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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended August 1, 2004



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from  to



Commission file number 0-8550



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Portrait Corporation of America, Inc.

(Exact name of registrant as specified in its charter)



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|                                                              |  |                                 
|------------------------------------------------------------- |  | --------------------------------
|Delaware                                                      |  | 57-1208051                      
|(State or other jurisdiction ofincorporation or organization) |  | (IRS EmployerIdentification No.)



815 Matthews-Mint
Hill Road

Matthews, North Carolina 28105

(Address of principal executive offices)

(Zip Code)



(704) 588-4351

(Registrants telephone number, including area code)



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PCA International, Inc.

(Former name, former address and former

fiscal year, if changed since last report)



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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 for 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.    Yes  x    No ̈



Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2 of the Exchange Act).    Yes ̈No  x



As of September 14, 2004, there were 2,294,352 shares of the registrants common stock outstanding.



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##### Table of Contents

Table of Contents



|         |  |                                                                                                                           |  |         
|-------- |  | ------------------------------------------------------------------------------------------------------------------------- |  | --------
|         |  |                                                                                                                           |  | Page No.
|Part I.  |  | Financial Information                                                                                                     |  | 1       
|         |  |                                                                                                                          
|Item 1.  |  | Financial Statements (Unaudited)                                                                                          |  | 1       
|         |  |                                                                                                                          
|         |  | Consolidated Balance Sheets as of August 1, 2004 and February 1, 2004                                                     |  | 1       
|         |  |                                                                                                                          
|         |  | Consolidated Statements of Operations for the Thirteen Weeks and Twenty-six Weeks Ended August 1, 2004 and August 3, 2003 |  | 3       
|         |  |                                                                                                                          
|         |  | Consolidated Statements of Cash Flows for the Twenty-six Weeks Ended August 1, 2004 and August 3, 2003                    |  | 4       
|         |  |                                                                                                                          
|         |  | Notes to Consolidated Financial Statements                                                                                |  | 5       
|         |  |                                                                                                                          
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                     |  | 17      
|         |  |                                                                                                                          
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                                |  | 23      
|         |  |                                                                                                                          
|Item 4.  |  | Controls and Procedures                                                                                                   |  | 23      
|         |  |                                                                                                                          
|Part II. |  | Other Information                                                                                                         |  | 23      
|         |  |                                                                                                                          
|Item 5.  |  | Other Information                                                                                                         |  | 23      
|         |  |                                                                                                                          
|Item 6.  |  | Exhibits and Reports on Form 8-K                                                                                          |  | 23      
|         |  |                                                                                                                          
|         |  | Signatures                                                                                                                |  | 24      



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##### Table of Contents

Part I. Financial Information



Item 1. Financial Statements



PORTRAIT CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(dollar amounts in
thousands)



|                                               |  |               |         |                 |   |        
|---------------------------------------------- |  | ------------- | ------- | --------------- | - | -------
|                                               |  | August 1,2004 |         | February 1,2004
|ASSETS                                         |  |               |         |                 |   |        
|CURRENT ASSETS:                                |  |               |         |                 |   |        
|Cash and cash equivalents                      |  | $             | 5,948   |                 | $ | 4,820  
|Accounts receivable                            |  |               | 2,149   |                 |   | 2,349  
|Inventories                                    |  |               | 12,254  |                 |   | 12,236 
|Deferred income taxes                          |  |               | 3,124   |                 |   | 3,124  
|Prepaid expenses and other assets              |  |               | 4,274   |                 |   | 4,018  
|                                               |  |               |         |                 |   |        
|Total current assets                           |  |               | 27,749  |                 |   | 26,547 
|PROPERTY AND EQUIPMENT:                        |  |               |         |                 |   |        
|Land and improvements                          |  |               | 2,306   |                 |   | 2,306  
|Buildings and improvements                     |  |               | 13,618  |                 |   | 13,117 
|Photographic, sales and finishing equipment    |  |               | 146,388 |                 |   | 139,742
|Studio improvements                            |  |               | 24,789  |                 |   | 23,566 
|Construction in progress                       |  |               | 3,150   |                 |   | 1,085  
|                                               |  |               |         |                 |   |        
|Total                                          |  |               | 190,251 |                 |   | 179,816
|Less accumulated depreciation and amortization |  |               | 117,698 |                 |   | 111,776
|                                               |  |               |         |                 |   |        
|Property and equipment, net                    |  |               | 72,553  |                 |   | 68,040 
|GOODWILL                                       |  |               | 51,642  |                 |   | 51,643 
|DEFERRED FINANCING COSTS, NET                  |  |               | 7,672   |                 |   | 8,466  
|DEFERRED INCOME TAXES, NONCURRENT              |  |               | 16,650  |                 |   | 10,316 
|OTHER ASSETS                                   |  |               | 19      |                 |   | 34     
|                                               |  |               |         |                 |   |        
|TOTAL ASSETS                                   |  | $             | 176,285 |                 | $ | 165,046
|                                               |  |               |         |                 |   |        



See notes to
consolidated financial statements.



