated in Note 8 of the Notes to the Consolidated Financial Statements, the projected
benefit obligation of the Companys pension plan exceeded plan assets by $13.8
million at the end of 2003 and 2002. Even though there was no net change in the unfunded
status between 2003 and 2002, there were significant offsetting amounts impacting both the
projected benefit obligation and the fair value of plan assets in both years. In 2003, the
projected benefit obligation was increased by a $2.1 million curtailment loss resulting
from our decision to freeze future benefit accruals under the pension plan. In 2003, plan
assets grew approximately $3.4 million compared to 2002 as returns on plan assets
increased $8.1 million as the result of improved market conditions and a $4.3 million
Company contribution made to the plan in 2002 while no corresponding contribution was made
in 2003. As noted above, the Company does not expect to contribute to the pension plan in
2004. The Critical Accounting Estimates section and Note 8 of the Notes to the
Consolidated Financial Statements provide a more complete description of the status of the
Companys pension plan.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | We
use stand-by letters of credit to support our 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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | 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 February 7, 2004 the maximum future           obligation to
the Company would be $10.1 million before any negotiation with           landlords or
subleasing. To recognize the risk associated with these leases and           based on the
Companys past experience with renegotiating lease           obligations, a $1.0
million reserve was established in 2001. At February 7,           2004, the Company had
made no further allowances for defaults under these           operating leases as, in the
opinion of management, Prints Plus is meeting the           performance standards
established under the operating leases.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 decline in cash flow from
continuing operations in 2003 and the continuing challenging and competitive sales
environment, we expect to generate sufficient cash flow from operations in 2004, when
coupled with cash on hand, to meet the above-mentioned obligations and commitments.


Page 32
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|However, as referred to in the
Executive Overview section of Managements Discussion and Analysis, our new Board is
evaluating the possibility of discharging substantial cash to shareholders through
large-scale share repurchases and/or a special distribution. To effectuate such a return
of capital would require either debt covenant relief from our existing Senior Note holders
or a refinancing of the Senior Notes and an increase in our existing revolving credit
facility to handle potential seasonal cash flow needs. Based on our discussions to date,
our Senior Note holders have advised us that they are unwilling to grant the debt covenant
relief necessary to effectuate a significant return of capital. However, prior to the
completion of the consent solicitation whereby there was material change in the
composition of our Board, we did receive a commitment from another lender to refinance the
existing Senior Notes in the amount of $35 million on a five-year term and increase the
current revolving credit facility from $15 million to $35 million and extend it for
another three years. Because of the material change in the composition of the Board
resulting from the completion of the consent solicitation process, we are in ongoing
discussions with the lender for purposes of determining their continued willingness to
provide the financing and our new Boards interest in pursuing the previous
commitment. At any rate, based on our discussions with lenders and knowledge of the
current credit markets, we believe adequate funding sources are available on terms
acceptable to the Company, should the new Board decide to pursue a significant return of
capital.


Page 33
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|ACCOUNTING PRONOUNCEMENTS
AND POLICIES


Adoption of New
Accounting Standards


In April 2003, the Financial
Accounting Standards Board (FASB) issued SFAS No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends
and clarifies financial accounting and reporting for derivative instruments embedded in
other contracts and for hedging activities under SFAS No. 133. The statement was effective
for contracts entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The adoption of SFAS No. 149 did not have any impact on
the Companys financial statements.


In May 2003, the FASB issued SFAS No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. SFAS No. 150 establishes standards that require companies to
classify certain financial instruments as liabilities that were previously classified as
equity. The Company did not reclassify any financial instruments as a result of adopting
SFAS No. 150.


In December 2003, the FASB revised
SFAS No. 132, Employers Disclosures about Pensions and Other Postretirement
benefits  an amendment of FASB Statements No. 87, 88 and 106". The Company has
adopted the provisions of the revised statement for fiscal year 2003.


In December 2003, the FASB reissued
Revised FASB Interpretation No. (FIN) 46, Consolidation of Variable
Interest Entities, which addresses the consolidation of variable interest entities
in which an enterprise absorbs a majority of the entitys expected losses, received a
majority of the entitys expected residual returns, or both, as a result of
ownership, contractual or other financial interests in the entity. FIN No. 46 is required
to be applied in financial statements of public entities that have variable interest
entities or potential variable interest entities commonly referred to as special-purpose
entities created before February 1, 2003 for periods ending after December 15, 2003, and
for all other types of entities is required to be applied in financial statements for
periods ending after March 15, 2004. Adoption of the standard did not have a material
impact on the Companys consolidated financial position, results of operations or
cash flows.


Application of Critical
Accounting Policies


The preparation of financial
statements requires the Company to estimate the effect of various matters that are
inherently uncertain as of the date of the financial statements. Each of these required
estimates varies in regard to the level of judgment involved and its potential impact on
the Companys reported financial results. Estimates are deemed critical when a
different estimate could have reasonably been used or where changes in the estimate are
reasonably likely to occur from period to period, and would materially impact the
Companys financial condition, changes in financial condition or results of
operations. The Companys significant accounting policies are discussed in Note 1 of
the Notes to Consolidated Financial Statements; critical estimates inherent in these
accounting policies are discussed in the following paragraphs.


Self-insurance reserves


The Company is self insured for
certain losses relating to workers compensation, general liability, business auto
usage and employee medical claims. The Company has stop-loss coverages to limit the
exposure arising from these claims. Self insurance losses for claims filed and claims
incurred but not reported are accrued based upon the Companys estimates of the
aggregate liability for uninsured claims incurred using actuarial assumptions followed in
the insurance industry and the Companys historical experience. Loss estimates are
adjusted based upon actual claims settlements and reported claims.


Defined benefit
retirement plans


The plan obligations and related
assets of defined benefit retirement plans are presented in Note 8 of the Notes to
Consolidated Financial Statements. Plan assets, which consist primarily of marketable
equity and debt instruments,


Page 34
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|are valued using market quotations.
Plan obligations and the annual pension expense are determined by independent actuaries
and through the use of a number of assumptions. Key assumptions in measuring the plan
obligations include the discount rate, the rate of salary increases and the estimated
future return on plan assets. In determining the discount rate, the Company utilizes the
yield on high-quality, fixed-income investments currently available with maturities
corresponding to the anticipated timing of the benefit payments. Salary increase
assumptions are based upon historical experience and anticipated future management
actions. Asset returns are based upon the anticipated average rate of earnings expected
on the invested funds of the plans. At February 7, 2004, the actuarial assumptions of the
Companys plans were: discount rate 6.0%; long-term rate of return on plan assets
8.75%; and assumed salary increases 3.75%.


The Company has made certain other
estimates that, while not involving the same degree of judgment, are important to
understanding the Companys financial statements. These estimates are in the areas of
assessing recoverability of the remaining amount due the Company resulting from the
disposal of its previous Wall Décor segment and of long-lived assets, realization
of net deferred tax assets and in establishing reserves in connection with restructuring
initiatives and other charges and with respect to the Companys operating lease
guarantees related to its former Wall Décor segment. On an ongoing basis,
management evaluates its estimates and judgments in these areas based on its substantial
historical experience and other relevant factors. Managements estimates as of the
date of the financial statements reflect its best judgment giving consideration to all
currently available facts and circumstances. As such, these estimates may require
adjustment in the future, as additional facts become known or as circumstances change.


The Companys management has
discussed the development and selection of these critical accounting policies with the
Audit Committee of the Companys Board of Directors and the Audit Committee has
reviewed the Companys disclosure relating to it in this Management Discussion and
Analysis.


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 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 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.


Page 35
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Item 7A. 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 relative to the Canadian and
Mexican operations is minimal. Canadian operations constitute only 10.3% of the
Companys total assets and 7.3% of the Companys total sales. Mexican operations
constitute 1.3% of the Companys total assets and significantly less than 1% of the
Companys total net sales.


Page 36
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Item 8. Financial
Statements and Supplemental Data


     (a)    
          INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|--------------------------------------------------------------------------------------------------------------------------------

| | 
        Managements Report                                                                |  | 38   
| | -------------------------------------------------------------------------------------------- |  | -----
| |    Independent
      Auditors Report                                                       |  | 39   
| |    Consolidated
      Balance Sheets as of February 7, 2004 and February 1, 2003            |  | 4041
| |    Consolidated
      Statements of Operations for the fiscal years ended                   |  |      
| | February
      7, 2004, February 1, 2003 and February 2, 2002                                |  | 42   
| |    Consolidated
      Statements of Changes in Stockholders Equity for the fiscal years    |  |      
| | ended February 7, 2004, February 1, 2003 and February
      2, 2002                          |  | 43   
| |    Consolidated
      Statements of Cash Flows for the fiscal years ended February 7, 2004, |  |      
| | February 1, 2003 and February 2, 2002                                                        |  | 4445
| |    Notes
      to Consolidated Financial Statements                                         |  | 4673

|The Companys fiscal year ends
the first Saturday of February. Accordingly, fiscal year 2003 ended February 7, 2004 and
consisted of 53 weeks, and fiscal years 2002 and 2001 ended February 1, 2003 and February
2, 2002, respectively, and consisted of 52 weeks. Throughout the FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA section, reference to 2003, 2002 or 2001 will mean
the fiscal year ended February 7, 2004, February 1, 2003 and February 2, 2002,
respectively.


Page 37
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Managements Report


Responsibility
for the consolidated financial statements and other information presented throughout the
Annual Report on Form 10-K rests with the management of CPI Corp. (the
Company). The Company believes that the consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the United States
and present fairly the substance of transactions based on the circumstances and
managements best estimates and judgment. All financial information throughout the
Annual Report on Form 10-K is consistent with that in the consolidated
financial statements.


In
meeting its responsibilities for the reliability of the consolidated financial statements,
the Company depends on its system of internal controls. The system is designed to provide
reasonable assurance that assets are safeguarded and transactions are executed in
accordance with the appropriate corporate authorization and recorded properly to permit
the preparation of the consolidated financial statements. To test compliance, the Company
carries out an extensive audit program. This program includes a review for compliance with
written policies and procedures and a comprehensive review of the adequacy and
effectiveness of the internal control systems. Although control procedures are designed
and tested, it must be recognized that there are limits inherent in all systems of
internal accounting control and, as such, errors and irregularities may nevertheless
occur. Also, estimates and judgments are required to assess and balance the relative cost
and expected benefits of the controls. The Company believes that its system of internal
controls provides reasonable assurance that errors or irregularities that could be
material to the consolidated financial statements are prevented or would be detected
within a timely period by employees in the normal course of performing their assigned
functions.


The
Board of Directors of the Company has an Audit Committee composed of directors who are not
officers or employees of CPI Corp. The committee meets periodically with management, the
internal auditors and the independent accountants to consider audit results and to discuss
internal accounting control, auditing and financial reporting matters.


The
Companys independent accountants, KPMG LLP, have been engaged to render an
independent professional opinion on the consolidated financial statements. Their opinion
on the consolidated financial statements is based on procedures conducted in accordance
with auditing standards generally accepted in the United States and forms the basis for
their report as to the fair presentation, in the consolidated financial statements, of the
Companys financial position, operating results and cash flows.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|/s/
      J. David Pierson    |  |  | /s/
      Gary W. Douglass                |  |  | /s/
      Kimberly A. LaBelle     
|----------------------------- |  |  | ----------------------------------------- |  |  | ----------------------------------
|                              |  |  |                                           |  | 
|J.
      David Pierson        |  |  | Gary
      W. Douglass                    |  |  | Kimberly
      A. LaBelle         
|Chairman,
      President and |  |  | Executive
      Vice President,           |  |  | Vice
      President, Controller  
|Chief
      Executive Officer |  |  | Finance
      and Chief Financial Officer |  |  | Principal
      Accounting Officer

|Page 38
|-------

|INDEPENDENT
AUDITORS REPORT


TO THE BOARD OF DIRECTORS AND
STOCKHOLDERS CPI CORP.:


We
have audited the consolidated financial statements of CPI Corp. and subsidiaries as listed
in the accompanying index. These consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.


We
conducted our audits in accordance with auditing standards generally accepted in the
United States of America. Those standards required that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.


In
our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of CPI Corp. and subsidiaries as of February
7, 2004 and February 1, 2003, and the results of their operations and their cash flows for
each of the fiscal years in the three-year period ended February 7, 2004, in conformity
with accounting principles generally accepted in the United States of America.


KPMG LLP
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|/s/ KPMG LLP 

KPMG
LLP
|-------------------------------------

|St. Louis, Missouri


April 8, 2004


Page 39
|---------------------------------------------

|CPI CORP.Consolidated Balance
Sheets  Assets
|---------------------------------------------

|February
      7, 2004                                                   |  | February
      1, 2003
|------------------------------------------------------------------------ |  | ----------------------
|                                                                         |  |                       
|ASSETS                                                                   |  |                       
|Current assets:                                                          | 
|Cash
      and cash equivalents                                          |  | $                     
|Accounts
      receivable:                                               | 
|Due
      from licensor stores                                           |  |                       
|Other                                                                    |  |                       
|Inventories                                                              |  |                       
|Prepaid
      expenses and other current assets                          |  |                       
|Refundable
      income taxes                                            |  |                       
|Deferred
      tax assets                                                |  |                       
|                                                                         |  |                       
|                                                                         |  |                       
|Total
      current assets                                               |  |                       
|                                                                         |  |                       
|                                                                         | 
|Property
      and equipment:                                            | 
|Land                                                                     |  |                       
|Building
      improvements                                              |  |                       
|Leasehold
      improvements                                             |  |                       
|Photographic,
      sales and manufacturing equipment                    |  |                       
|                                                                         |  |                       
|Total                                                                    |  |                       
|Less
      accumulated depreciation and amortization                     |  |                       
|                                                                         |  |                       
|Property
      and equipment, net                                        |  |                       
|Assets of
      business transferred under contractual arrangements:     | 
|Preferred
      Security                                                 |  |                       
|Loan
      receivable                                                    |  |                       
|Assets of
      supplemental retirement plan:                            | 
|Cash
      surrender value of life insurance policies (net of borrowings | 
|of
      $1,548 and $1,596 at February 7, 2004 and February 1, 2003,     | 
|respectively)                                                            |  |                       
|Other
      investments                                                  |  |                       
|Other assets,
      net of amortization of $1,359 at both                | 
|February
      7, 2004 and February 1, 2003                              |  |                       
|                                                                         |  |                       
|                                                                         |  |                       
|TOTAL
      ASSETS                                                       |  | $                     
|                                                                         |  |                       

|See accompanying notes to
consolidated financial statements.












Page 40
|--------------------------------------------------------------------------------

|CPI CORP.

Consolidated
Balance Sheets  Liabilities and Stockholders Equity
|-----------------------------------------------------------------------------

|February
      7, 2004                                                                      |  | February
      1, 2003 |         
|------------------------------------------------------------------------------------------- |  | ---------------------- | --------
|                                                                                            |  |                        |         
|LIABILITIES                                                                                 |  |                        |         
|Current liabilities:                                                                        | 
|Current
      maturities of long-term debt                                                  |  | $                      | 8,580   
|Accounts
      payable                                                                      |  |                        | 15,294  
|Accrued
      employment costs                                                              |  |                        | 12,297  
|Customer
      deposit liability                                                            |  |                        | 24,897  
|Sales
      taxes payable                                                                   |  |                        | 2,524   
|Accrued
      advertising expenses                                                          |  |                        | 1,803   
|Accrued
      expenses and other liabilities                                                |  |                        | 3,024   
|                                                                                            |  |                        |         
|                                                                                            |  |                        |         
|Total
      current liabilities                                                             |  |                        | 68,419  
|                                                                                            |  |                        |         
|Long-term
      debt, less current maturities                                               |  |                        | 25,589  
|Accrued pension
      obligations                                                           |  |                        | 10,364  
|Supplemental
      retirement plan obligations                                              |  |                        | 3,547   
|Customer
      deposit liability                                                            |  |                        | 4,769   
|Other liabilities                                                                           |  |                        | 2,715   
|                                                                                            |  |                        |         
|                                                                                            |  |                        |         
|Total
      liabilities                                                                     |  |                        | 115,403 
|                                                                                            |  |                        |         
|STOCKHOLDERS
      EQUITY                                                                  | 
|Preferred
      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,
      $.40 par value, 50,000,000 shares authorized; 18,360,238 and            | 
|18,288,006
      shares issued at February 7, 2004 and February 1, 2003,                    | 
|respectively                                                                                |  |                        | 7,344   
|Additional
      paid in capital                                                            |  |                        | 52,272  
|Retained
      earnings                                                                     |  |                        | 230,394 
|Accumulated
      other comprehensive loss                                                  |  |                        | (9,599  
|                                                                                            |  |                        |         
|                                                                                            |  |                        | 280,411 
|Treasury
      stock  at cost, 10,292,503 and 10,238,303 shares at                         | 
|February
      7, 2004 and at February 1, 2003, respectively                                |  |                        | (228,577
|Unamortized
      deferred compensation restricted stock                                   |  |                        | (8      
|                                                                                            |  |                        |         
|                                                                                            |  |                        |         
|Total
      stockholders equity                                                            |  |                        | 51,826  
|                                                                                            |  |                        |         
|                                                                                            |  |                        |         
|TOTAL
LIABILITIES AND STOCKHOLDERS EQUITY                                                  |  | $                      | 167,229 
|                                                                                            |  |                        |         

|See accompanying notes to
consolidated financial statements.