1



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##### Table of Contents

PORTRAIT CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (continued)

(Unaudited)

(dollar amounts in thousands)



|                                                                                                                                          |  |               |          |   |                 |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | --------------- | - | -------- | -
|                                                                                                                                          |  | August 1,2004 |          |   | February 1,2004 |  
|LIABILITIES AND SHAREHOLDERS DEFICIENCY                                                                                                  |  |               |          |   |                 |   |          |  
|CURRENT LIABILITIES:                                                                                                                      |  |               |          |   |                 |   |          |  
|Short-term borrowings                                                                                                                     |  | $             | 7,300    |   |                 | $ | 10,000   |  
|Current portion of long-term debt                                                                                                         |  |               | 242      |   |                 |   | 279      |  
|Accounts payable-trade                                                                                                                    |  |               | 31,417   |   |                 |   | 23,672   |  
|Accrued insurance                                                                                                                         |  |               | 4,396    |   |                 |   | 4,055    |  
|Accrued income taxes                                                                                                                      |  |               | 695      |   |                 |   | 858      |  
|Accrued compensation                                                                                                                      |  |               | 4,603    |   |                 |   | 5,270    |  
|Accrued interest                                                                                                                          |  |               | 10,166   |   |                 |   | 10,197   |  
|Other accrued liabilities                                                                                                                 |  |               | 12,114   |   |                 |   | 10,128   |  
|                                                                                                                                          |  |               |          |   |                 |   |          |  
|Total current liabilities                                                                                                                 |  |               | 70,933   |   |                 |   | 64,459   |  
|LONG-TERM DEBT                                                                                                                            |  |               | 227,941  |   |                 |   | 219,658  |  
|OTHER LIABILITIES                                                                                                                         |  |               | 5,234    |   |                 |   | 5,679    |  
|                                                                                                                                          |  |               |          |   |                 |   |          |  
|TOTAL LIABILITIES                                                                                                                         |  |               | 304,108  |   |                 |   | 289,796  |  
|COMMITMENTS AND CONTINGENCIES                                                                                                             |  |               |          |   |                 |   |          |  
|SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK, $10.00 par value(authorized200,000 shares; outstanding15,000
shares)                   |  |               | 15,000   |   |                 |   | 15,000   |  
|SHAREHOLDERS DEFICIENCY:                                                                                                                 |  |               |          |   |                 |   |          |  
|Common stock, $0.20 par value (authorized20,000,000 shares; issued and outstanding August 1, 2004 and February 1,
20042,294,352 shares |  |               | 459      |   |                 |   | 459      |  
|Warrants to purchase Series A redeemable convertible preferred stock (issued and outstanding287)                                         |  |               | 642      |   |                 |   | 642      |  
|Warrants to purchase common stock (issued and outstanding306,610)                                                                        |  |               | 2,947    |   |                 |   | 2,947    |  
|Additional paid-in capital                                                                                                                |  |               | 23,668   |   |                 |   | 23,668   |  
|Deferred compensation                                                                                                                     |  |               | (294     | ) |                 |   | (333     | )
|Accumulated deficit                                                                                                                       |  |               | (170,043 | ) |                 |   | (166,851 | )
|Accumulated other comprehensive loss                                                                                                      |  |               | (202     | ) |                 |   | (282     | )
|                                                                                                                                          |  |               |          |   |                 |   |          |  
|Total shareholders deficiency                                                                                                            |  |               | (142,823 | ) |                 |   | (139,750 | )
|                                                                                                                                          |  |               |          |   |                 |   |          |  
|TOTAL LIABILITIES AND SHAREHOLDERS DEFICIENCY                                                                                            |  | $             | 176,285  |   |                 | $ | 165,046  |  
|                                                                                                                                          |  |               |          |   |                 |   |          |  



See notes to
consolidated financial statements.



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PORTRAIT CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(dollar amounts in
thousands)



|                                           |  |                              |        |   |                               |   |        |               |  |   |               |   |  |   |         |  
|------------------------------------------ |  | ---------------------------- | ------ | - | ----------------------------- | - | ------ | ------------- |  | - | ------------- | - |  | - | ------- | -
|                                           |  | For the Thirteen Weeks Ended |        |   | For the Twenty-sixWeeks Ended |  
|                                           |  | August 1,2004                |        |   | August 3,2003                 |   |        | August 1,2004 |  |   | August 3,2003 |  
|SALES                                      |  | $                            | 68,442 |   |                               | $ | 71,309 |               |  | $ | 148,338       |   |  | $ | 142,865 |  
|COST OF SALES                              |  |                              | 57,415 |   |                               |   | 55,284 |               |  |   | 120,121       |   |  |   | 110,646 |  
|                                           |  |                              |        |   |                               |   |        |               |  |   |               |   |  |   |         |  
|GROSS PROFIT                               |  |                              | 11,027 |   |                               |   | 16,025 |               |  |   | 28,217        |   |  |   | 32,219  |  
|GENERAL AND ADMINISTRATIVE                 |  |                              | 10,149 |   |                               |   | 10,857 |               |  |   | 21,869        |   |  |   | 22,370  |  
|                                           |  |                              |        |   |                               |   |        |               |  |   |               |   |  |   |         |  
|INCOME FROM OPERATIONS                     |  |                              | 878    |   |                               |   | 5,168  |               |  |   | 6,348         |   |  |   | 9,849   |  
|INTEREST INCOME                            |  |                              | 2      |   |                               |   | 3      |               |  |   | 4             |   |  |   | 5       |  
|INTEREST EXPENSE                           |  |                              | (7,946 | ) |                               |   | (7,659 | )             |  |   | (15,878       | ) |  |   | (15,333 | )
|                                           |  |                              |        |   |                               |   |        |               |  |   |               |   |  |   |         |  
|LOSS BEFORE INCOME TAXES                   |  |                              | (7,066 | ) |                               |   | (2,488 | )             |  |   | (9,526        | ) |  |   | (5,479  | )
|INCOME TAX BENEFIT                         |  |                              | 5,051  |   |                               |   | 1,094  |               |  |   | 6,334         |   |  |   | 2,399   |  
|                                           |  |                              |        |   |                               |   |        |               |  |   |               |   |  |   |         |  
|NET LOSS                                   |  | $                            | (2,015 | ) |                               | $ | (1,394 | )             |  | $ | (3,192        | ) |  | $ | (3,080  | )
|                                           |  |                              |        |   |                               |   |        |               |  |   |               |   |  |   |         |  
|PRO FORMA FOR APPLICATION OF SFAS NO. 123: |  |                              |        |   |                               |   |        |               |  |   |               |   |  |   |         |  
|NET LOSS                                   |  | $                            | (2,022 | ) |                               | $ | (1,402 | )             |  | $ | (3,208        | ) |  | $ | (3,096  | )
|                                           |  |                              |        |   |                               |   |        |               |  |   |               |   |  |   |         |  



See notes to
consolidated financial statements.



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PORTRAIT CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(dollar amounts in
thousands)



|                                                                                          |  |                                |         |   |               |   |         |  
|----------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ------------- | - | ------- | -
|                                                                                          |  | For the Twenty-six Weeks Ended |        
|                                                                                          |  | August 1, 2004                 |         |   | August 3,2003 |  
|OPERATING ACTIVITIES:                                                                     |  |                                |         |   |               |   |         |  
|Net loss                                                                                  |  | $                              | (3,192  | ) |               | $ | (3,080  | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                                |         |   |               |   |         |  
|Depreciation and amortization                                                             |  |                                | 6,277   |   |               |   | 5,607   |  
|Amortization of deferred financing cost                                                   |  |                                | 831     |   |               |   | 804     |  
|Paid-in-kind interest                                                                     |  |                                | 3,139   |   |               |   | 2,679   |  
|Amortization of debt discounts                                                            |  |                                | 307     |   |               |   | 307     |  
|Stock compensation expense                                                                |  |                                | 39      |   |               |   | 22      |  
|Provision for deferred income taxes                                                       |  |                                | (6,334  | ) |               |   | (2,399  | )
|Loss on disposal of property and equipment                                                |  |                                | 202     |   |               |   | 150     |  
|Changes in assets and liabilities which provided (used) cash:                             |  |                                |         |   |               |   |         |  
|Accounts receivable                                                                       |  |                                | 200     |   |               |   | (731    | )
|Inventories                                                                               |  |                                | (18     | ) |               |   | (1,140  | )
|Prepaid expenses and other assets                                                         |  |                                | (256    | ) |               |   | (770    | )
|Other noncurrent assets                                                                   |  |                                | 15      |   |               |   | 6       |  
|Accounts payable - trade                                                                  |  |                                | 7,745   |   |               |   | 2,682   |  
|Accrued expenses                                                                          |  |                                | (489    | ) |               |   | 685     |  
|Accrued interest                                                                          |  |                                | (31     | ) |               |   | (11,592 | )
|Other current accrued liabilities                                                         |  |                                | 1,986   |   |               |   | 2,928   |  
|Other non-current accrued liabilities                                                     |  |                                | (445    | ) |               |   | 169     |  
|                                                                                          |  |                                |         |   |               |   |         |  
|NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                                       |  |                                | 9,976   |   |               |   | (3,673  | )
|                                                                                          |  |                                |         |   |               |   |         |  
|INVESTING ACTIVITIES:                                                                     |  |                                |         |   |               |   |         |  
|Purchases of property and equipment                                                       |  |                                | (11,217 | ) |               |   | (11,744 | )
|Proceeds from sales of property and equipment                                             |  |                                |        |   |               |   | 7       |  
|                                                                                          |  |                                |         |   |               |   |         |  
|NET CASH USED IN INVESTING ACTIVITIES                                                     |  |                                | (11,217 | ) |               |   | (11,737 | )
|                                                                                          |  |                                |         |   |               |   |         |  
|FINANCING ACTIVITIES:                                                                     |  |                                |         |   |               |   |         |  
|Increase in borrowings under senior secured credit facility                               |  |                                | 41,500  |   |               |   | 47,900  |  
|Repayment of senior secured credit facility and capital lease obligations                 |  |                                | (39,251 | ) |               |   | (29,145 | )
|Repayment of installment purchase agreement                                               |  |                                | (149    | ) |               |   |        |  
|Deferred financing cost                                                                   |  |                                | (37     | ) |               |   | (82     | )
|Issuance of common stock                                                                  |  |                                |        |   |               |   | 10      |  
|                                                                                          |  |                                |         |   |               |   |         |  
|NET CASH PROVIDED BY FINANCING ACTIVITIES                                                 |  |                                | 2,063   |   |               |   | 18,683  |  
|                                                                                          |  |                                |         |   |               |   |         |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                   |  |                                | 306     |   |               |   | (160    | )
|                                                                                          |  |                                |         |   |               |   |         |  
|INCREASE IN CASH AND CASH EQUIVALENTS                                                     |  |                                | 1,128   |   |               |   | 3,113   |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                          |  |                                | 4,820   |   |               |   | 2,522   |  
|                                                                                          |  |                                |         |   |               |   |         |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                |  | $                              | 5,948   |   |               | $ | 5,635   |  
|                                                                                          |  |                                |         |   |               |   |         |  
|NONCASH FINANCING ACTIVITIES:                                                             |  |                                |         |   |               |   |         |  
|Paid-in-kind interest capitalized                                                         |  | $                              | 3,139   |   |               | $ | 2,679   |  
|                                                                                          |  |                                |         |   |               |   |         |  