Page 41
|----------------------------------------------------------------------

|CPI CORP.Consolidated
Statements of Operations Fifty-three weeks ended February 7,
2004 and Fifty-two weeks ended February 1, 2003 and February 2, 2002
|-------------------------------------------------------------------------------------------------------------------------------------------------------

|2003                                                                           |  | 2002 |   | 2001     
|------------------------------------------------------------------------------ |  | ---- | - | ---------
|                                                                               |  |      |   |          
|Net
      sales                                                                |  |      | $ | 301,683  
|                                                                               |  |      |   |          
|Cost and
      expenses:                                                       |  |     
|Cost
      of sales (exclusive of depreciation and amortization shown below)   |  |      |   | 40,865   
|Selling,
      general and administrative expenses                             |  |      |   | 235,790  
|Depreciation
      and amortization                                            |  |      |   | 17,240   
|Other
      charges and impairments                                            |  |      |   | 5,515    
|                                                                               |  |      |   |          
|                                                                               |  |      |   | 299,410  
|                                                                               |  |      |   |          
|                                                                               |  |      |   |          
|Income from
      operations                                                   |  |      |   | 2,273    
|                                                                               |  |      |   |          
|Interest
      expense                                                         |  |      |   | 2,949    
|Interest
      income                                                          |  |      |   | 1,709    
|Other income,
      net                                                        |  |      |   | 850      
|                                                                               |  |      |   |          
|Earnings
      from continuing operations before income tax expense            |  |      |   | 1,883    
|                                                                               |  |      |   |          
|Income tax
      expense                                                       |  |      |   | 665      
|                                                                               |  |      |   |          
|                                                                               |  |      |   |          
|Net earnings
      from continuing operations                                  |  |      |   | 1,218    
|Net loss
      from discontinued operations, net of income tax benefit of $578 |  |     
|and
      $259, respectively                                                   |  |      |   |         
|                                                                               |  |      |   |          
|                                                                               |  |      |  
|                                                                               |  |      |   |          
|NET EARNINGS                                                                   |  |      | $ | 1,218    
|                                                                               |  |      |   |          
|                                                                               |  |     
|EARNINGS
      (LOSS) PER COMMON SHARE                                         |  |     
|                                                                               |  |      |   |          
|Net earnings
      per share from continuing operations - diluted              |  |      | $ | 0.15     
|Net loss
      per share from discontinued operations - diluted                |  |      |   |         
|                                                                               |  |      |   |          
|Net earnings
      per share - diluted                                         |  |      | $ | 0.15     
|                                                                               |  |      |   |          
|                                                                               |  |      |   |          
|Net earnings
      per share from continuing operations - basic                |  |      | $ | 0.15     
|Net loss
      per share from discontinued operations - basic                  |  |      |   |         
|                                                                               |  |      |   |          
|Net earnings
      per share - basic                                           |  |      | $ | 0.15     
|                                                                               |  |      |   |          
|                                                                               |  |      |   |          
|Dividends
      per share                                                      |  |      | $ | 0.60     
|                                                                               |  |      |   |          
|                                                                               |  |     
|Weighted
      average number of common and common equivalent                  |  |     
|shares
      outstanding-diluted                                               |  |      |   | 8,148,164
|Weighted
      average number of common and common equivalent                  |  |     
|shares
      outstanding-basic                                                 |  |      |   | 8,081,619

|See accompanying
notes to consolidated financial statements.



Page 42
|-----------------------------------------------------------------------

|CPI CORP. Consolidated
Statements of Changes in Stockholders Equity

Fifty-three weeks ended February 7,
2004 and Fifty-two weeks ended February 1, 2003 and February 2, 2002
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Common
      stock                       |  | Additional
      paidin
      capital |       | Retained
      earnings |   | Accumulated
      other
      comprehensive
      income (loss) |  | Treasury
      stock,
      at cost |         | Deferred
      compensation 
      restricted
      stock |   | Total   |  
|---------------------------------------- |  | -------------------------------------- | ----- | ----------------------- | - | --------------------------------------------------------------- |  | ----------------------------------- | ------- | ---------------------------------------------------------- | - | ------- | -
|                                         |  |                                        |       |                         |   |                                                                 |  |                                     |         |                                                            |   |         |  
|Balance
      at February 3, 2001        |  | $                                      | 7,154 |                         | $ | 44,363                                                          |  | $                                   | 229,803 |                                                            | $ | (3,478  | )
|                                         |  |                                        |       |                         |   |                                                                 |  |                                     |         |                                                            |   |         |  
|Net
      earnings                       |  |                                        |       |                         |   |                                                                 |  |                                     | 6,541   |                                                            |   |         |  
|Total
      other comprehensive loss     |  |                                        |       |                         |   |                                                                 |  |                                     |         |                                                            |   | (1,908  | )
|                                         |  |                                        |       |                         |   |                                                                 |  |                                     |         |                                                            |   |         |  
|Total
      comprehensive income         |  |                                        |       |                         |   |                                                                 |  |                                     |         |                                                            |   |         |  
|Issuance
      of common stock to        | 
|employee
      stock plans and           | 
|option
      exercises                   | 
|(316,098
      shares)                   |  |                                        | 127   |                         |   | 5,482                                                           |  |                                     |         |                                                            |   |         |  
|Dividends
      ($0.56 per common share) |  |                                        |       |                         |   |                                                                 |  |                                     | (4,364  | )                                                          |   |         |  
|Issuance
      of treasury stock         |  |                                        |       |                         |   |                                                                 |  |                                     |         |                                                            |   |         |  
|Amortization
      of deferred           | 
|compensation
       restricted          | 
|stock                                    |  |                                        |       |                         |   |                                                                 |  |                                     |         |                                                            |   |         |  
|                                         |  |                                        |       |                         |   |                                                                 |  |                                     |         |                                                            |   |         |  
|                                         |  |                                        |       |                         |   |                                                                 |  |                                     |         |                                                            |   |         |  
|Balance
      at February 2, 2002        |  |                                        | 7,281 |                         |   | 49,845                                                          |  |                                     | 231,980 |                                                            |   | (5,386  | )
|                                         |  |                                        |       |                         |   |                                                                 |  |                                     |         |                                                            |   |         |  
|Net
      earnings                       |  |                                        |       |                         |   |                                                                 |  |                                     | 6,540   |                                                            |   |         |  
|Total
      other comprehensive loss     |  |                                        |       |                         |   |                                                                 |  |                                     |         |                                                            |   | (5,317  | )
|                                         |  |                                        |       |                         |   |                                                                 |  |                                     |         |                                                            |   |         |  
|Total
      comprehensive income         |  |                                        |       |                         |   |                                                                 |  |                                     |         |                                                            |   |         |  
|Issuance
      of common stock to        | 
|employee
      stock plans and           | 
|option
      exercises                   | 
|(86,263
      shares)                    |  |                                        | 34    |                         |   | 1,366                                                           |  |                                     |         |                                                            |   |         |  
|Dividends
      ($0.56 per common share) |  |                                        |       |                         |   |                                                                 |  |                                     | (4,498  | )                                                          |   |         |  
|Amortization
      of deferred           | 
|compensation
       restricted          | 
|stock                                    |  |                                        |       |                         |   |                                                                 |  |                                     |         |                                                            |   |         |  
|                                         |  |                                        |       |                         |   |                                                                 |  |                                     |         |                                                            |   |         |  
|                                         |  |                                        |       |                         |   |                                                                 |  |                                     |         |                                                            |   |         |  
|Balance
      at February 1, 2003        |  |                                        | 7,315 |                         |   | 51,211                                                          |  |                                     | 234,022 |                                                            |   | (10,703 | )
|                                         |  |                                        |       |                         |   |                                                                 |  |                                     |         |                                                            |   |         |  
|Net
      earnings                       |  |                                        |       |                         |   |                                                                 |  |                                     | 1,218   |                                                            |   |         |  
|Total
      other comprehensive income   |  |                                        |       |                         |   |                                                                 |  |                                     |         |                                                            |   | 1,104   |  
|                                         |  |                                        |       |                         |   |                                                                 |  |                                     |         |                                                            |   |         |  
|Total
      comprehensive income         |  |                                        |       |                         |   |                                                                 |  |                                     |         |                                                            |   |         |  
|Issuance
      of common stock to        | 
|employee
      stock plans and           | 
|option
      exercises                   | 
|(72,232
      shares)                    |  |                                        | 29    |                         |   | 1,061                                                           |  |                                     |         |                                                            |   |         |  
|Dividends
      ($0.60 per common share) |  |                                        |       |                         |   |                                                                 |  |                                     | (4,846  | )                                                          |   |         |  
|Purchase
      of treasury stock         | 
|(54,200
      shares)                    |  |                                        |       |                         |   |                                                                 |  |                                     |         |                                                            |   |         |  
|Amortization
      of deferred           | 
|compensation
       restricted          | 
|stock                                    |  |                                        |       |                         |   |                                                                 |  |                                     |         |                                                            |   |         |  
|                                         |  |                                        |       |                         |   |                                                                 |  |                                     |         |                                                            |   |         |  
|                                         |  |                                        |       |                         |   |                                                                 |  |                                     |         |                                                            |   |         |  
|Balance
      at February 7, 2004        |  | $                                      | 7,344 |                         | $ | 52,272                                                          |  | $                                   | 230,394 |                                                            | $ | (9,599  | )
|                                         |  |                                        |       |                         |   |                                                                 |  |                                     |         |                                                            |   |         |  

|See accompanying notes to
consolidated financial statements.


Page 43
|----------------------------------------------------------------------

|CPI CORP. Consolidated
Statements of Cash Flows 
Fifty-three weeks ended February 7,
2004 and Fifty-two weeks ended February 1, 2003 and February 2, 2002
|---------------------------------------------------------------------------------------------------------------------------------------------------------

|2003                                                                     |  | 2002 |        | 2001 |  
|------------------------------------------------------------------------ |  | ---- | ------ | ---- | -
|                                                                         |  |      |        |      |  
|Reconciliation
      of net earnings to cash flows provided by (used in) |  |      |        |      |  
|operating
      activities:                                              | 
|                                                                         |  |      |        |      |  
|Net
      earnings from continuing operations                            |  | $    | 1,218  |      | $
|                                                                         | 
|Adjustments
      for items not requiring cash:                          | 
|Depreciation
      and amortization                                      |  |      | 17,240 |      |  
|Loss
      on disposition of property, plant and equipment               |  |      | 303    |      |  
|Deferred
      income taxes                                              |  |      | (2,504 | )    |  
|Deferred
      revenues and related costs                                |  |      | (2,835 | )    |  
|Post-closing
      adjustment on Preferred Security                      |  |      |       |      |  
|Accrued
      interest on Preferred Security                             |  |      | 5      |      |  
|Impairment
      loss                                                    |  |      |       |      |  
|Other                                                                    |  |      | 2,145  |      |  
|                                                                         | 
|Decrease
      (increase) in current assets:                             | 
|Receivables
      and inventories                                        |  |      | 1,017  |      |  
|Refundable
      income taxes                                            |  |      | 4,646  |      |  
|Prepaid
      expenses and other current assets                          |  |      | (1,327 | )    |  
|                                                                         | 
|Increase
      (decrease) in current liabilities:                        | 
|Accounts
      payable, accrued expenses and other liabilities           |  |      | 4,105  |      |  
|Income
      taxes                                                       |  |      |       |      |  
|                                                                         |  |      |        |      |  
|                                                                         |  |      |        |      |  
|Cash
      flows provided by continuing operations                       |  |      | 24,013 |      |  
|Cash
      flows used in discontinued operations                         |  |      |       |      |  
|                                                                         |  |      |        |      |  
|Cash
      flows provided by operating activities                        |  | $    | 24,013 |      | $
|                                                                         |  |      |        |      |  

|See accompanying notes to
consolidated financial statements.



Page 44
|-----------------------------------------------------------------------

|CPI CORP.Consolidated
Statements of Cash Flows (continued) 

Fifty-three weeks ended February 7,
2004 and Fifty-two weeks ended February 1, 2003 and February 2, 2002
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2003                                                               |  | 2002 |   | 2001    |  
|------------------------------------------------------------------ |  | ---- | - | ------- | -
|                                                                   |  |      |   |         |  
|Cash
      flows provided by operating activities                  |  |      | $ | 24,013  |  
|                                                                   |  |     
|Cash flows
      provided by (used in) financing activities:       |  |     
|Repayment
      of long-term obligations                           |  |      |   | (8,580  | )
|Proceeds
      from borrowings against cash surrender value        |  |     
|of
      life insurance                                            |  |      |   | 289     |  
|Repayment
      of borrowings against cash surrender value         |  |     
|of
      life insurance                                            |  |      |   | (337    | )
|Issuance
      of common stock to employee stock plans             |  |     
|and
      option exercises                                         |  |      |   | 1,090   |  
|Cash
      dividends                                               |  |      |   | (4,846  | )
|Issuance
      of treasury stock                                   |  |      |   |        |  
|Purchase
      of treasury stock                                   |  |      |   | (935    | )
|                                                                   |  |      |   |         |  
|                                                                   |  |      |   |         |  
|Cash
      flows used in financing activities:                     |  |      |   | (13,319 | )
|                                                                   |  |      |   |         |  
|                                                                   |  |     
|Cash flows
      provided by (used in) investing activities:       |  |     
|Additions
      to property and equipment                          |  |      |   | (22,764 | )
|Redemptions
      of Preferred Security                            |  |      |   | 2,500   |  
|Changes
      in loan receivable:                                  |  |     
|Borrowings                                                         |  |      |   | (61,079 | )
|Repayments                                                         |  |      |   | 59,639  |  
|Purchases
      of investment securities in Rabbi Trust            |  |      |   | (2,843  | )
|Proceeds
      from sales of investment securities in Rabbi Trust  |  |      |   | 6,348   |  
|                                                                   |  |      |   |         |  
|                                                                   |  |      |   |         |  
|Cash
      flows used in investing activities                      |  |      |   | (18,199 | )
|                                                                   |  |      |   |         |  
|                                                                   |  |      |   |         |  
|Effect of
      exchange rate changes on cash and cash equivalents |  |      |   | 594     |  
|                                                                   |  |      |   |         |  
|                                                                   |  |      |   |         |  
|Net (decrease)
      increase in cash and cash equivalents         |  |      |   | (6,911  | )
|                                                                   |  |      |   |         |  
|Cash and
      cash equivalents at beginning of year               |  |      |   | 57,922  |  
|                                                                   |  |      |   |         |  
|                                                                   |  |      |   |         |  
|Cash and
      cash equivalents at end of year                     |  |      | $ | 51,011  |  
|                                                                   |  |      |   |         |  
|Supplemental
      cash flow information:                          |  |     
|Interest
      paid                                                |  |      | $ | 2,907   |  
|                                                                   |  |      |   |         |  
|Income
      taxes paid (refunded)                                 |  |      | $ | (4,230  | )
|                                                                   |  |      |   |         |  

|See accompanying notes to
consolidated financial statements.




Page 45
|------------------------------------------------------------------------

|CPI CORP.
Notes to Consolidated
Financial Statements


NOTE 1  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES


Description of Business


CPI Corp. (the Company)
is a holding company engaged, through its majority or wholly-owned subsidiaries and
partnerships, in selling and manufacturing professional portrait photography of babies,
children, adults and family groups and offers other related products and services.


The Company operates 1,018
professional portrait studios as of February 7, 2004 throughout the United States, Canada
and Puerto Rico under license agreements with Sears, Roebuck and Co. (Sears).
On August 14, 2003, the Company announced the execution of an amendment to its agreement
with Sears eliminating the then existing exclusivity provision from that agreement. In
return for the removal of the exclusivity provision, the Company, upon certain conditions,
has agreed to provide Sears with certain commission adjustments through 2008, the
remaining term of the current agreement. The Company opened its first Mexican studio in
February 2003. That studio is located in City Club, a wholesale club launched by Soriana,
owner of a leading Mexican chain of hypermarkets. The Company had 18 fully operational
studios by the end of the fiscal year. In the first quarter of 2003, the Company also
launched its mobile photography operations under the name Everyday Expressions
offering mobile photography services to childcare centers in four metropolitan markets.
The Company currently offers mobile photography services to childcare centers, youth
sports associations and events in twenty-six markets throughout the United States. 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.


Basis of Presentation


The consolidated financial statements
include the accounts of the Company and its subsidiaries. The Company consolidates all
subsidiaries in which it has a majority voting interest. All significant intercompany
accounts and transactions are eliminated in consolidation. Certain items in prior years
have been reclassified to conform to the current year presentation.


Fiscal Year


The Companys fiscal year ends
on the first Saturday of February. Unless otherwise stated, references to years in this
report relate to fiscal years rather than to calendar years.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Fiscal
        year |  | Ended                  |  | Weeks
| | ------------------- |  | ---------------------- |  | -----
| |                     |  |                        |  |      
| | 2003                |  | February
      7, 2004 |  | 53   
| | 2002                |  | February
      1, 2003 |  | 52   
| | 2001                |  | February
      2, 2002 |  | 52   

|Business Concentrations


Volume of business  The
Companys customers are not concentrated in any specific geographic region. Due to
the widely dispersed nature of the Companys nationwide retail business across
millions of customers, no single customer accounted for a significant amount of the
Companys sales.


Revenues  Approximately 98% of
total revenues for fiscal year 2003 and 99% of total revenues for fiscal years 2002 and
2001 were derived from sales at permanent portrait studios operating under the Sears
Portrait Studio name. These studios operate under agreements with Sears in the United
States, Canada and Puerto Rico that require the Company to pay license fees to Sears based
on net sales.


Page 46
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|CPI CORP. Notes to
Consolidated Financial Statements


Sources of supply  The Company
purchases photographic paper, film and chemistry from three major manufacturers. The
Company purchases other equipment and materials for all its operations from a number of
suppliers and is not dependent upon any other supplier for any specific kind of equipment.
The Company has had no difficulty in the past obtaining sufficient materials to conduct
its businesses and believes its relationships with suppliers are good.


Foreign operations  Included in
the Companys consolidated balance sheets at February 7, 2004 and February 1, 2003
are long-lived assets of $1.7 million and $4.3 million, respectively employed in the
Companys Canadian operations. Long-lived assets employed in the Companys new
Mexican operations were $1.3 million as of February 7, 2004. Net sales related to the
Canadian operations were $22.1 million, $21.6 million and $22.7 million in fiscal 2003,
2002 and 2001, respectively. Net sales related to the Mexican operations were $731,000 in
fiscal 2003.


Use of Estimates


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. Significant
estimates include, but are not limited to workers compensation and employee health
insurance liability self insurance reserves; recoverability of long-lived assets;
establishing restructuring and other reserves; and defined benefit retirement plan
assumptions. Actual results could differ from those estimates.


Foreign Currency
Translations


Assets and liabilities of foreign operations
are translated into U.S. dollars at the exchange rate in effect on the balance sheet date,
while income and expense accounts are translated at the average rates in effect during
each fiscal year. Gains and losses on foreign currency translations are included in the
determination of accumulated other comprehensive income (loss) for the year. These gains
(losses) amounted to $1.7 million, $403,000 and ($798,000), in 2003, 2002 and 2001,
respectively.


Cash and Cash Equivalents


The Company considers all highly
liquid investments with an original maturity of three months or less to be cash
equivalents.


Inventories


Inventories include raw material
inventories of film, paper and chemicals and are stated at the lower of cost or market,
with cost of the majority of inventories being determined by the first-in, first-out
(FIFO) method and the remainder by the last-in, first-out (LIFO) method. Costs incurred
relating to portraits processed pending delivery to customers, or in-process, are
inventoried and expensed when the related sales revenue is recognized.


Property and Equipment


Property and equipment are stated at
cost less accumulated depreciation and amortization.


Page 47
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|CPI CORP. Notes to
Consolidated Financial Statements


Depreciation and amortization on
property and equipment is computed principally using the straight-line method over
estimated service lives of the respective assets. A summary of estimated useful lives is
as follows:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Building
      improvements                           | 15
        to 19 years
| | ----------------------------------------------------- | ----------------------
| | Leasehold
      improvements                          | 5 to
        15 years 
| | Photographic,
      sales and manufacturing equipment | 3 to
        10 years 

|Expenditures for improvements are
capitalized, while normal repair and maintenance costs are charged to expense as incurred.
When properties are disposed of, the related cost and accumulated depreciation are removed
from the respective accounts, and any gain or loss is credited or charged to income.


In accordance with Accounting
Standards Executive Committee Statement of Position (SOP) 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use, photographic, sales and manufacturing equipment includes amounts related to the
capitalization of certain costs incurred in connection with developing or obtaining
software for internal use.


Long-lived Asset
Recoverability


In accordance with Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-lived Assets, long-lived assets, primarily property
and equipment, are tested for recoverability whenever events or changes in circumstances
indicate that their carrying amount may not be recoverable. The SFAS No. 144 impairment
test is a two-step process. If the carrying value of the asset exceeds the expected future
cash flows (undiscounted and without interest) from the asset, an impairment is indicated.
The impairment loss recognized is the excess of the carrying value of the asset over its
fair value.


Self-Insurance Reserves


The Company is self-insured for
certain losses relating to workers compensation, general liability, business auto
usage and employee medical claims. The Company has stop-loss coverages to limit the
exposure arising from these claims. Self insurance losses for claims filed and claims
incurred but not reported are accrued based upon the Companys estimates of the
aggregate liability for uninsured claims incurred using actuarial assumptions followed in
the insurance industry and the Companys historical experience. Loss estimates are
adjusted based upon actual claims settlements and reported claims.


Revenue Recognition and
Deferred Costs


Sales revenues are recorded when
portraits and/or other merchandise are delivered to customers. Costs incurred relating to
portraits processed pending delivery to customers, or in-process, are inventoried and
expensed when the related photographic sales revenue is recognized.


The Company offers a customer loyalty
program (Smile Savers Plan®) under which a customer pays a one-time fee and in return
pays no sitting fees for unlimited portrait sessions over the twenty-four month period
covered by the program. The entire Smile Savers Plan® fee received is deferred and
amortized into revenues on a straight-line basis over the twenty-four month period of the
customers program.


Page 48
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|CPI CORP. Notes to
Consolidated Financial Statements


Advertising Costs


The Company expenses costs associated
with newspaper, magazines and other media advertising the first time the advertising takes
place. Certain direct-response advertising costs are capitalized. Direct-response
advertising consists of direct mail advertisements and certain broadcast costs. Such
capitalized costs are amortized over the expected period of future benefits following the
delivery of the direct media in which it appears.


The consolidated balance sheets
include capitalized direct-response advertising costs of $1.3 million and $1.1 million at
February 7, 2004 and February 1, 2003, respectively. Advertising expense for 2003, 2002
and 2001 was $33.9 million, $36.6 million and $39.4 million, respectively.


Defined Benefit Plans


For purposes of its retirement plans,
the Company utilizes a measurement date of December 31. At the measurement date, plan
assets are determined based on fair value. The net pension and supplemental executive
retirement benefits obligations and the related periodic costs are based on, among other
things, assumptions of the discount rate, estimated return on plan assets and salary
increases. These obligations and related periodic costs are measured using actuarial
techniques and assumptions. The actuarial cost method used to compute the pension
liabilities and related expense is the projected unit method. Market related value of
assets are valued with a five-year phase in of gains and losses since January 1, 2001.


Income Taxes


Income taxes are accounted for under
the asset and liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to operating loss and tax credit carry forwards as
well as differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes
the enactment date.


Page 49
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|CPI CORP. Notes to
Consolidated Financial Statements


Stock-based Compensation
Plans


At February 7, 2004, the Company had
various stock-based employee compensation plans which are described more fully in Note 7.
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 earnings and earnings per share
if the Company had applied the fair value recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2003                                             |  | 2002 |   | 2001  |  
|------------------------------------------------ |  | ---- | - | ----- | -
|                                                 |  |      |   |       |  
|Net
      earnings - as reported                 |  |      | $ | 1,218 |  
|Less: Total
      stock-based employee           |  |     
|compensation
      expense determined under fair |  |     
|value
      based method for all awards, net of  |  |     
|related
      taxes                              |  |      |   | (179  | )
|                                                 |  |      |   |       |  
|Net earnings
      - pro forma                   |  |      | $ | 1,039 |  
|                                                 |  |      |   |       |  
|                                                 |  |     
|Earnings
      per common share  basic          |  |     
|As
      reported                                |  |      | $ | 0.15  |  
|Pro
      forma                                  |  |      | $ | 0.13  |  
|                                                 |  |     
|Earnings
      per common share  diluted        |  |     
|As
      reported                                |  |      | $ | 0.15  |  
|Pro
      forma                                  |  |      | $ | 0.13  |  

|Per Share Calculations


Basic earnings per common share is
computed by dividing net income available to common shareholders by the weighted-average
number of common shares outstanding for the periods presented. Diluted earnings per common
share also include the dilutive effect of potential common shares (primarily dilutive
stock options) outstanding during the period for the periods presented.


Industry Segment
Information


In years prior to 2002, the Company
reported results in two business segments, Portrait Studios and Technology Development. As
is more fully discussed in Note 6, in the fourth quarter of 2002, the Company exited the
previously-existing Technology Development segment. Accordingly, the selected industry
segment information called for by Statement of Financial Accounting Standards No. 131,
Disclosures About Segments of an Enterprise and Related Information, is no
longer applicable and thus is not presented. Selected industry segment information related
to the then-existing Technology Development segment and presented in years prior to 2002
has not been included herein as all amounts related to that segment are immaterial in
relation to the consolidated financial statements for these years. As a result of the
discontinued Technology Development segment, the Company now only operates in one segment.


Page 50
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|CPI CORP. Notes to
Consolidated Financial Statements


NOTE 2  IMPACT OF
RECENTLY ISSUED ACCOUNTING STANDARDS


In April 2003, the Financial
Accounting Standards Board (FASB) issued SFAS No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends
and clarifies financial accounting and reporting for derivative instruments embedded in
other contracts and for hedging activities under SFAS No. 133. The statement was effective
for contracts entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The adoption of SFAS No. 149 did not have any impact on
the Companys financial statements in 2003.


In May 2003, the FASB issued SFAS No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. SFAS No. 150 establishes standards that require companies to
classify certain financial instruments as liabilities that were previously classified as
equity. The Company did not reclassify any financial instruments as a result of adopting
SFAS No. 150.


In December 2003, the FASB revised
SFAS No. 132, Employers Disclosures about Pensions and Other Postretirement
Benefits  an amendment of FASB Statements No. 87, 88 and 106". The Company has
adopted the provisions of the revised statement for fiscal year 2003.


In December 2003, the FASB reissued
Revised FASB Interpretation No. (FIN) 46, Consolidation of Variable
Interest Entities, which addresses the consolidation of variable interest entities
in which an enterprise absorbs a majority of the entitys expected losses, received a
majority of the entitys expected residual returns, or both, as a result of
ownership, contractual or other financial interests in the entity. FIN 46 is required to
be applied in financial statements of public entities that have variable interest entities
or potential variable interest entities commonly referred to as special-purpose entities
created before February 1, 2003 for periods ending after December 15, 2003, and for all
other types of entities is required to be applied in financial statements for periods
ending after March 15, 2004. Adoption of the standard did not have any impact on the
Companys financial statements.


Page 51
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|CPI CORP. Notes to
Consolidated Financial Statements


NOTE 3 
DISCONTINUED OPERATIONS


Wall Decor Segment


In April 2000, the Company announced
it was negotiating to sell its Wall Decor segment, a business operated by the Company
since 1993 under the name Prints Plus. In August 2000, the Company announced that
negotiations to sell its Wall Decor business had terminated and the Company was pursuing
other buyers for this business. Subsequently, in April 2001, the Company announced it had
signed an agreement with TRU Retail, Inc. (TRU Retail), a corporation formed
by top management of Prints Plus, to buy the Wall Decor segment.


In July 2001, the Company announced
the completion of the sale of its Wall Decor segment for $16.0 million. The sales price
reflected the receipt of $11.0 million in a Preferred Security of Prints Plus,
approximately $4.0 million in cash, other consideration netting to $1.0 million and the
assumption of certain liabilities. The sales price was subject to final post-closing
adjustments. The Company also announced it had provided TRU Retail, Inc., the legal entity
that acquired and was subsequently merged into Prints Plus, Inc. (Prints Plus)
with a $6.4 million revolving line of credit, from which borrowings and repayments are made on a daily
basis. The Company elected to provide a revolving
line of credit to TRU Retail because it believed a third party commercial lender would
have imposed certain restrictions on the amount of cash TRU Retail could use to pay
dividends on and redeem shares of the Preferred Security. In addition, the Company did not
want to be in a subordinate position to another lender because the Company is the
guarantor of certain retail store leases that TRU Retail assumed (see below). The Company,
as the sole holder of the Preferred Security, is entitled to receive, prior in preference
to any class or series of capital stock of TRU Retail, Inc., a cumulative, compounding,
cash dividend at the rate per annum of nine percent of the par value, paid annually.


In the event of any liquidation,
dissolution, or winding up of TRU Retail, the holder of the Preferred Security is entitled
to receive, prior to and in preference to any distribution of TRU Retails assets to
holders of each other class and series of TRU Retails capital stock
and to the extent funds of TRU Retail are sufficient, an amount equal to the aggregate of
the par value of, and accrued but unpaid dividends with respect to, each share of
Preferred Security. Upon the occurrence of certain events relating to TRU Retail (public
offering, sale of substantially all its assets, merger in which TRU Retail is not the
surviving entity or a transaction in which a majority of the common shares are transferred
to another entity), at the option of the holder, each share of the Preferred Security is
convertible into share of common stock of TRU Retail, pursuant to a formula set forth in
the Certificate of Designation designating the Preferred Security. The holder of the
Preferred Security may tender to TRU Retail for redemption a limited number of shares of
the Preferred Security on an annual basis.


On or before January 31, 2012, TRU
Retail is obligated, to the extent it lawfully may do so, to redeem all then outstanding
shares of the Preferred Security. TRU Retail may, in its absolute discretion and without
penalty, redeem any shares of the Preferred Security prior to January 31, 2012. So long as
any shares of the Preferred Security are outstanding, TRU Retail is precluded from taking
certain actions (all protective in nature to the Company, such as limitations on capital
expenditures, incurrence of additional debt and other changes in the capitalization of TRU
Retail that would alter the preference or rights of the Preferred Security) without prior
unanimous approval of the Board of Directors of TRU Retail and/or the prior approval of
shareholders holding two-thirds of the outstanding shares of the Preferred Security. In
certain instances, the holder of shares of the Preferred Security has voting rights as a
separate class.


The Company determined that the fair
value of the Preferred Security approximated the $11 million face value assigned to it by
reference to the 9% interest rate of the Preferred Security, which was determined to be an
appropriate risk-adjusted market rate of interest for such an obligation. In making the
determination that fair value approximated face value the Company compared the 9% rate of
the Preferred Security to the then existing BB high yield bond rate of 8.86%.