See notes to
consolidated financial statements.



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PORTRAIT CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(dollar amounts in thousands, except where noted)



1.
ORGANIZATION AND BASIS OF PRESENTATION



The accompanying unaudited
Consolidated Financial Statements of Portrait Corporation of America, Inc., formerly known as PCA International, Inc., and its subsidiaries (the Company) have been prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The financial statements do not include all information and notes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (including normal recurring accruals) necessary for a fair presentation of the Companys financial
information. Operating results for the thirteen week and twenty-six week periods ended August 1, 2004 and August 3, 2003 are not necessarily indicative of the results for the fiscal years ending January 30, 2005 (fiscal 2004) and
February 1, 2004 (fiscal 2003), respectively. These financial statements should be read in conjunction with the Consolidated Financial Statements included in the Companys Annual Report on Form 10-K for the fiscal year ended
February 1, 2004. On August 6, 2004, PCA International, Inc. merged with and into the Company with the Company as the surviving company. See Note 13.



2. STOCK OPTION PLAN



Prior to fiscal 2003, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. As such, compensation expense relating to stock options granted to employees was recorded only if the current market price of the underlying stock exceeded the exercise price on the date of grant (see
Note 10 to the Consolidated Financial Statements (Item 8.) in the Annual Report on Form 10-K for the fiscal year ended February 1, 2004).



During the fourth quarter of fiscal 2003, the Company elected to adopt the fair value based employee stock-based compensation expense recognition provisions of Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 states the adoption of the fair value based method is a change to a preferable method of accounting. Management believes
use of the fair value based method to record employee stock-based compensation expense is consistent with the accounting for all other forms of compensation.



Under the prospective transition provisions of SFAS No. 123, as amended by SFAS No. 148, Accounting for Stock-Based CompensationTransition and
Disclosure, the Company adopted the fair value method effective as of the beginning of the year in which the decision was made, or February 3, 2003. Prior awards will continue to be accounted for under the intrinsic value method.



The pro forma results disclosed for the current period differ from the actual results,
because under APB Opinion No. 20, Accounting Changes, the pro forma results are computed as if SFAS No. 123 had been applied for all periods, whereas, the adoption of SFAS No. 123 in fiscal 2003 is applied only to awards granted
subsequent to February 2, 2003.



Employee stock-based compensation expense
determined using the fair value based method applied prospectively is not necessarily indicative of future amounts when the fair value based method will apply to all outstanding, non-vested awards, as non-vested awards issued to employees prior to
February 3, 2003, were, and continue to be, accounted for using the intrinsic value based provisions of APB Opinion No. 25.



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As required by SFAS No. 123, the Company provides pro forma net income disclosures for employee stock option grants as if
the fair value based method as defined in SFAS No. 123 had been applied for all stock-based awards since fiscal 1995. The Companys net loss as reported and the pro forma amounts are indicated below:



|                                              |  |                              |        |   |                                |   |        |                |  |   |                |   |  |   |        |  
|--------------------------------------------- |  | ---------------------------- | ------ | - | ------------------------------ | - | ------ | -------------- |  | - | -------------- | - |  | - | ------ | -
|                                              |  | For the Thirteen Weeks Ended |        |   | For the Twenty-six Weeks Ended |  
|                                              |  | August 1,2004                |        |   | August 3,2003                  |   |        | August 1, 2004 |  |   | August 3, 2003 |  
|Net loss attributable to common shareholders: |  |                              |        |   |                                |   |        |                |  |   |                |   |  |   |        |  
|As reported                                   |  | $                            | (2,015 | ) |                                | $ | (1,394 | )              |  | $ | (3,192         | ) |  | $ | (3,080 | )
|                                              |  |                              |        |   |                                |   |        |                |  |   |                |   |  |   |        |  
|Less:                                         |  |                              |        |   |                                |   |        |                |  |   |                |   |  |   |        |  
|Additional compensation expense               |  |                              | 7      |   |                                |   | 8      |                |  |   | 16             |   |  |   | 16     |  
|                                              |  |                              |        |   |                                |   |        |                |  |   |                |   |  |   |        |  
|Pro forma                                     |  | $                            | (2,022 | ) |                                | $ | (1,402 | )              |  | $ | (3,208         | ) |  | $ | (3,096 | )
|                                              |  |                              |        |   |                                |   |        |                |  |   |                |   |  |   |        |  



3. SEASONALITY



Sales of portrait photography and ancillary portrait photography products are highly
seasonal, with the fall/winter holiday season accounting for a high percentage of sales and operating income. The Companys fiscal fourth quarter (generally, late October/early November through late January/early February) typically produces a
large percentage of annual sales and operating income. The Companys first fiscal quarter and second fiscal quarter results may be affected by the timing of the Easter holiday.



4. COMPREHENSIVE LOSS



Total comprehensive loss for the thirteen weeks and twenty-six weeks ended August 1, 2004 and August 3, 2003 was comprised of the following:



|                                                      |  |                             |        |   |                               |   |        |               |  |   |               |   |  |   |        |  
|----------------------------------------------------- |  | --------------------------- | ------ | - | ----------------------------- | - | ------ | ------------- |  | - | ------------- | - |  | - | ------ | -
|                                                      |  | For the ThirteenWeeks Ended |        |   | For the Twenty-sixWeeks Ended |  
|                                                      |  | August 1,2004               |        |   | August 3,2003                 |   |        | August 1,2004 |  |   | August 3,2003 |  
|Net loss                                              |  | $                           | (2,015 | ) |                               | $ | (1,394 | )             |  | $ | (3,192        | ) |  | $ | (3,080 | )
|Foreign currency translation adjustment, net of taxes |  |                             | 87     |   |                               |   | 20     |               |  |   | 80            |   |  |   | 443    |  
|                                                      |  |                             |        |   |                               |   |        |               |  |   |               |   |  |   |        |  
|Total comprehensive loss                              |  | $                           | (1,928 | ) |                               | $ | (1,374 | )             |  | $ | (3,112        | ) |  | $ | (2,637 | )
|                                                      |  |                             |        |   |                               |   |        |               |  |   |               |   |  |   |        |  



5. OTHER ACCRUED LIABILITIES



Other accrued liabilities were comprised of the following:



|                                |  |                |        |                 |   |       
|------------------------------- |  | -------------- | ------ | --------------- | - | ------
|                                |  | August 1, 2004 |        | February 1,2004
|Accrued taxes other than income |  | $              | 2,937  |                 | $ | 2,587 
|Other accrued expenses          |  |                | 3,385  |                 |   | 3,269 
|Customer deposits               |  |                | 5,792  |                 |   | 4,272 
|                                |  |                |        |                 |   |       
|Total other accrued liabilities |  | $              | 12,114 |                 | $ | 10,128
|                                |  |                |        |                 |   |       



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6. OTHER LIABILITIES



Other liabilities were comprised of the following:



|                                                       |  |               |       |                 |   |      
|------------------------------------------------------ |  | ------------- | ----- | --------------- | - | -----
|                                                       |  | August 1,2004 |       | February 1,2004
|Accrued interest                                       |  | $             | 661   |                 | $ | 628  
|Long-term portion of retiree benefit obligation        |  |               |      |                 |   | 1,061
|Long-term portion of workers compensation obligations |  |               | 4,501 |                 |   | 3,916
|Long-term occupancy obligations                        |  |               | 72    |                 |   | 74   
|                                                       |  |               |       |                 |   |      
|Total other liabilities                                |  | $             | 5,234 |                 | $ | 5,679
|                                                       |  |               |       |                 |   |      



7. EMPLOYEE BENEFITS



The Company provides health and life insurance benefits, effective
February 1, 1992, to those persons already retired on February 1, 1992 and to those employees who were 55 years of age with 5 years of service on February 1, 1992. The plan provides for annual benefits of $2,000 (single) or $4,000 (married) toward
the purchase of supplemental health care coverage. An eligible employee who retires after February 1, 1992 can receive benefits after attaining the age of 65. The plan was closed to new participants in March 1993 and only employees in the plan prior
to March 1993 are eligible for benefits.



On June 29, 2004, the Board of
Directors of the Company passed a resolution to terminate this plan. As a result of this termination, the Company recognized a reduction in the accrued benefit cost for this plan and a corresponding reduction in general and administrative expenses
of $1.1 million. The remaining liability for this plan is $0.1 million.



8.
COMMITMENTS AND CONTINGENCIES



In April 2002, the Company entered into a
five year supply agreement to purchase substantially all of its annual North American requirements for photographic paper, film and processing chemistry during the period of the agreement from the supplier. There are no minimum or maximum purchase
requirements under this supply agreement. As of August 1, 2004, the Company was in compliance with this agreement.