Page 52
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|CPI CORP. Notes to
Consolidated Financial Statements




Subsequently, in January 2002, May
2002 and February 2003, the balance of the Preferred Security decreased due to the
optional redemption of $1.0 million, $353,000 and $2.5 million, respectively, of the
security by Prints Plus in cash, and, in the first quarter of 2002, by a final
post-closing adjustment of $147,000 to the security reflecting a decrease in the final
sales price. The final purchase price adjustment related principally to certain expenses
incurred by Prints Plus covered by an indemnity of the Company, and was accounted for by a
charge to selling, general and administrative expenses and a credit to the Preferred
Security balance. These events, offset by the accrued interest income of $60,000 that is
also reflected in the value of the Preferred Security, resulted in a balance on February
7, 2004 of $7.1 million. At February 7, 2004, the Company held 7,000 shares of the
Preferred Security with a redemption price per share of $1,000.


In assessing the recoverability of
its recorded investment in the Preferred Security, the Company reviews whether events or
changes in circumstances indicate that the carrying value may not be recoverable. This
review includes an analysis of the current operating performance of Prints Plus, including
the amounts of free cash flow being generated providing for interest and debt service as
well as their compliance with all the performance standards included within the covenants
of the Preferred Security. Based on this review, no valuation allowance is deemed
necessary at February 7, 2004.


Borrowings under the revolving line
of credit extended to Prints Plus were $1.9 million and $475,000 as of February 7, 2004
and February 1, 2003, respectively. Interest income earned on this revolving line of
credit for 2003, 2002 and 2001 was $206,000, $157,000 and $120,000, respectively. Although
the legal transfer of ownership of the Companys Wall Décor segment was
completed in July 2001, the transaction was not accounted for as a divestiture for
accounting purposes as it was the Companys assessment, because of the Companys
continuing financial interest in the business, that the risks and other incidents of
ownership had not been transferred to the buyer with sufficient certainty. The
Companys continuing financial interest is represented by the following:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The repayment of the Preferred Security, which constitutes the principal consideration in
the transaction, is dependent on future successful operations of the business.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The continued necessity for operating lease guarantees of the business by the Company.
| | - | --------------------------------------------------------------------------------------

| |  | Absence
of a significant financial investment in the business by the buyer as the majority of the
cash paid at closing was advanced under the Companys revolving line of credit to TRU
Retail.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|As a result of its continuing
financial interest in Prints Plus, the Company, in accordance with the guidance provided
in SEC Staff Accounting Bulletin, Topic 5-Miscellaneous Accounting, Subtopic
E- Accounting for Divestiture of a Subsidiary or Other Business Operation, is
required to follow a modified equity method of accounting. The modified equity method
requires cumulative losses, if any, incurred by Prints Plus during its fiscal year be
reflected in the Companys financial statements as a valuation allowance and
corresponding charge to income. As a result of Prints Plus operating performance and
compliance with the covenants of the Preferred Security and revolving line of credit, no
valuation allowance was recorded as of February 7, 2004.


Further, if Prints Plus defaults on
certain operating real estate leases, the Company guaranteed monthly lease payments over
the remaining life of these leases. As of February 7, 2004, the maximum future obligation
to the Company would be $10.1 million before any negotiation with landlords or subleasing.
Based on scheduled lease payments, the maximum future obligations will decrease an
additional $5.0 million by the end of fiscal 2004, then by $2.9 million in 2005 and
approximately $2.2 million over the next two years. To recognize the risk associated with
these leases, a $1.0 million reserve was established in 2001. The $1.0 million reserve was
established assuming an average of seventy-five days of lease payments for each of the
fifty-six leases then guaranteed by the Company. The seventy-five day estimate was based
upon the Companys historical experiences in settling lease obligations resulting
from early terminations of leases, taking into account the nature of prime mall space
represented by the guaranteed leases. The Company has recognized no losses to date related
to its obligations under these guarantees. At February 7, 2004, the Company had made no
further allowances for defaults under these operating leases as, in the opinion of
management, Prints Plus is meeting the performance standards established under the
operating leases.


Page 53
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|CPI CORP. Notes to
Consolidated Financial Statements




Technology Development
Segment


During the third quarter of fiscal
2002, management completed a review of the infrastructure and platform from which it
delivers technology development and support services. The objectives of the review were to
1) improve focus on and support for the Companys core portraiture business, 2)
improve organizational functionality and systems flexibility, and 3) eliminate duplicative
cost structures. Consequently, during the fourth quarter of fiscal 2002, final decisions
were made and implemented regarding the elimination of the Companys separate
technology segment. To achieve the aforementioned objectives, the Company transferred the
technology development activities, previously performed by its subsidiary Centrics
Technology, Inc. (Centrics), back into a newly reorganized corporate
technology function. In addition, the Company decided to no longer pursue the sale of
consulting and software development to third parties. Net revenues from such sales
amounted to approximately $636,000 and $103,000 in 2002 and 2001, respectively.


For financial reporting purposes, in
2002 the Company has classified its former Technology Development segment as a
discontinued operation and has reclassified prior year amounts to conform to the current
presentation. Also, through the elimination of the
Companys separate technology segment and the transfer of activities to the corporate
technology function, the Company incurred certain fourth quarter charges in 2002 related
to the discontinued operations, including approximately $537,000 in employee severance
pay, $243,000 in remaining lease obligation accruals and $266,000 in asset abandonment
write-offs.


NOTE 4  BORROWINGS


Short-term


The Company has a $15.0 million
revolving credit facility (the Revolving Facility) which expires June 20, 2004
and carries variable interest rate charged at either LIBOR or prime rate funds, with an
applicable margin added. A commitment fee of 0.200% to 0.375% per annum is payable on the
unused portion of the Revolving Facility.


As of February 7, 2004, there were no
borrowings under the Revolving Facility other than the need to support the principal
amount of $6.9 million in outstanding standby letters of credit used in conjunction with
the Companys self insurance programs.


The Revolving Facility requires the
Company maintain certain financial ratios and comply with certain restrictive covenants.
As of February 7, 2004, the Company is in compliance with all covenants. In addition, the
Company is currently in negotiations to establish a new revolving credit facility and
expects to have an agreement in place prior to the expiration of the existing Revolving
Facility.


Long-term


The Company has a $60.0 million
Senior Note Agreement (the Note Agreement) privately placed with two major
insurance companies. The Note Agreement was entered into in June 1997. The notes issued
pursuant to the Note Agreement mature over a ten-year period with an average maturity of
seven years and call for annual principal payments beginning in 2001 with the final
payment due in 2007.


Interest on the notes is payable
semi-annually, in June and December, at an average effective fixed rate of 7.46%. The
Company incurred $591,000 in issuance costs associated with the private placement of the
notes. These costs are being amortized using the effective interest method over the
ten-year life of the notes.


The Note Agreement also requires that
the Company maintain certain financial ratios and comply with certain restrictive
covenants. As of February 7, 2004, the Company was in compliance with all the covenants.


Page 54
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|CPI CORP. Notes to
Consolidated Financial Statements


Outstanding debt obligations are as
follows:
|---------------------------------------------------------------------------------------------------

|February 7,
      2004                 |  | February 1,
      2003 |  
|-------------------------------------- |  | ---------------------- | -
|                                       |  |                        |  
|Senior
      notes, net of unamortized |  |                        |  
|issuance
      costs                   |  |                        | $
|                                       |  |                        |  
|Less: current
      maturity           |  |                        |  
|                                       |  |                        |  
|                                       |  |                        | $
|                                       |  |                        |  

|As of February 7, 2004, long-term
debt maturities for the next four fiscal years are as follows:
|------------------------------------------------------------------------------------------------

|                                
|--------------------------------
|                                
|2004                            
|2005                            
|2006                            
|2007                            
|                                
|                                
|Unamortized
      issuance costs
|                                
|                                
|                                

|NOTE 5 
STOCKHOLDERS EQUITY


Shareholder Rights Plan


In 2000, the Board of Directors
renewed its Shareholders Rights Plan (Rights Plan) under which holders of CPI
Corp. common stock after March 2000 are granted a dividend distribution of one right (a
Right) for each share of Company common stock held. Each right entitles
stockholders to buy one one-hundredth of a share of Series A Participating Preferred Stock
of the Company at an exercise price of $96.00. Each preferred share fraction is designed
to be equivalent in voting and dividend rights to one share of common stock.


The Rights will be exercisable and
will trade separately from the shares of common stock only if a person or group, with
certain exceptions, acquires beneficial ownership of 20% or more of the shares of common
stock or commences a tender or exchange offer that would result in such person or group
beneficially owning 20% or more of the shares of common stock. Prior to this time, the
Rights will not trade separately from the common stock. The Company may redeem the Rights
at $.001 per Right at any time prior to the occurrence of one of these events. All Rights
expire on March 13, 2010.


Each right will entitle its holders
to purchase, at the Rights then-current exercise price, common stock of CPI Corp.
having a value of twice the Rights exercise price. This amounts to the right to buy
common stock of the Company at half price. Rights owned by the party triggering the
exercise of Rights will not be exercisable. In addition, if after any person has become a
20%-or-more stockholder, the Company is involved in a merger or other business combination
transaction with another person in which its shares of common stock are exchanged or
converted, or sells 50% or more of its assets or earning power to another person, each
Right will entitle its holder to purchase, at the Rights then-current exercise
price, shares of common stock of such other person having a value of twice the
Rights exercise price.


Page 55
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|CPI CORP. Notes to
Consolidated Financial Statements


Share Repurchase Program


On June 3, 2003, the Board of
Directors authorized the Company to repurchase up to 5% of its common shares on the open
market from time to time depending on market conditions. Under this authorization, the
Company purchased 54,200 shares of stock for $935,000 at an average price of $17.26 during
2003. As of February 7, 2004, the Company had remaining authorization to repurchase
350,843 shares.


Annual Dividend Rate


On June 3, 2003, the Company
announced that its Board of Directors approved a 14% increase in 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.


Comprehensive Income and Accumulated
Other Comprehensive Loss


The following table shows the
computation of comprehensive income:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                           |  | 2003 |   | 2002  |   | 2001 |       
| | --------------------------------------------------------- |  | ---- | - | ----- | - | ---- | ------
| |                                                           |  |      |   |       |   |      |       
| | Net
      earnings                                        |  |      | $ | 1,218 |   | $    | 6,540 
| |                                                           |  |      |   |       |  
| | Other
      comprehensive income (loss):                  |  |     
| | Foreign
      currency translation adjustments            |  |      |   | 1,668 |   |      | 403   
| | Minimum
      pension liability adjustment, net (1)       |  |      |   | (564  | ) |      | (5,720
| |                                                           |  |      |   |       |  
| | Total
      accumulated other comprehensive income (loss) |  |      |   | 1,104 |   |      | (5,317
| |                                                           |  |      |   |       |  
| | Total
      comprehensive income                          |  |      | $ | 2,322 |   | $    | 1,223 
| |                                                           |  |      |   |       |  

| |    
| | ---
| | (1)
| |    

|The following table displays the
components of accumulated other comprehensive loss as of February 7, 2004, February 1,
2003 and February 2, 2002:
|--------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                |  | 2003 |   | 2002  |  | 2001 |       
| | ---------------------------------------------- |  | ---- | - | ----- |  | ---- | ------
| |                                                |  |      |   |       |  |      |       
| | Foreign currency
      translation adjustments |  |      | $ | 2,205 |  | $    | 3,873 
| | Minimum pension
      liability, net of taxes  |  |      |   | 7,394 |  |      | 6,830 
| |                                                |  |      |   |       | 
| | Accumulated
      other comprehensive loss     |  |      | $ | 9,599 |  | $    | 10,703
| |                                                |  |      |   |       | 

|Page 56
|-------

|CPI CORP. Notes to
Consolidated Financial Statements



NOTE 6  OTHER
CHARGES AND IMPAIRMENTS


Other charges and impairments
included the following:
|------------------------------------------------------------------------------------------------------------------------------------------------------

|2003                                                 |  | 2002 |   | 2001  | 
|---------------------------------------------------- |  | ---- | - | ----- | 
|                                                     |  |      |   |       | 
|Restructuring
      Initiatives:                     |  |      |   |       | 
|Executive
      management repositioning             |  |      | $ | 659   | 
|Exiting
      Technology Development segment (1)     |  |      |   |       | 
|Production
      facility closure                    |  |      |   | 121   | 
|Corporate
      administrative support               |  |     
|headcount
      reductions                           |  |      |   | 687   | 
|                                                     |  |     
|Other Charges:                                       |  |     
|Impairment
      losses                              |  |      |   |       | 
|Professional
      fees - proxy consent solicitation |  |      |   | 1,663 | 
|Pension
      plan curtailment                       |  |      |   | 2,385 | 
|                                                     |  |      |   |       | 
|                                                     |  |      |   | 5,515 | 
|Less:                                                |  |      |   |       | 
|Exiting
      Technology Development segment (1)     |  |      |   |       | 
|                                                     |  |      |   |       | 
|                                                     |  |      |   |       | 
|Total Other
      Charges and Impairments            |  |      | $ | 5,515 | 
|                                                     |  |      |   |       | 

|(1) | Charges
relating to exiting the Technology Development segment are included as  a component of
        discontinued operations in the accompanying Consolidated Statements of Operations.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Executive Management
Repositioning


During the fourth quarter of 2003 and the
third quarter of 2002, the Company recognized $659,000 and $380,000, respectively, in
expense consisting principally of severance pay and supplemental retirement plan benefits
related to the early retirement of senior executives.


In February 2001, the Company
announced it had hired J. David Pierson as Chairman and Chief Executive Officer to replace
the retiring Alyn V. Essman. The Company incurred $1.7 million in 2001 in other charges
related to the severance pay, recognition of unamortized supplemental retirement plan
benefits and other costs associated with the retirement of Mr. Essman and recruitment of
Mr. Pierson.


In addition, in December 2001, the
Company announced that Russ Isaak, President, and Pat Morris, Senior Executive Vice
President and President of the Companys Portrait Studio division, would retire from
their respective positions and resign from the Companys Board of Directors effective
the end of the fiscal year. The Company incurred $2.8 million in 2001 in expenses for
severance pay, recognition of unamortized supplemental retirement plan benefits and other
costs related to these and other administrative retirements at year-end.


Throughout 2001, the Company reviewed
its administrative employee structure in an effort to more efficiently support the
operating divisions, which resulted in $1.1 million in severance pay and recognition of
unamortized supplemental retirement plan benefits.


Page 57
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|CPI CORP. Notes to
Consolidated Financial Statements


Exiting Technology
Development Segment


During the third quarter of 2002,
management completed a review of the infrastructure and platform from which it delivers
technology development and support services. The objectives of the review were to 1)
improve focus on and support for the Companys core portraiture business, 2) improve
organizational functionality and systems flexibility, and 3) eliminate duplicative cost
structures.


Consequently, during the fourth
quarter of 2002, final decisions were made and implemented regarding the elimination of
the Companys separate technology segment. To achieve the aforementioned objectives,
the Company transferred the technology development activities for its portrait studios,
previously performed by its subsidiary Centrics Technology, Inc. (Centrics),
back into a newly reorganized corporate technology function. In addition, the Company
decided to no longer pursue the sale of consulting and software development to third
parties.


In 2002, through the elimination of
the Companys separate technology segment and the transfer of activities to the
corporate technology function, the Company incurred certain fourth quarter charges related
to the discontinued operations, including approximately $537,000 in employee severance
pay, $243,000 in remaining lease obligation accruals and $266,000 in asset abandonment
write-offs.


For financial reporting purposes, in
2002 the Company has classified its former Technology Development segment as a
discontinued operation and has reclassified prior year amounts to conform to the current
presentation.


Production Facility
Closure


During the fourth quarter of 2003,
the Company recorded an additional charge of $121,000 relating to the closure of its Las
Vegas manufacturing facility that occurred in the fourth quarter of 2002. This charge
resulted principally from the Companys inability to realize the expected sublease
income on the facility recorded in 2002 as an offset to the remaining lease obligation
accrual.


During the fourth quarter of 2002,
management completed a review of its manufacturing capacity. As a result, the
Companys Las Vegas manufacturing facility was closed. This action resulted in
charges of approximately $407,000 in employee severance, $270,000 in accruals, net of
expected sublease income, relating to the remaining lease obligations and $305,000 in
asset abandonment write-offs.