The Company is currently responding to a claim by Mexican federal tax authorities regarding 1997, 1998 and 2000 tax years of a subsidiary of the Company. Based on
information available to management, it is the opinion of management that the ultimate disposition of this inquiry will not have a materially adverse effect on the Companys consolidated financial position, results of operations, or liquidity.



The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a materially adverse effect on the Companys consolidated financial position, results of operations, or liquidity.



9. DEBT



On July 2, 2004, the Company entered into an amendment to its senior secured credit facility which included, among other things, a change in
the definition of Consolidated EBITDA and an increase in the maximum loans outstanding from December 15 through January 15 to $15.0 million from $10.0 million. Consolidated EBITDA now also excludes extraordinary charges, as defined in the senior
secured credit facility, related to workers compensation programs in the amount of $2.0 million for the fiscal quarter ending on or about October 31, 2003, $0.8 million for the fiscal quarter ending on or about January 31, 2004, and additional
charges up to $1.2 million relating to the execution of a loss portfolio transfer with respect to workers compensation programs.



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10. GOODWILL AND INTANGIBLE ASSETS



On February 4, 2002 the Company adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. In accordance with
SFAS No. 142, goodwill and indefinite lived intangible assets are no longer amortized but will be reviewed annually for impairment. Intangible assets not deemed to have an indefinite life will continue to be amortized over their useful lives. The
Company compared the fair value of its retail reporting unit, where all of the goodwill is recorded, to the carrying value of this reporting unit as of February 2, 2004. Fair value was derived utilizing the income approach, which considers expected
returns on an investment discounted or capitalized at an appropriate rate of return to reflect investor risks and hazards. A discounted net cash flow analysis is utilized which provides an indication of value based upon the present value of
anticipated future cash flows, discounted at an appropriate factor reflecting the risk inherent in the investment. At February 2, 2004, the fair value of the retail reporting unit exceeded the carrying value of that reporting units goodwill
(step one of the impairment test). As a result, we were not required to conduct the second step of the impairment test, comparing the implied fair value of reporting unit goodwill with the carrying amount of that goodwill, and we recognized no
impairment of the carrying value of our goodwill on our balance sheet at February 1, 2004.



As of August 1, 2004 and February 1, 2004, the Company had no intangible assets subject to amortization. The following table sets forth the information for intangible assets not subject to amortization:



|                               |  |               |        |                 |   |       
|------------------------------ |  | ------------- | ------ | --------------- | - | ------
|                               |  | August 1,2004 |        | February 1,2004
|Unamortized intangible assets: |  |               |        |                 |   |       
|Goodwill                       |  | $             | 51,642 |                 | $ | 51,643
|                               |  |               |        |                 |   |       



The decrease of $1 from February 1,
2004 to August 1, 2004 is due to fluctuations in foreign currency exchange rates.



11. BUSINESS SEGMENT AND GEOGRAPHIC DATA



The Company has two
reportable segments, Retail Portraiture and Institutional Portraiture. The Retail Portraiture segment serves studios in retail stores and military bases in the U.S., Canada, Mexico, Germany and the U.K. The Institutional Portraiture segment serves
institutional markets such as church congregations, schools and special events photography.



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The Company evaluates performance based on sales and Adjusted EBITDA. The Company defines Adjusted EBITDA as income
(loss) before cumulative effect of accounting change plus the mark-to-market adjustment expense for the embedded derivative in the Series A preferred stock (mark-to-market derivative expense), early extinguishments of debt, interest, taxes,
depreciation and amortization. Cumulative effect of accounting change, mark-to-market derivative expense, and early extinguishments of debt do not pertain to the periods shown but do pertain to other recent periods. The accounting policies of the
reportable segments are the same as those described in the summary of significant accounting policies in the Annual Report on Form 10-K for the fiscal year ended February 1, 2004.



Adjusted EBITDA is presented herein because the Company believes it to be relevant and useful to investors because it is used by management
to evaluate the operating performance of the Company and compare the Companys operating performance with that of its competitors. Management also uses Adjusted EBITDA for planning and forecasting purposes, including the preparation of annual
operating budgets, to determine appropriate levels of operating and capital investments and as one of the target elements in the Companys compensation incentive programs. Adjusted EBITDA excludes certain items, including the mark-to-market
change in the fair value of the Series A preferred stock and the loss on early extinguishments of debt, which management believes are not indicative of the Companys core operating results and are not expected to have a financial impact in the
foreseeable future. The Company therefore utilizes Adjusted EBITDA as a useful alternative to net income as an indicator of operating performance. However, Adjusted EBITDA is not a measure of financial performance under GAAP and Adjusted EBITDA
should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP, such as net income. While management believes some of the items excluded from Adjusted EBITDA are not
indicative of the Companys core operating results, these items do impact the Companys statement of operations; therefore, management utilizes Adjusted EBITDA as an operating performance measure in conjunction with a comparable GAAP
measure such as net income and/or income from operations.