Corporate Administrative
Support Reductions


During the fourth quarters of 2003
and 2002, management reviewed its overall level of corporate support expenses.
Consequently, a number of support positions in the Companys corporate headquarters
were eliminated resulting in employee severance accruals of approximately $687,000 and
$509,000, respectively.


Impairment Losses


In the third quarter of 2002, as part
of the ongoing transfer and reorganization activities discussed above relating to the
Companys then-existing Technology Development segment, certain strategic technology
decisions were made that either reduced or eliminated the future utility of certain
historic capitalized technology development costs necessitating a write-down or write-off
of these costs, thus resulting in a pre-tax, non-cash, charge of $4.2 million.


Page 58
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|CPI CORP. Notes to
Consolidated Financial Statements



The impacted development activities
included a proprietary digital camera development project ($2.9 million, including $2.5
million in equipment costs), a digital manufacturing system ($445,000) and, a portion of
the store automation system platform ($863,000). In the case of both the digital camera
project and the digital manufacturing system, the Company has made the decision to
prospectively utilize commercially available cameras and digital manufacturing software.
The Companys change in technology direction and its decision to no longer pursue the
sale of technology services to third parties resulted in the need to write-off a portion
of its store automation system capitalized software code.


Consent Solicitation


In the third and fourth quarters of
2003, the Company incurred $480,000 and $1.2 million, respectively, of professional
services costs related to a consent solicitation initiated by a group of shareholders.


Pension Plan Curtailment


During 2003, the Company completed a
comprehensive analysis of its retirement plan practices and their projected costs,
especially as they compare to other retail industries. As a result of the analysis, on
February 3, 2004 the Company implemented a freeze of future benefit accruals under the
Retirement Plan effective April 1, 2004, except for those employees with ten years of
service and who have attained age 50 who were grandfathered and whose benefits will
continue to accrue. The Company incurred a charge of $2.4 million related to the pension
plan curtailment.


Page 59
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|CPI CORP. Notes to
Consolidated Financial Statements


The following is a summary of the
2003 activity in the reserves established in connection with the Companys
restructuring and other initiatives:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Reserve
      Balance
      02/01/03                 |  | 2003
      Charges |       | Asset
      Write-
      Downs |   | Long-term
      pension
      liability |  | Cash
      Payments |     | Reserve
      Balance
      02/07/04
|---------------------------------------------------- |  | ------------------ | ----- | ------------------------------ | - | --------------------------------------- |  | ------------------- | --- | ------------------------------------
|Restructuring
      Initiatives:                     |  |                    |       |                                |   |                                         |  |                     |     |                                     
|                                                     | 
|Executive
      Management Repositioning            | 
|Termination/retirement
      costs                   |  | $                  | 132   |                                | $ | 659                                     |  | $                   |    |                                     
|                                                     | 
|Exiting
      Technology Development Segment:        | 
|Employee
      termination costs                     |  |                    | 418   |                                |   |                                        |  |                     |    |                                     
|Remaining
      lease obligations                    |  |                    | 228   |                                |   |                                        |  |                     |    |                                     
|                                                     |  |                    |       |                                |   |                                         |  |                     |     |                                     
|                                                     |  |                    | 646   |                                |   |                                        |  |                     |    |                                     
|Production
      Facility Closure:                   | 
|Employee
      termination costs                     |  |                    | 402   |                                |   |                                        |  |                     |    |                                     
|Asset
      abandonment write-downs                  | 
|and
      other costs                                |  |                    | 16    |                                |   |                                        |  |                     | (16 | )                                   
|Remaining
      lease obligations                    |  |                    | 270   |                                |   | 121                                     |  |                     |    |                                     
|                                                     |  |                    |       |                                |   |                                         |  |                     |     |                                     
|                                                     |  |                    | 688   |                                |   | 121                                     |  |                     | (16 | )                                   
|Corporate
      Administrative Support Reductions   | 
|Termination/retirement
      costs                   |  |                    | 430   |                                |   | 687                                     |  |                     |    |                                     
|                                                     | 
|Other
      Charges:                                 | 
|                                                     |  |                    |       |                                |   |                                         |  |                     |     |                                     
|Professional
      fees  proxy consent solicitation |  |                    |      |                                |   | 1,663                                   |  |                     |    |                                     
|Pension
      plan curtailment                       |  |                    |      |                                |   | 2,385                                   |  |                     |    |                                     
|                                                     |  |                    |       |                                |   |                                         |  |                     |     |                                     
|TOTAL                                                |  | $                  | 1,896 |                                | $ | 5,515                                   |  | $                   | (16 | )                                   
|                                                     |  |                    |       |                                |   |                                         |  |                     |     |                                     

|The reserve for employee termination
costs as well as the professional fees accrual will be paid out by the end of 2004. The
remaining lease obligation reserve related to the former Las Vegas production facility
will be paid out within the next two years.


Page 60
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|CPI CORP. Notes to
Consolidated Financial Statements


NOTE 7 
STOCK-BASED COMPENSATION PLANS


The Company offers three stock-based
compensation plans, stock option, voluntary stock option and restricted stock plans, all
of which have been approved by the Companys shareholders. Expenses recognized for
2003, 2002 and 2001 with respect to the Restricted Stock Plan were approximately $12,000,
$14,000 and $9,000, respectively. No expenses were recognized for the Stock Option or
Voluntary Stock Option plans.


The following descriptions reflect
pertinent information with respect to each individual plan:


Stock Option Plan


The Company has an amended and
restated non-qualified stock option plan, under which certain officers and key employees
may receive options to acquire shares of the Companys common stock. Awards of stock
options and the terms and conditions of such awards are subject to the discretion of the
Stock Option Committee created under the plan and consisting of members of the
Compensation Committee of the Board of Directors, all of whom are independent directors. A
total of 1,700,000 shares have been authorized for issuance under the plan. Under the
plan, 414,603 options granted become exercisable at a rate of one-fourth a year commencing
one year after award and expiring from four to eight years after award. An additional
115,603 options granted under the plan are cliff-vested and become exercisable from four
to five years after award and expire six to eight years after award. As of February 7,
2004, there were 686,951 shares reserved for issuance under this plan.


Changes in stock options are as
follows:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                 | 2003 |  | 2002 |           | 2001 |  
|-------------------------------- | ---- |  | ---- | --------- | ---- | -
|
|Stock
      Option Plan          |      |  |      |           |      |  
|Number
      outstanding at      |      | 
|beginning
      of year          |      |  |      | 1,066,713 |      | $
|Granted                          |      |  |      | 83,240    |      |  
|Cancelled                        |      |  |      | (596,526  | )    |  
|Exercised                        |      |  |      | (23,221   | )    |  
|                                 |      |  |      |           |      |  
|                                 |      | 
|Number
      outstanding at      |      | 
|end
      of year                |      |  |      | 530,206   |      | $
|                                 |      |  |      |           |      |  
|                                 |      |  |      |           |      |  
|Exercisable
      at end of year |      |  |      | 267,770   |      | $
|                                 |      |  |      |           |      |  

|Page 61
|-------

|CPI CORP. Notes to
Consolidated Financial Statements


The following table summarizes
information about stock options outstanding at February 7, 2004:
|------------------------------------------------------------------------------------------------------------------------------------------------------

|                      | Options Outstanding |  | Exercisable
      Options |        
|--------------------- | ------------------- |  | ------------------------- | -------
|
|$12.94
      - $14.99 |                     |  |                           | 190,210
|$15.40 -
      $20.45 |                     |  |                           | 172,268
|$21.06 -
      $27.13 |                     |  |                           | 167,728
|                      |                     |  |                           |        
|                      |                     |  |                           |        
|Total                 |                     |  |                           | 530,206
|                      |                     |  |                           |        

|Based on the Black-Scholes option
pricing model, the weighted-average fair value of options granted under the stock-option
plan for 2003, 2002 and 2001 is $3.66, $3.70 and $6.10, respectively.


The following table provides a
summary of the valuation assumptions utilized by the Company to determine the estimated
value of stock option grants:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Weighted-average
      assumptions in stock option valuation |  |  | 2003 |          | 2002 |  | 2001     |  
|------------------------------------------------------------ |  |  | ---- | -------- | ---- |  | -------- | -
|Risk-free
      interest rates                               |  |  |      | 3.0      | %    |  | 3.0      | %
|Dividend
      yields                                        |  |  |      | 3.4%-4.6 | %    |  | 2.1%-4.3 | %
|Stock volatility
      factor                                |  |  |      | 35.1     | %    |  | 36.9     | %
|Expected
      life of options ( in years)                   |  |  |      | 8        |      |  | 5        |  

|Voluntary Stock Option
Plan


On August 14, 2003, the Board of
Directors terminated the Companys Voluntary Stock Option Plan. The plan termination
includes provisions for the retirement and cancellation of all options authorized under
the plan, not previously awarded. The plan originated in 1993 and options were granted
under the plan in 1993 and in 1994. As of February 7, 2004, all previously awarded
voluntary options had been exercised, had expired or been cancelled.


Restricted Stock Plan


The Company has an amended and
restated restricted stock plan that has 250,000 shares of CPI Corp. common stock reserved
for issuance to key employees. In 2003, no restricted shares were issued. Of the grants
previously awarded, no shares were forfeited in 2003, 2002 or 2001. As of February 7,
2004, 197,743 shares are issued and outstanding under this plan and 52,257 shares are
reserved for issuance. Restricted stock is valued based on the fair market value of the
Companys common stock on the grant date and the value is amortized over the vesting
period.


Page 62
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|CPI CORP. Notes to
Consolidated Financial Statements




NOTE 8  EMPLOYEE
BENEFIT PLANS


Expenses for retirement and
savings-related plans were as follows:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                     |  | 2003 |   | 2002  |  | 2001
| | --------------------------------------------------- |  | ---- | - | ----- |  | ----
| | Profit
      sharing                                |  |      | $ | 659   |  | $   
| | Pension
      plan expense                          |  |      |   | 1,764 |  |     
| | Pension
      plan curtailment loss                 |  |      |   | 2,385 |  |     
| | Supplemental
      retirement plan expense          |  |      |   | 1,545 |  |     
| | Supplemental
      retirement plan curtailment loss |  |      |   | 58    |  |     
| |                                                     |  |      |   |      
| | Total                                               |  |      | $ | 6,411 |  | $   
| |                                                     |  |      |   |      

|Profit Sharing


Under the Companys
profit-sharing plan, as amended and restated, eligible employees may elect to invest from
1% to 25% of their base compensation in a trust fund, the assets of which are invested in
securities other than Company stock. The Company matches at 50% of the employees
investment contributions, up to a maximum of 5% of the employees compensation. The
Companys matching contributions are made in shares of its common stock which vest
incrementally at 20% per year of service or 100% once an employee has five years of
service with the Company. Expenses related to the profit-sharing plan are accrued in the
year to which the awards relate, based on the fair market value of the Companys
common stock to be issued, determined as of the date earned. The Company provided 47,699,
32,624 and 25,753 shares to satisfy its obligations under the plan for 2003, 2002 and
2001, respectively, and recognized $659,000, $582,000 and $689,000 in expenses relating to
the awards during those same time periods.


Defined 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.


Plan amendments effective at the
beginning of fiscal 2001 included changing the limit used in average compensation earned
from $50,000 from the later of the hire date or January 1, 1995 to $100,000 from the later
of the hire date or January 1, 1998. Plan amendments effective at the beginning of fiscal
2002 increased the annual maximum compensation used to calculate benefits from $100,000 to
$200,000, subject to adjustments to conform to IRS maximums.


On February 3, 2004, the Company
amended its pension plan to implement a freeze of future benefit accruals under the plan,
except for those employees with ten years of service and who have attained age 50 at April
1, 2004 who were grandfathered and whose benefits will continue to accrue. The Company
recognized a curtailment loss of $2.4 million in the fourth quarter of 2003 related to
this action. The current year information disclosed below includes the impact of this
amendment.


Page 63
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|CPI CORP. Notes to
Consolidated Financial Statements



The Company seeks to maximize returns
and minimize risk of the plans investment portfolio by diversifying the risks of the
portfolio over many different industries and sectors. The targeted allocations are
indicated below. The Companys pension plan weighted average asset allocations at
December 31, 2003 and December 31, 2002, by asset category, are as follows:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                        |  |  |  |     | Plan
      Assets at December 31 | 
|----------------------- |  |  |  | --- | -------------------------------- | 
|
|
|                        |  |  |  |     |                                  | 
|Equity
      securities |  |  |  | 60  | %                                | 
|Debt
      securities   |  |  |  | 40  | %                                | 
|Other                   |  |  |  | 0   | %                                | 
|                        |  |  |  |     |                                  | 
|Total                   |  |  |  | 100 | %                                | 
|                        |  |  |  |     |                                  | 

|The Company uses a variety of outside
sources to determine the overall expected long term rate of return on plan assets. The
expectation is created based on the asset allocation assumptions noted and the selection
of the most efficient blend of returns and risk characteristics. In developing this rate,
assumptions were made about the number of asset classes used, expected return of each
class, the associated risk inherent in the asset class and the correlation between the
asset classes.


The Company also maintains a
noncontributory defined benefit plan providing supplemental retirement benefits for
certain current and former key executives. The cost of providing these benefits is accrued
over the remaining expected service lives of the active plan participants. Net
supplemental retirement benefit costs for 2003, 2002 and 2001 were $1.6 million, $984,000
and $2.0 million, respectively. 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
cash surrender value of corporate-owned life insurance policies and other investments in a
Rabbi Trust, and amounted to $11.5 million and $13.7 million at February 7, 2004 and
February 1, 2003, respectively. In 2004, the Company expects to contribute $380,000 to the
supplemental retirement plan to fund benefit payments during the fiscal year.


The measurement dates for the pension
and supplemental executive retirement plans are December 31, 2003 and December 31, 2002,
which correlate to the Companys fiscal years ended February 7, 2004 and February 1,
2003, respectively.


The following benefit payments, which
reflect expected future service, as appropriate, are expected to be paid as follows:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Pension
Benefits |  | Supplemental
Benefits
|---------------- |  | ---------------------
|                 |  |                      
|2004             |  |                      
|2005             |  |                      
|2006             |  |                      
|2007             |  |                      
|2008             |  |                      
|2009-2013        |  |                      

|The Company does not expect to
contribute to the pension plan in 2004.