The following table
reconciles net loss to Adjusted EBITDA:



|                                            |  |                   |        |   |                           |   |      |              |  |   |        |  
|------------------------------------------- |  | ----------------- | ------ | - | ------------------------- | - | ---- | ------------ |  | - | ------ | -
|                                            |  | RetailPortraiture |        |   | Institutional Portraiture |   |      | Consolidated | 
|For the thirteen weeks ended August 1, 2004 |  |                   |        |   |                           |   |      |              |  |   |        |  
|Net loss                                    |  | $                 | (1,826 | ) |                           | $ | (189 | )            |  | $ | (2,015 | )
|Reconciling items:                          |  |                   |        |   |                           |   |      |              |  |   |        |  
|Depreciation and amortization               |  |                   | 3,163  |   |                           |   | 45   |              |  |   | 3,208  |  
|Income tax benefit                          |  |                   | (4,859 | ) |                           |   | (192 | )            |  |   | (5,051 | )
|Interest income                             |  |                   | (2     | ) |                           |   |     |              |  |   | (2     | )
|Interest expense                            |  |                   | 7,672  |   |                           |   | 274  |              |  |   | 7,946  |  
|                                            |  |                   |        |   |                           |   |      |              |  |   |        |  
|Adjusted EBITDA                             |  | $                 | 4,148  |   |                           | $ | (62  | )            |  | $ | 4,086  |  
|                                            |  |                   |        |   |                           |   |      |              |  |   |        |  
|For the thirteen weeks ended August 3, 2003 |  |                   |        |   |                           |   |      |              |  |   |        |  
|Net loss                                    |  | $                 | (1,110 | ) |                           | $ | (284 | )            |  | $ | (1,394 | )
|Reconciling items:                          |  |                   |        |   |                           |   |      |              |  |   |        |  
|Depreciation and amortization               |  |                   | 2,838  |   |                           |   | 43   |              |  |   | 2,881  |  
|Income tax benefit                          |  |                   | (1,059 | ) |                           |   | (35  | )            |  |   | (1,094 | )
|Interest income                             |  |                   | (3     | ) |                           |   |     |              |  |   | (3     | )
|Interest expense                            |  |                   | 7,345  |   |                           |   | 314  |              |  |   | 7,659  |  
|                                            |  |                   |        |   |                           |   |      |              |  |   |        |  
|Adjusted EBITDA                             |  | $                 | 8,011  |   |                           | $ | 38   |              |  | $ | 8,049  |  
|                                            |  |                   |        |   |                           |   |      |              |  |   |        |  



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|                                              |  |                   |        |   |                           |   |      |              |  |   |        |  
|--------------------------------------------- |  | ----------------- | ------ | - | ------------------------- | - | ---- | ------------ |  | - | ------ | -
|                                              |  | RetailPortraiture |        |   | Institutional Portraiture |   |      | Consolidated | 
|For the twenty-six weeks ended August 1, 2004 |  |                   |        |   |                           |   |      |              |  |   |        |  
|Net loss                                      |  | $                 | (2,730 | ) |                           | $ | (462 | )            |  | $ | (3,192 | )
|Reconciling items:                            |  |                   |        |   |                           |   |      |              |  |   |        |  
|Depreciation and amortization                 |  |                   | 6,186  |   |                           |   | 91   |              |  |   | 6,277  |  
|Income tax benefit                            |  |                   | (6,119 | ) |                           |   | (215 | )            |  |   | (6,334 | )
|Interest income                               |  |                   | (4     | ) |                           |   |     |              |  |   | (4     | )
|Interest expense                              |  |                   | 15,339 |   |                           |   | 539  |              |  |   | 15,878 |  
|                                              |  |                   |        |   |                           |   |      |              |  |   |        |  
|Adjusted EBITDA                               |  | $                 | 12,672 |   |                           | $ | (47  | )            |  | $ | 12,625 |  
|                                              |  |                   |        |   |                           |   |      |              |  |   |        |  
|For the twenty-six weeks ended August 3, 2003 |  |                   |        |   |                           |   |      |              |  |   |        |  
|Net loss                                      |  | $                 | (2,405 | ) |                           | $ | (675 | )            |  | $ | (3,080 | )
|Reconciling items:                            |  |                   |        |   |                           |   |      |              |  |   |        |  
|Depreciation and amortization                 |  |                   | 5,512  |   |                           |   | 95   |              |  |   | 5,607  |  
|Income tax benefit                            |  |                   | (2,323 | ) |                           |   | (76  | )            |  |   | (2,399 | )
|Interest income                               |  |                   | (5     | ) |                           |   |     |              |  |   | (5     | )
|Interest expense                              |  |                   | 14,739 |   |                           |   | 594  |              |  |   | 15,333 |  
|                                              |  |                   |        |   |                           |   |      |              |  |   |        |  
|Adjusted EBITDA                               |  | $                 | 15,518 |   |                           | $ | (62  | )            |  | $ | 15,456 |  
|                                              |  |                   |        |   |                           |   |      |              |  |   |        |  