Page 64
|--------------------------------------------------------------------------------

|CPI CORP. Notes to
Consolidated Financial Statements




The following table summarizes
benefit obligation and plan asset activity for the retirement plans:
|------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                | Defined Benefit Plans | 
|----------------------------------------------- | --------------------- | 
|
|
|
|thousands                                      
|Projected
      benefit obligation              |                       | 
|Benefit
      obligation at beginning of year   |                       | 
|Service
      cost                              |                       | 
|Interest
      cost                             |                       | 
|Actuarial
      losses                          |                       | 
|Benefit
      payments                          |                       | 
|Plan
      amendments                           |                       | 
|Curtailment                                     |                       | 
|                                                |                       | 
|Benefit
      obligation at end of year (1) (2) |                       | 
|                                                |                       | 
|Fair
      value of plan assets                 |                       | 
|Fair
      value at beginning of year           |                       | 
|Actual
      return (loss) on plan assets       |                       | 
|Employer
      contributions (3)                |                       | 
|Benefit
      payments                          |                       | 
|                                                |                       | 
|Fair
      value at end of year                 |                       | 
|                                                |                       | 
|Funded
      status                             |                       | 
|Funded
      status at end of year              |                       | 
|Unrecognized
      transition obligation        |                       | 
|Unrecognized
      prior service cost           |                       | 
|Unrecognized
      net loss                     |                       | 
|                                                |                       | 
|Net
      amount recognized                     |                       | 
|                                                |                       | 
|Components
      of consolidated balance sheet  |                       | 
|Accrued
      benefit liability                 |                       | 
|Intangible
      asset                          |                       | 
|Accumulated
      other comprehensive loss      |                       | 
|                                                |                       | 
|Net
      amount recognized                     |                       | 
|                                                |                       | 

|
|

|(1) | At February
      7, 2004 and February 1, 2003, the accumulated benefit obligation for the
      pension plan was $43.8 million and $37.9 million, respectively.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | At February
      7, 2004 and February 1, 2003, the accumulated benefit obligation for the
      supplemental retirement plan was $3.5 million and $6.2 million, respectively.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | For
the supplemental retirement plan for the fiscal years ended February 7, 2004
          and February 1, 2003, the employer contributions were financed through the
          liquidation of investments in the Companys Rabbi Trust.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Page 65
|-------

|CPI CORP. Notes to
Consolidated Financial Statements


The following table sets forth the
components of net periodic benefit cost for the retirement plans:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                       | Pension
      Plan |        | Supplemental
      Retirement Plan
|------------------------------------------------------ | ------------------ | ------ | ----------------------------------
|
|thousands                                             
|Components
      of net periodic benefit cost          |                    |        |                                   
|Service
      cost                                     | $                  | 1,520  |                                   
|Interest
      cost                                    |                    | 2,626  |                                   
|Expected
      return on plan assets                   |                    | (3,078 | )                                 
|Amortization
      of transition obligation            |                    |       |                                   
|Amortization
      of prior service cost               |                    | 441    |                                   
|Amortization
      of net (gain) or loss               |                    | 255    |                                   
|Net
      loss due to settlements                      |                    |       |                                   
|Curtailment
      reduction in transition obligation   |                    |       |                                   
|                                                       |                    |        |                                   
|                                                       |                    |        |                                   
|Net period
      benefit cost                          |                    | 1,764  |                                   
|Curtailment
      loss                                 |                    | 2,385  |                                   
|                                                       |                    |        |                                   
|                                                       |                    |        |                                   
|Net periodic
      benefit cost after curtailment loss | $                  | 4,149  |                                   
|                                                       |                    |        |                                   

|The following table sets forth the weighted-average
plan assumptions and other data:
|------------------------------------------------------------------------------------

|                                                     | Pension
      Plan |      | Supplemental
      Retirement Plan
|---------------------------------------------------- | ------------------ | ---- | ----------------------------------
|
|                                                    
|Weighted-average
      assumptions used to determine |                    |      |                                   
|benefit
      obigations at fiscal year end         
|Discount
      rate                                  |                    | 6.00 | %                                 
|Rate
      of increase in future compensation        |                    | 3.75 | %                                 
|Weighted-average
      assumptions used to determine
|net
      periodic benefit cost                     
|Discount
      rate                                  |                    | 6.50 | %                                 
|Expected
      long-term return on plan assets       |                    | 8.75 | %                                 
|Rate
      of increase in future compensation        |                    | 4.00 | %                                 

|Page 66
|-------

|CPI CORP. Notes to
Consolidated Financial Statements


The following table provides the
required information for the pension plan and supplemental retirement plan as in both
cases benefit obligations are in excess of plan assets:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                     | Pension
      Plan |        | Supplemental
      Retirement Plan
|------------------------------------ | ------------------ | ------ | ----------------------------------
|
|thousands                           
|Projected benefit obligation         | $                  | 45,307 |                                   
|Accumulated
      benefit obligation |                    | 43,807 |                                   
|Fair value
      of plan assets      |                    | 31,546 |                                   

|The Company also maintains a
noncontributory pension plan that covers all permanent Canadian employees meeting certain
service requirements. The plan provides pension benefits based on an employees
length of service and annual compensation earned. The Company contributed approximately
$252,000 and $184,000 to this retirement plan in calendar 2003 and 2002, respectively.
Plan assets were $1.3 million as of December 31, 2003 and December 31, 2002, and consisted
of several Canadian equity and fixed income funds and a global equity fund. No liability
is reflected in the Companys consolidated financial statements as the plan is fully
funded.


NOTE 9  INCOME
TAXES


The components of income tax expense
(benefits) were:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2003                             |  | 2002 |   | 2001 |  
|-------------------------------- |  | ---- | - | ---- | -
|                                 |  |      |   |      |  
|Federal                          |  |      |   |      |  
|Current                          |  |      | $ | 412  |  
|Deferred                         |  |      |   | 15   |  
|                                 |  |      |   |      |  
|Federal
      income tax         |  |      |   | 427  |  
|                                 |  |     
|State                            |  |     
|Current                          |  |      |   | 100  |  
|Deferred                         |  |      |   | 423  |  
|                                 |  |      |   |      |  
|State
      income tax           |  |      |   | 523  |  
|                                 |  |     
|Foreign                          |  |     
|Current                          |  |      |   |     |  
|Deferred                         |  |      |   | (285 | )
|                                 |  |      |   |      |  
|Foreign
      income tax         |  |      |   | (285 | )
|                                 |  |      |   |      |  
|                                 |  |      |   |      |  
|Total
      income tax provision |  |      | $ | 665  |  
|                                 |  |      |   |      |  

|Page 67
|-------

|CPI CORP. Notes to
Consolidated Financial Statements


A reconciliation of expected income
tax expense at the federal statutory rate to the Companys applicable income tax
expense follows:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2003                                               |  | 2002 |   | 2001 |  
|-------------------------------------------------- |  | ---- | - | ---- | -
|                                                   |  |      |   |      |  
|Tax
      at statutory rate                        |  |      | $ | 640  |  
|State income
      tax, at statutory rates, net of |  |      |   | 345  |  
|federal
      tax benefit                          |  |     
|Tax effect
      of                                |  |     
|Nondeductible
      expenses                       |  |      |   | 123  |  
|Tax
      credits and exclusions                   |  |      |   | (384 | )
|Officers
      life insurance                      |  |      |   | (110 | )
|Other
      items                                  |  |      |   | 51   |  
|                                                   |  |      |   |      |  
|                                                   |  |      |   |      |  
|Applicable
      income taxes                      |  |      | $ | 665  |  
|                                                   |  |      |   |      |  

|In preparing its tax return, the
Company is required to interpret complex tax laws and regulations and utilize income and
cost allocation methods to determine its taxable income. On an ongoing basis, the Company
is subject to examination by federal, state and foreign taxing authorities that may give
rise to differing interpretation of these complex laws and regulations and methods. Due to
the nature of the examination process, it generally takes years before these examinations
are completed and matters are resolved. As of February 7, 2004, the Company is under
examination for its federal tax return filed for the year ended February 3, 2001. In
addition, examinations by various state taxing authorities date back to February 7, 1998.
At year-end, the Company believes the aggregate amount of any additional tax liabilities
that may result from these examinations, if any, will not have a material adverse effect
on the financial condition, results of operations or cash flows of the Company.


Deferred income tax assets and
liabilities reflect the tax effect of temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts used for the
same items for income tax reporting purposes.


The components of the Companys
net deferred tax assets as of February 7, 2004 and February 1, 2003 were:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                             | 2003 |  | 2002 |       
|---------------------------------------------------------------------------- | ---- |  | ---- | ------
|thousands                                                                   
|                                                                             |      |  |      |       
|Deferred
      tax assets                                                    |      |  |      |       
|Federal,
      state and foreign operating loss carry forwards               |      |  | $    | 6,629 
|Pension and
      supplemental retirement benefits                           |      |  |      | 5,617 
|Reserves,
      principally due to accrual for financial reporting purposes  |      |  |      | 3,437 
|Revenue recognition,
      principally due to SAB 101                        |      |  |      | 1,478 
|Federal and
      foreign tax credit carry forwards                          |      |  |      | 523   
|Other                                                                        |      |  |      |      
|                                                                             |      |  |      |       
|Gross
      deferred tax assets                                              |      |  |      | 17,684
|                                                                             |      | 
|Deferred
      tax liabilities                                               |      | 
|Property
      and equipment, principally due to differences in depreciation |      |  |      | (5,687
|Other                                                                        |      |  |      | (87   
|                                                                             |      |  |      |       
|Gross
      deferred tax liabilities                                         |      |  |      | (5,774
|                                                                             |      |  |      |       
|Valuation
      allowance                                                    |      |  |      | (393  
|                                                                             |      |  |      |       
|                                                                             |      |  |      |       
|Net deferred
      tax asset                                                 |      |  | $    | 11,517
|                                                                             |      |  |      |       

|Page 68
|-------

|CPI CORP. Notes to
Consolidated Financial Statements




As of February 7, 2004, the Company
had a valuation allowance of approximately $393,000 to offset deferred tax assets related
to foreign tax credit carry forwards which are expected to expire unused. The credits
expire in tax years 2007 and 2008. It is managements belief that the remaining
deferred tax assets meet the criteria for realization, including the existence of a
history of taxes paid sufficient to support the realization of deferred tax assets.


Included in current deferred tax
assets in the accompanying consolidated balance sheets is $2.3 million representing the
expected realization in 2004 of a net operating loss carry forward. In 2002, this amount
had been recorded in other assets. However, since the Company now expects these amounts
will be realized in 2004, they were reclassified to current deferred tax assets in 2003.


United States Federal income taxes
have not been provided on $7.7 million of undistributed earnings of the Canadian
subsidiary because of the Companys intention to reinvest these earnings. The
determination of unrecognized deferred U.S. tax liability for undistributed earnings of
international subsidiaries is not practicable. However, it is estimated that foreign
withholding taxes of $385,000 may be payable if such earnings were distributed.


Refundable income taxes in the
accompanying consolidated balance sheets consist of the following components:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2003                                                             |  | 2002
|---------------------------------------------------------------- |  | ----
|                                                                 | 
|                                                                 |  |     
|Net operating
      loss carry back and carry forward claims     |  |     
|generated
      from 2001 realization of net deferred tax assets |  |     
|Tax overpayments
      applied to subsequent year tax liability  |  |     
|Refund claims
      relating to various amended tax returns      |  |     
|                                                                 |  |     
|                                                                 |  |     
|Refundable
      income taxes                                    |  |     
|                                                                 |  |     

|Page 69
|-------

|CPI CORP. Notes to
Consolidated Financial Statements



NOTE 10 
COMMITMENTS AND CONTINGENCIES


Operating Lease
Commitments


The Company leases various premises
and equipment under noncancellable operating lease agreements with initial terms in excess
of one year and expiring at various dates through fiscal year 2008. The leases generally
provide for the lessee to pay maintenance, insurance, taxes and certain other operating
costs of the leased property. In addition to the minimum rental commitments, certain of
these operating leases provide for contingent rentals based on a percentage of revenues in
excess of specified amounts.


Rental expense during 2003, 2002, and
2001 on all operating leases was $1.9 million, $3.3 million, and $3.9 million,
respectively.


Minimum rental payments under
operating leases with initial terms in excess of one year at February 7, 2004, are as
follows:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2004                         |  | $ | 1,843 | 
| | ---------------------------- |  | - | ----- | 
| | 2005                         |  |   | 949   | 
| | 2006                         |  |   | 490   | 
| | 2007                         |  |   | 256   | 
| | 2008                         |  |   | 25    | 
| |                              | 
| | Total
      minimum payments |  | $ | 3,563 | 
| |                              | 

|Standby Letters of Credit


As of February 7, 2004, the Company
had outstanding standby letters of credit in the principal amount of $6.9 million
primarily used in conjunction with the Companys self insurance programs.


Purchase Commitments


As of February 7, 2004, the Company
had outstanding purchase obligations for future goods and services of $10.5 million. These
purchase commitments include $3.9 million of future services to be provided by advertising
agencies and other promotional vendors in conjunction with the Companys marketing
initiatives, $2.9 million in purchase commitments for computer equipment, printers and
peripherals, $869,000 for film, $626,000 in database maintenance fees, $450,000 in fees for the
Companys long-distance services and $301,000 in purchase commitments for accessories
inventory. The purchase obligations also include $275,000 representing variable price
provisions based on minimum purchase quantities of photographic paper, as contractually
arranged with certain suppliers and $274,000 for business continuity services.


Contingent Lease
Obligations


As is more fully described in Note 3,
in July 2001 the Company announced the completion of the sale of its Wall Decor segment,
which included the ongoing guarantee of certain operating real estate leases of Prints
Plus. As of February 7, 2004, the maximum future obligation to the Company related to
these lease guarantees is $10.1 million before any negotiation with landlords or
subleasing. To recognize the risk associated with these leases and based on the
Companys past experience with renegotiating lease obligations, a $1.0 million
reserve was established in 2001. At February 7, 2004, the Company had made no further
allowances for defaults under these operating leases as, in the opinion of management,
Prints Plus is meeting the performance standards established under the operating leases.


Page 70
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|CPI CORP. Notes to
Consolidated Financial Statements


Contingent Commission
Payments


On August 14, 2003, the Company
announced the execution of an amendment with Sears eliminating the existing exclusivity
provisions from that agreement. In return for the removal of the exclusivity provision,
the Company, upon certain conditions, has agreed to provide Sears with certain commission
adjustments (the Contingent Payments) through 2008, the remaining term of the
current agreement.


The Contingent Payments are triggered
only if the Company operates more than 24 domestic non-Sears portrait studios and the rate
of growth in total contractual commissions paid to Sears by the Company under the
pre-existing agreement does not exceed Sears same-store revenue growth rate by
specified percentages, up to a maximum of 2%. If both of the above mentioned conditions
occur, the Contingent Payments are determined by a formula included in the amendment to
the agreement, however, in no event shall such payments exceed $2.5 million annually or
$7.5 million cumulatively over the remaining five-year term of the agreement. No domestic
non-Sears portrait studios were opened in 2003 and thus no contingent payments were made.


Legal Proceedings


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.


NOTE 11  FAIR
VALUE OF FINANCIAL INSTRUMENTS


Fair value estimates are made at a
specific point in time, based on relevant market information and information about the
financial instrument. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.


Cash and Cash
Equivalents, Receivables, Accounts Payable and Accrued Expenses


The carrying amounts approximate fair
value at February 7, 2004 and February 1, 2003 due to the short maturity of these
financial instruments.


Long-Term Debt


The fair value of the Companys
long-term debt is estimated based on quoted market prices for similar debt issues with the
similar remaining maturities. On February 7, 2004, the carrying value and estimated fair
market value of the Companys long-term debt was $34.2 million and $34.6 million,
respectively. On February 1, 2003, the carrying value and estimated fair market value of
the Companys debt was $42.7 million and $43.0 million, respectively.


NOTE 12 SUBSEQUENT
EVENTS


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


Page 71
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|CPI CORP. Notes to
Consolidated Financial Statements


the SEC on February 20, 2004 relating
to its opposition to the Knightspoint Groups consent solicitation. On March 18,
2003, the Knightspoint Group delivered to the Company written consents. On March 24, 2004
an independent inspection 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 for director of the Company, the
removal of seven of the nine members of the sitting Board and the adoption of the
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 may trigger change of control provisions in various employment and stock
option agreements between the Company and certain of its executives and employees. This
may give rise in 2004 to the recording of several expense accruals in amounts up to
$4.0$5.0 million. The Companys new legal counsel is in the process of
reviewing the relevant underlying agreements. In the first quarter of 2004, the
Company paid amounts owed and previously accrued relating
principally to former directors deferred compensation and stock compensation plans in the
approximate amount of $1.4 million.


Page 72
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|CPI CORP. Notes to
Consolidated Financial Statements


NOTE 13  SELECTED
QUARTERLY FINANCIAL DATA (UNAUDITED)
|--------------------------------------------------------------------------------------------------------------

|QUARTER
      ENDED:                          | 
|--------------------------------------------- | 
|thousands,
      except per share data       
|                                              | 
|FISCAL
      YEAR 2003                        | 
|Net sales                                     | 
|Gross margin                                  | 
|Net earnings
      (loss)                     | 
|                                              | 
|Net earnings
      (loss) per share - diluted | 
|                                              | 
|Net earnings
      (loss) per share - basic   | 
|                                              | 
|Weighted
      average number of common and   | 
|equivalent
      shares - diluted             | 
|Weighted
      average number of common and   | 
|equivalent
      shares - basic               | 

|QUARTER
      ENDED:                                   | 
|------------------------------------------------------ | 
|thousands,
      except per share data                
|                                                       | 
|FISCAL
      YEAR 2002                                 | 
|Net
      sales                                        | 
|Gross
      margin                                     | 
|Net
      earnings (loss) from continuing operations   | 
|Net
      earnings (loss) from discontinued operations | 
|Net
      earnings (loss)                              | 
|                                                       | 
|Net
      earnings (loss) per share from continuing    | 
|operations
      - diluted                             | 
|Net
      earnings (loss) per share from discontinued  | 
|operations
      - diluted                             | 
|                                                       | 
|Net
      earnings (loss) per share - diluted          | 
|                                                       | 
|Net
      earnings (loss) per share from continuing    | 
|operations
      - basic                               | 
|Net
      earnings (loss) per share from discontinued  | 
|operations
      - basic                               | 
|Net
      earnings (loss) per share - basic            | 
|                                                       | 
|Weighted
      average number of common and            | 
|equivalent
      shares - diluted                      | 
|Weighted
      average number of common and            | 
|equivalent
      shares - basic                        | 

|Page 73
|-------

|CPI CORP. Notes to
Consolidated Financial Statements



Item 9. Change
in and Disagreements with Accountants on
Accounting and Financial Disclosure



Not
Applicable.


Item 9A. Controls and
Procedures


The Companys management,
including J. David Pierson, Chairman of the Board of Directors, President and Chief
Executive Officer, Gary W. Douglass, Executive Vice President and Chief Financial Officer
and Kimberly A. LaBelle, Vice President  Corporate Controller and Principal
Accounting Officer, have evaluated the effectiveness of the Companys
disclosure controls and procedures, as such term is defined in Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended, (the Exchange
Act). Based upon their evaluation, the chief executive officer, chief financial
officer and principal accounting officer concluded that, as of the end of the period
covered by this report, the Companys disclosure controls and procedures were
effective for the purpose of ensuring that the information required to be disclosed in the
reports that the Company files or submits under the Exchange Act with the Securities and
Exchange Commission (the SEC) (1) is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms, and (2) is
accumulated and communicated to the Companys management, including its chief
executive, chief financial and principal accounting officers, as appropriate to allow
timely decisions regarding required disclosure. In addition, based on that evaluation, no
change in the Companys internal control over financial reporting occurred during the
fiscal year ended February 7, 2004 that has materially affected, or is reasonably likely
to materially affect, the Companys internal control over financial reporting.


Page 74
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PART III


Item 10. Directors,
Executive Officers, Promoters, and Control Persons of the Registrant


Information required under this Item
will be contained in the Registrants 2003 Proxy Statement, to be filed with the SEC
within 120 days of the end of the Registrants fiscal year 2003, and is incorporated
herein by reference and will be delivered to stockholders in connection with the Annual
Shareholders meeting to be held on July 22, 2004.


Item 11. Executive
Compensation


Information required under this Item
will be contained in the Registrants 2003 Proxy Statement, to be filed with the SEC
within 120 days of the end of the Registrants fiscal year 2003, and is incorporated
herein by reference and will be delivered to stockholders in connection with the Annual
Shareholders meeting to be held on July 22, 2004.


Item 12. Security
Ownership of Certain Beneficial Owners and Management


Information required under this Item
will be contained in the Registrants 2003 Proxy Statement, to be filed with the SEC
within 120 days of the end of the Registrants fiscal year 2003, and is incorporated
herein by reference and will be delivered to stockholders in connection with the Annual
Shareholders meeting to be held on July 22, 2004.


Item 13. Certain
Relationships and Related Transactions


As described in Footnote 3 to the
Consolidated Financial Statements and in Item 7 (Managements Discussion and Analysis
of Financial Condition and Results of Operations), in July 2001, the Company sold its Wall
Décor segment that operated through the Companys wholly owned Prints Plus,
Inc. (Prints Plus) subsidiary to TRU Retail, Inc (TRU), a company
formed by the top management of Prints Plus. Mr. Ted Upland, the CEO of Prints Plus, held
all of the issued and outstanding common stock of TRU at the time of the transaction. The
purchase price to be paid by TRU was $16 million, consisting of $11 million of TRU
preferred security, $4 million of cash, and $1 million of other consideration. TRU also
assumed certain liabilities of Prints Plus. The purchase price, which the Companys
Board of Directors approved, was the result of negotiations with Mr. Upland and his
advisors following the Companys failure to negotiate definitive agreements with at
least five other unrelated potential buyers. For additional information about the TRU
transaction, see Footnote 3 to the Financial Statements and Item 7 of this Form 10-K.


Item 14. Principal
Accounting Fees and Services


Information required under this Item
will be contained in the Registrants 2003 Proxy Statement, to be filed with the SEC
within 120 days of the end of the Registrants fiscal year 2003, is incorporated
herein by reference and will be delivered to stockholders in connection with the Annual
Shareholders meeting to be held on July 22, 2004.


Page 75
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PART IV


Item 15. Exhibits,
Financial Statement Schedules and Reports on Form 8-K


(a)           CERTAIN DOCUMENTS
FILED AS PART OF FORM 10-K
|-----------------------------------------------------------------------------------------------------------------------------------------------

| | (1.) | FINANCIAL STATEMENTS                                |  |  | PAGES | 
| | ---- | --------------------------------------------------- |  |  | ----- | 
| |      | -
      Managements Report                         |  |  | 38    | 
| |      | -
      Independent Auditors Report                |  |  | 39    | 
| |      |                                                    
| |      | -
      Consolidated Balance Sheets as of           |  |  |       | 
| |      | February
      7, 2004 and February 1, 2003         |  |  | 40    | 
| |      | -
      Consolidated Statements of Operations for   |  |  |       | 
| |      | the
      fiscal years ended February 7, 2004,      |  |  |       | 
| |      | February
      1, 2003 and February 2, 2002         |  |  | 42    | 
| |      | -
      Consolidated Statements of Changes in       |  |  |       | 
| |      | Stockholders
      Equity for the fiscal           |  |  |       | 
| |      | years
      ended February 7, 2004,                 |  |  |       | 
| |      | February
1, 2003 and February 2, 2002               |  |  | 43    | 
| |      | -  Consolidated
      Statements of Cash Flows for  |  |  |       | 
| |      | the
      fiscal years ended February 7, 2004,      |  |  |       | 
| |      | February
      1, 2003 and February 2, 2002         |  |  | 44    | 
| |      | -  Notes
      to Consolidated Financial Statements |  |  | 46    | 

|(2.)
FINANCIAL STATEMENT SCHEDULES


Schedules
to the consolidated financial statements required by Regulation S-X are omitted since the
required information is included in the footnotes.


(3.)EXHIBITS
  FILED   UNDER   ITEM   601   OF            REGULATION   S-K


The
exhibits listed below for CPI Corp. and its subsidiaries (the Company), with
their corresponding filing date and registration or Commission file numbers where
applicable, are incorporated by reference as exhibits required by Item 601 of Regulation
S-K:



Page 76
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(a) EXHIBIT
INDEX


EXHIBIT INDEX
|---------------------------------

|EXHIBITNUMBER |             | 
|------------- | ----------- | 
|              | DESCRIPTION
|              |             | 

|(3.1) | Articles
of Incorporation of the Company, incorporated by reference to CPI Corp.s Annual Report
                 for fiscal year 1989 on Form 10-K filed  4/30/90.  File No. 1-10204
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3.2) | Bylaws
of the Company, incorporated by reference to CPI Corp.s Annual Report for fiscal year
                 1989 on Form 10-K filed 4/30/90.  File No. 1-10204
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3.4) | Amendment
to Bylaws of the Company, incorporated by reference to CPI Corp.s Form 8-K filed
                 8/18/95.  File No. 0-11227
|----- | ---------------------------------------------------------------------------------------------------------------------------------------

|(3.5) | Amendment
to Bylaws of the Company, incorporated by reference to CPI Corp.s Annual
                 Report for fiscal year 1996 on Form 10-K filed 5/2/97.  File No. 1-10204
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3.6) | Amendment
to Bylaws of the Company, incorporated by reference to CPI Corp.s Annual Report
                 for fiscal year 1993 on Form 10-K filed 5/4/94.   File No. 1-10204
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3.7) | Amendment
to Bylaws of the Company, incorporate by reference to CPI Corp.s Annual Report
                 for fiscal year 2001 on Form 10-K filed 5/1/02.  File No. 1-10204
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3.8) | Second
Amendment to CPI Corp. Employees Profit Sharing Plan and Trust (As Amended and Restated
                 Effective January 1, 1998), incorporated by reference to CPI Corp.s
Form 10-Q filed 6/7/02.  File No. 1-10204
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.1) | Articles
of Incorporation and Bylaws of the Company, incorporated by reference to CPI Corp.s
Annual                  Report for fiscal year 1989 on Form 10-K filed 4/30/90.  File No.
1-10204
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.2) | Note
Agreement for CPI Corp. Senior Notes dated June 16, 1997, incorporated by reference to
CPI                  Corp.s Form 8-K filed 7/1/97.  File No. 0-11227
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.3) | CPI
Corp. 7.46% Senior Notes due June 16, 2007, PPN 12617# ACO, incorporated by reference to
                 CPI Corp.s Form 8-K filed 7/1/97.  File No. 0-11227
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.4) | CPI
Corp. 7.46% Senior Notes due June 16, 2007, Security No.!Inv5641!, incorporated by
reference to                  CPI Corp.s Form 8-K filed 7/1/97.  File No. 0-11227
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.5) | Registration
of CPI Corp. Preferred Stock Purchase Rights, incorporated by reference to CPI Corp.s
                  Form 8-A12B filed 3/15/00.  File No. 1-10204
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.1) | Registration
of Securities on the New York Stock Exchange, incorporated by reference to CPI Corp.s
                 Form 8-A filed 3/21/89.
|------ | --------------------------------------------------------------------------------------------------------------------------------------------

|(10.6) | $30
Million Revolving Credit Note with Firstar Bank and Commerce Bank, incorporated by
reference to                  CPI Corp.s Form 10-Q filed 9/1/00.  File No. 1-10204
|------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Page 77
|-------

|EXHIBIT INDEX (continued)
|-------------------------

|EXHIBITNUMBER |             | 
|------------- | ----------- | 
|              | DESCRIPTION
|              |             | 

|(10.7) | $10
Million Revolving Credit Note with Commerce Bank, incorporated by reference to CPI
Corp.s                  Form 10-Q filed 9/1/00.  File No. 1-10204
|------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.8) | $20
Million Revolving Credit Note with Firstar Bank, incorporated by reference to CPI Corp.s
Form 10-Q                  filed 9/1/00.  File No. 1-10204
|------ | --------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.9) | License
Agreement Sears, Roebuck & Co., incorporated by reference to CPI Corp.s Annual Report
for                  fiscal year 1998 on Form 10-K filed 5/5/99. File No. 1-10204
|------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.10) | Second
Amendment to License Agreement Sears, Roebuck & Co., incorporated by reference to
                 CPI Corp.s Form 10-Q filed 12/23/99.  File No. 1-10204
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.11) | License
Agreement Sears, Roebuck & Co. (Off Mall), incorporated by reference to CPI Corp.s
Annual Report                   for fiscal year 1998 on Form 10-K filed 5/5/99.  File No.
1-10204
|------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.12) | Second
Amendment to License Agreement Sears, Roebuck & Co. (Off Mall), incorporated by reference
to                   CPI Corp.s Form 10-Q filed 12/23/99.  File No. 1-10204
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.13) | License
Agreement Sears, Roebuck De Puerto Rico, Inc., incorporated by reference to CPI Corp.s
Annual Report                  for fiscal year 1998 on Form 10-K filed 5/5/99.  File No.
1-10204
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.14) | License
Agreement Sears Canada, Inc., incorporated by reference to CPI Corp.s Annual Report for
fiscal year                  1998 on Form 10-K filed 5/5/99.   File No. 1-10204
|------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.15) | Development
and License Agreement between Sears, Roebuck and Co. and Consumer Programs, Incorporated,
                 incorporated by reference to CPI Corp.s Annual Report for fiscal year
2000 on Form 10-K filed 5/3/01.                  File No. 1-10204
|------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.16)* | Employment
Contract Alyn V. Essman, incorporated by reference to CPI Corp.s Annual Report for
fiscal                  year 1997 on Form 10-K filed 5/6/98.   File No. 1-10204
|-------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.17) | Retirement
Agreement for Alyn V. Essman, incorporated by reference to CPI Corp.s Annual Report for
                 fiscal year 2000 on Form 10-K filed 5/3/01.  File No. 1-10204
|------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.18)* | Employment
Contract for J. David Pierson, incorporated  by reference to CPI Corp.s Annual Report
                 for fiscal year 2000 on Form 10-K filed 5/3/01.  File No. 1-10204
|-------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.19)* | Employment
Contract Russell H. Isaak, incorporated by reference to CPI Corp.s Annual Report
                 for fiscal year 1997 on Form 10-K filed 5/6/98.   File No. 1-10204
|-------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.20)* | Employment
Contract for Russell A. Isaak, incorporated by reference to CPI Corp.s Annual Report
                 for fiscal year 2000 on Form 10-K filed 5/3/01.  File No. 1-10204
|-------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.21)* | Employment
Contract Patrick J. Morris, incorporated by reference to CPI Corp.s Annual Report
                 for fiscal year 1997 on Form 10-K filed 5/6/98.  File No. 1-10204
|-------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Page 78
|-------

|EXHIBIT INDEX (continued)
|-------------------------

|EXHIBITNUMBER |             | 
|------------- | ----------- | 
|              | DESCRIPTION
|              |             | 

|(10.22)* | Employment
Contract for Patrick J. Morris, incorporated by reference to CPI Corp.s Annual Report
                 for fiscal year 2000 on Form 10-K filed 5/3/01.  File No. 1-10204
|-------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.23)* | Employment
Contract for Timothy F. Hufker, incorporated by reference to CPI Corp.s Annual Report
                 for fiscal year 2000 on Form 10-K filed 5/3/01.  File No. 1-10204
|-------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.24)* | Employment
Contract Barry C. Arthur, incorporated by reference to CPI Corp.s Annual Report
                 for fiscal year 1997 on Form 10-K filed 5/6/98.  File No. 1-10204
|-------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.25)* | Employment
Contract Fran Scheper, incorporated by reference to CPI Corp.s Annual Report
                 for fiscal year 1997 on Form 10-K filed 5/6/98.  File No. 1-10204
|-------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.26)* | Employment
Contract Jane E. Nelson, incorporated by reference to CPI Corp.s Annual Report
                 for fiscal year 1999 on Form 10-K filed 4/26/00.  File No. 1-10204
|-------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.27) | CPI
Corp. Employees Profit Sharing Plan & Trust (As Amended and Restated Effective
                 January 1, 1998), incorporated by reference to CPI Corp.s Annual Report
for fiscal year 1998                  on Form 10-K filed 5/5/99.   File No. 1-10204
|------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.28) | First
Amendment to CPI Corp. Employee Profit Sharing Plan & Trust (As Amended and Restated
                 Effective January 1, 1998) (Effective January 1, 1999), incorporated by
reference to CPI Corp.s                  Annual Report  for fiscal year 1998 on Form
10-K filed 5/5/99.   File No. 1-10204
|------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.29) | CPI
Corp. 1981 Stock Bonus Plan (As Amended and Restated Effective 2/3/91), incorporated by
                 reference to CPI Corp.s Annual Report for fiscal year 1992 on Form 10-K
filed 5/5/93.  File No. 1-10204
|------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.30) | First
Amendment to CPI Corp. 1981 Stock Bonus Plan (As Amended and Restated Effective
                 February 3, 1991) Effective January 1, 1995, incorporated by reference
to CPI Corp.s Annual Report                  for fiscal year 2000 on  Form 10-K filed
5/3/01.  File No. 1-10204
|------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.31) | CPI
Corp. Deferred Compensation and Retirement Plan for Non-Management Directors
                 (Amended and Restated as of January 28, 2000), incorporated by reference
to CPI Corp.s Annual                  Report for fiscal year 2000 on Form  10-K filed
5/3/01.  File No. 1-10204
|------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.32) | Deferred
Compensation and Stock Appreciation Rights Plan (Amended and Restated as of
                 June 6, 1996),  incorporated by reference to CPI Corp.s Annual Report
for fiscal year 2000                  on Form 10-K filed 5/3/01.   File No. 1-10204
|------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.33) | CPI
Corp. Restricted Stock Plan (As Amended and Restated Effective as of January 16, 1995),
                 incorporated by reference to CPI Corp.s Annual Report for fiscal year
2000 on Form 10-K filed 5/3/01.                  File No. 1-10204
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Page 79
|-------

|EXHIBIT INDEX (continued)
|-------------------------

|EXHIBITNUMBER |             | 
|------------- | ----------- | 
|              | DESCRIPTION
|              |             | 

|(10.34) | CPI
Corp. Stock Option Plan (Amended and Restated  Effective as of December 16, 1997),
incorporated                  by reference to CPI Corp.s Annual Report for fiscal year
 2000 on Form 10-K filed 5/3/01.                   File No. 1-10204
|------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.35) | CPI
Corp. Voluntary Stock Option Plan (Amended and Restated Effective as of December 16,
1997),                  incorporated by reference to CPI Corp.s Annual Report  for
fiscal year 2000 on Form 10-K filed 5/3/01.                  File No. 1-10204
|------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.36) | CPI
Corp. Key Executive Deferred Compensation Plan (As Amended and Restated June 6, 1996),
                 incorporated by reference to CPI Corp.s Annual Report for fiscal year
2000 on Form 10-K filed 5/3/01.                  File No. 1-10204
|------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.37) | Stock
Purchase Agreement By and Between Ridgedale  Prints Plus, Inc. and TRU Retail, Inc.,
                 incorporated  by reference to CPI Corp.s Form 10-Q filed 6/8/01.   File
No. 1-10204
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.38) | First
Amendment to Revolving Credit Agreement,  incorporated by reference to CPI Corp.s
                 Form 10-Q   filed 8/31/01.  File No. 1-10204
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.39) | Loan
Agreement among TRU Retail, Inc., Prints Plus,  Inc. and Consumer Programs Incorporated,
                 incorporated by reference to CPI Corp.s Form 10Q filed 8/31/01.
    File No. 110204
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.40) | Stock
Purchase Agreement among Ridgedale Prints Plus, Inc., and TRU Retail, Inc., incorporated,
                 incorporated  by reference to CPI Corp.s Form 10-Q filed 8/31/01.
  File No. 1-10204
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.41) | Exhibit
B, Certificate of Designation, Preferences and Rights of Series A Preferred Security of
                 TRU Retail, Inc., incorporated by reference to CPI Corp.s Form 10-Q
filed 8/31/01.  File No. 1-10204
|------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.42)* | Employment
Agreement by and between Jack Krings and CPI Corp., incorporated by reference to
                 CPI Corp.s Form 10-Q filed 12/21/01.  File No. 1-10204
|-------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.43) | Second
Agreement to Revolving Credit Agreement, incorporated by reference to CPI Corp.s
                 Form 10-Q  filed 12/21/01.  File No. 1-10204 (10.44)          Third
Amendment to Revolving Credit Agreement, incorporated by reference to CPI Corp.s
                 Annual Report for fiscal year 2001 on Form 10-K filed 5/1/02.  File No.
1-10204
|------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.45) | Consulting
Agreement by and between Patrick J. Morris and CPI Corp., incorporated by
                 reference to CPI Corp.s Annual Report for fiscal year 2001 on Form 10-K
filed 5/1/02.  File No. 1-10204
|------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.46) | Retirement
and Release Agreement by and between Russell Isaak and CPI Corp., incorporated
                 by reference to CPI Corp.s Annual Report for fiscal year 2001 on Form
10-K filed 5/1/02.  File No. 1-10204
|------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.47) | Retirement
and Release Agreement by and between Patrick J. Morris and CPI Corp., incorporated by
                 reference to CPI Corp.s Annual Report for fiscal year 2001 on Form 10-K
filed 5/1/02.  File No. 1-10204
|------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.48) | Centrics
Technology, Inc. Stock Option Plan, incorporated by reference to CPI Corp.s Annual
                 Report for fiscal year 2001 on Form 10-K filed 5/1/02.  File No. 1-10201
|------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Page 80
|-------

|EXHIBIT INDEX (continued)
|-------------------------

|EXHIBITNUMBER |             | 
|------------- | ----------- | 
|              | DESCRIPTION
|              |             | 

|(10.49) | Fourth
Amendment to Revolving Credit Agreement, incorporated by reference to CPI Corp.s
                 Annual Report for fiscal year 2001 on Form 10-K filed 5/1/02.    File
No. 1-10204
|------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.50)* | Employment
Agreement by and between Gary W. Douglass and CPI Corp., incorporated by
                 reference to CPI Corp.s Annual Report for fiscal year 2001 on Form 10-K
filed 5/1/02.  File No. 1-10204
|-------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.51) | Third
Amendment to Sears Contract, incorporated by  reference to CPI Corp.s Form 10-Q
                 filed 6/7/02.  File No. 1-10204
|------- | ---------------------------------------------------------------------------------------------------------------------------------------

|(10.52) | First
Amendment to CPI Corp. Deferred Compensation and Retirement Plan for Non-management
                 Directors (As Amended and Restated as of January 28, 2002), incorporated
by reference to                  CPI Corp.s Form 10-Q filed 6/7/02.  File No. 1-10204
|------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.53) | Fifth
Amendment to Sears License Agreement, incorporated by reference to CPI Corp.s Form 10-Q
                 filed 12/11/02.  File No. 1-10204
|------- | -------------------------------------------------------------------------------------------------------------------------------------------------

|(10.54) | Sixth
Amendment to Sears License Agreement, incorporated by reference to CPI Corp.s
                 Form 10-Q filed 12/11/02.   File No. 1-10204
|------- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(10.55) | Third
Amendment to Sears License Agreement (Off Mall), incorporated by reference to
                 CPI Corp.s Form 10-Q filed 12/11/02.  File No. 1-10204
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.56) | Fourth
Amendment to Sears License Agreement (Off Mall), incorporated by reference to CPI Corp.s
                 Form 10-Q filed  12/11/02.  File No. 1-10204
|------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.57) | Fifth
Amendment to Sears License Agreement (Off Mall), incorporated by reference to CPI Corp.s
                 Form 10-Q filed  12/11/02.  File No. 1-10204
|------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.58)* | Employment
Agreement by and between Peggy J. Deal and CPI Corp., incorporated by reference
                 to CPI Corp.s Form 10-Q filed 12/11/02.  File No. 1-10204
|-------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.59)* | Employment
Agreement by and between Thomas Gallahue and CPI Corp., incorporated by reference
                 to CPI Corp.s  Form 10-Q filed 12/11/02.  File No. 1-10204
|-------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.60) | Fifth
Amendment to Revolving Credit Agreement by and among CPI Corp. and U.S. Bank,
                 National Association, incorporated by reference to CPI Corp.s Annual
Report for fiscal year 2002                  on Form 10-K filed 5/15/03.  File No. 1-10204
|------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.61) | Retirement
and Release Agreement by and between CPI Corp. and Barry Arthur, incorporated by
                 reference to CPI Corp.s Annual Report for fiscal year 2002 on Form 10-K
filed 5/15/03.  File No. 1-10204
|------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Page 81
|-------

|EXHIBIT INDEX (continued)
|-------------------------

|EXHIBITNUMBER |             | 
|------------- | ----------- | 
|              | DESCRIPTION
|              |             | 

|(10.62) | Resignation
and Release Agreement by and between CPI Corp. and Timothy A. Hufker, incorporated by
                 reference to CPI Corp.s Annual Report for fiscal year 2002 on Form 10-K
filed 5/15/03.  File No. 1-10204
|------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.63)* | Employment
Agreement by and between CPI Corp. and Jeffrey Sexton, incorporated by reference
                 to to CPI Corp.s Annual Report for fiscal year 2002 on Form 10-K filed
5/15/03.  File No. 1-10204
|-------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.64) | Sears
License Agreement by and between Sears, Canada, Inc., Sears Roebuck and Co. and CPI
Corp.,                  incorporated by reference to CPI Corp.s Annual Report for fiscal
year 2002 on Form 10-K filed 5/15/03.                   File No. 1-10204
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.65) | First
Amendment to CPI Corp. Retirement Plan and Trust, incorporated by reference to CPI
Corp.s                  Annual Report for fiscal year 2002 on Form 10-K filed 5/15/03.
 File No. 1-10204
|------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.66) | Second
Amendment to CPI Corp. Retirement Plan and Trust, incorporated by reference to CPI
Corp.s                  Annual Report for fiscal year 2002 on Form 10-K filed 5/15/03.
 File No. 1-10204
|------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.67) | Third
Amendment to CPI Corp. Employees Profit Sharing Plan and Trust, incorporated by reference
                 to CPI Corp.s Annual Report for fiscal year 2002 on Form 10-K filed
5/15/03.  File No. 1-10204
|------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.68) | $15
Million Revolving Credit Note with Commerce Bank, incorporated by reference to CPI
Corp.s                  Form 10-Q filed 8/27/03.  File No. 1-10204
|------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.69) | Seventh
Amendment to Sears License Agreement, incorporated by reference to CPI Corp.s
                 Form 10-Q filed 8/27/03.   File No. 1-10204
|------- | ---------------------------------------------------------------------------------------------------------------------------------------------------

|(10.70) | Eighth
Amendment to Sears License Agreement, incorporated by reference to CPI Corp.s
                 Form 10-Q filed 12/18/03.   File No. 1-10204
|------- | ---------------------------------------------------------------------------------------------------------------------------------------------------

|* | Employment
contract is automatically renewed and extended for one year unless terminated by the
                   Board of Directors or the employee.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------

|Page 82
|-------

|The following exhibits are included
in this 10-K Annual Report:
|---------------------------------------------------------------

|(3.9) | Amendment
to Bylaws of the Company
|----- | ----------------------------------

|(10.71) | Resolutions
of the Board of Directors of CPI Corp. to terminate the Voluntary Stock Option Plan
|------- | -----------------------------------------------------------------------------------------------

|(10.72) | First
Amendment to Employment Agreement by and between Consumer Programs Incorporated and J.
David Pierson
|------- | ----------------------------------------------------------------------------------------------------------

|(10.73) | Third
Amendment to CPI Corp. Retirement Plan and Trust
|------- | ------------------------------------------------------

|(10.74) | Fourth
Amendment to License Agreement by and between Sears, Roebuck and Co.            and
Consumer Programs Incorporated
|------- | -------------------------------------------------------------------------------------------------------------------------

|(10.75) | Indemnification
Agreement by and between CPI Corp. and Edmond S. Abrain
|------- | -----------------------------------------------------------------------

|(10.76) | Indemnification
Agreement by and between CPI Corp. and James R. Clifford
|------- | ------------------------------------------------------------------------

|(10.77) | Indemnification
Agreement by and between CPI Corp. and Joanne Sawhill Griffin
|------- | -----------------------------------------------------------------------------

|(10.78) | Indemnification
Agreement by and between CPI Corp. and Lee Liberman
|------- | -------------------------------------------------------------------

|(10.79) | Indemnification
Agreement by and between CPI Corp. and Nicholas L. Reding
|------- | -------------------------------------------------------------------------

|(10.80) | Indemnification
Agreement by and between CPI Corp. and Ingrid Otero-Smart
|------- | -------------------------------------------------------------------------

|(10.81) | Indemnification
Agreement by and between CPI Corp. and Martin Sneider
|------- | ---------------------------------------------------------------------

|(10.82) | Indemnification
Agreement by and between CPI Corp. and Virginia V. Weldon
|------- | -------------------------------------------------------------------------

|(11.1) | Computation
of Earnings Per Share - Diluted
|------ | -------------------------------------------

|(11.2) | Computation
of Earnings Per Share - Basic
|------ | -----------------------------------------

|(21.0) | Subsidiaries
of the Registrant
|------ | ------------------------------

|(23.0) | Independent
Auditors Consent
|------ | -----------------------------

|(31.1) | Certification Pursuant to Rule 13a-14(a) Under the Securities Exchange Act of 1934 by Chief Executive Officer
|------ | -------------------------------------------------------------------------------------------------------------

|(31.2) | Certification Pursuant to Rule 13a-14(a) Under the Securities Exchange Act of 1934 by Chief Financial Officer
|------ | -------------------------------------------------------------------------------------------------------------

|(32.0) | 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 Chief Financial Officer
|------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Page 83
|-------

|(b)       REPORTS
ON FORM 8-K
|-----------------------------

| |  | On November 10, 2003, CPI Corp. filed an 8-K Current Report announcing the issuance of a
press release dated November 4, 2003 reporting strategy adjustments and retention of cost
reduction consultant.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On December 4, 2003, CPI Corp. filed an 8-K Current Report announcing the issuance of a
press release dated December 3, 2003 reporting third quarter results for fiscal year 2003
and reiterating commitment to adjustments in its strategic plan.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On February 3, 2004, CPI Corp. filed and 8-K Current Report announcing the issuance of a
press release dated February 2, 2004 reporting that its Board of Directors set a record
date of February 12, 2004 for the consent solicitation initiated by a group of minority
stockholders led by Knightspoint Partners.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c)    
          EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K



See Item 15(a)(3)


     (d)    
          FINANCIAL STATEMENT SCHEDULE REQUIRED BY REGULATION S-X



See Item 15(a)(2)


Page 84
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|SIGNATURES


Pursuant
to the requirements of Section 13 or 15 (d) 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 on the 21st day of April, 2004.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | CPI CORP.
      
      BY:  /s/ J. David Pierson
            
            J. David Pierson
            Chairman of the Board of Directors,
            President and Chief Executive Officer
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
indicated.



SIGNATURES OF DIRECTORS
AND PRINCIPAL OFFICERS
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Signature                       |  |  | Title                                       |  |  | Date                 |  | 
|------------------------------- |  |  | ------------------------------------------- |  |  | -------------------- |  | 
|                                |  |  |                                             |  | 
|                                |  |  |                                             |  |  |                      |  | 
|/s/ J. David
      Pierson      |  |  | Chairman
      of the Board of Directors,   |  |  | April 21,
      2004 |  | 
|                                |  |  | President
      and Chief Executive Officer |  |  |                      |  | 
|(J.
      David Pierson)        |  |  |                                             |  |  |                      |  | 
|                                |  |  |                                             |  |  |                      |  | 
|/s/ James
      J. Abel         |  |  | Director                                    |  |  | April 21,
      2004 |  | 
|                                |  |  |                                             |  |  |                      |  | 
|(James
      J. Abel)           |  |  |                                             |  |  |                      |  | 
|                                |  |  |                                             |  |  |                      |  | 
|/s/ Michael
      S. Koeneke    |  |  | Director                                    |  |  | April 21,
      2004 |  | 
|                                |  |  |                                             |  |  |                      |  | 
|(Michael
      S. Koeneke)      |  |  |                                             |  |  |                      |  | 
|                                |  |  |                                             |  |  |                      |  | 
|/s/ David
      M. Meyer        |  |  | Director                                    |  |  | April 21,
      2004 |  | 
|                                |  |  |                                             |  |  |                      |  | 
|(David
      M. Meyer)          |  |  |                                             |  |  |                      |  | 
|                                |  |  |                                             |  |  |                      |  | 
|/s/ Mark
      R. Mitchell      |  |  | Director                                    |  |  | April 21,
      2004 |  | 
|                                |  |  |                                             |  |  |                      |  | 
|(Mark
      R. Mitchell)        |  |  |                                             |  |  |                      |  | 
|                                |  |  |                                             |  |  |                      |  | 
|/s/ Steven
      J. Smith       |  |  | Director                                    |  |  | April 21,
      2004 |  | 
|                                |  |  |                                             |  |  |                      |  | 
|(Steven
      J. Smith)         |  |  |                                             |  |  |                      |  | 
|                                |  |  |                                             |  |  |                      |  | 
|/s/ John
      Turner White, IV |  |  | Director                                    |  |  | April 21,
      2004 |  | 
|                                |  |  |                                             |  |  |                      |  | 
|(John
      Turner White, IV)   |  |  |                                             |  |  |                      |  | 
|                                |  |  |                                             |  |  |                      |  | 
|/s/ Gary
      W. Douglass      |  |  | Executive
      Vice President,             |  |  | April 21,
      2004 |  | 
|                                |  |  | Finance and
      Chief Financial           |  |  |                      |  | 
|(Gary
      W. Douglass)        |  |  | Officer                                     |  | 
|                                |  | 
|                                |  |  |                                             |  |  |                      |  | 
|/s/ Kimberly
      A. LaBelle   |  |  | Vice President,
      Controller            |  |  | April 21,
      2004 |  | 
|                                |  |  | Principal
      Accounting Officer          |  |  |                      |  | 
|(Kimberly
      A. LaBelle)     |  | 

|Page 85
|-------