Business Segment Data



|                                              |  |                   |         |                           |   |       |              |  |   |        
|--------------------------------------------- |  | ----------------- | ------- | ------------------------- | - | ----- | ------------ |  | - | -------
|                                              |  | RetailPortraiture |         | Institutional Portraiture |   |       | Consolidated
|For the thirteen weeks ended August 1, 2004   |  |                   |         |                           |   |       |              |  |   |        
|Sales                                         |  | $                 | 66,086  |                           | $ | 2,356 |              |  | $ | 68,442 
|Adjusted EBITDA                               |  | $                 | 4,148   |                           | $ | (62   | )            |  | $ | 4,086  
|                                              |  |                   |        
|For the thirteen weeks ended August 3, 2003   |  |                   |         |                           |   |       |              |  |   |        
|Sales                                         |  | $                 | 68,351  |                           | $ | 2,958 |              |  | $ | 71,309 
|Adjusted EBITDA                               |  | $                 | 8,011   |                           | $ | 38    |              |  | $ | 8,049  
|                                              |  |                   |        
|For the twenty-six weeks ended August 1, 2004 |  |                   |         |                           |   |       |              |  |   |        
|Sales                                         |  | $                 | 143,243 |                           | $ | 5,095 |              |  | $ | 148,338
|Adjusted EBITDA                               |  | $                 | 12,672  |                           | $ | (47   | )            |  | $ | 12,625 
|                                              |  |                   |        
|For the twenty-six weeks ended August 3, 2003 |  |                   |         |                           |   |       |              |  |   |        
|Sales                                         |  | $                 | 136,899 |                           | $ | 5,966 |              |  | $ | 142,865
|Adjusted EBITDA                               |  | $                 | 15,518  |                           | $ | (62   | )            |  | $ | 15,456 



Geographic Data as of and for the
Thirteen and Twenty-Six Weeks Ended:



|                                     |  |              |         |        |   |        |  |              |       |              |   |       |  |   |        
|------------------------------------ |  | ------------ | ------- | ------ | - | ------ |  | ------------ | ----- | ------------ | - | ----- |  | - | -------
|                                     |  | UnitedStates |         | Canada |   | Mexico |  | OtherForeign |       | Consolidated
|August 1, 2004                       |  |              |         |        |   |        |  |              |       |              |   |       |  |   |        
|Sales for the Thirteen Weeks Ended   |  | $            | 61,385  |        | $ | 4,596  |  | $            | 2,180 |              | $ | 281   |  | $ | 68,442 
|Sales for the Twenty-Six Weeks Ended |  |              | 134,123 |        |   | 9,210  |  |              | 4,454 |              |   | 551   |  |   | 148,338
|Long-lived assets                    |  |              | 112,447 |        |   | 6,417  |  |              | 3,331 |              |   | 2,019 |  |   | 124,214
|                                     |  |              |         |        |  
|August 3, 2003                       |  |              |         |        |   |        |  |              |       |              |   |       |  |   |        
|Sales for the Thirteen Weeks Ended   |  | $            | 64,878  |        | $ | 4,201  |  | $            | 2,088 |              | $ | 142   |  | $ | 71,309 
|Sales for the Twenty-Six Weeks Ended |  |              | 130,977 |        |   | 7,613  |  |              | 4,043 |              |   | 232   |  |   | 142,865
|Long-lived assets                    |  |              | 105,452 |        |   | 5,863  |  |              | 3,181 |              |   | 1,439 |  |   | 115,935



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12. GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS



On June 27, 2002, PCA LLC (the Issuer) and PCA Finance Corp. (the
Co-issuer) issued an aggregate amount of $165 million of 11.875% senior notes due 2009 (the Senior Notes), at an offering price of 98.218%. Payment of the Senior Notes is unconditionally guaranteed, jointly and severally, by
the Company and all of the Issuers domestic subsidiaries (other than the Co-issuer). All guarantor subsidiaries are wholly-owned. The following information has been presented in accordance with Securities and Exchange Commission rules.



PORTRAIT CORPORATION OF AMERICA, INC.

CONDENSED CONSOLIDATING BALANCE SHEET

August 1, 2004





|                                                        |  |                  |          |   |            |   |          |                       |  |   |                       |   |  |              |         |       |  |   |         |  |   |          |  
|------------------------------------------------------- |  | ---------------- | -------- | - | ---------- | - | -------- | --------------------- |  | - | --------------------- | - |  | ------------ | ------- | ----- |  | - | ------- |  | - | -------- | -
|                                                        |  | Parent/Guarantor |          |   | Co-issuers |   |          | GuarantorSubsidiaries |  |   | Non-guarantorEntities |   |  | Eliminations |         | Total | 
|Assets:                                                 |  |                  |          |   |            |   |          |                       |  |   |                       |   |  |              |         |       |  |   |         |  |   |          |  
|Cash and cash equivalents                               |  | $                |         |   |            | $ |         |                       |  | $ | 4,702                 |   |  | $            | 1,246   |       |  | $ |        |  | $ | 5,948    |  
|Accounts receivable                                     |  |                  |         |   |            |   |         |                       |  |   | 1,960                 |   |  |              | 189     |       |  |   |        |  |   | 2,149    |  
|Inventories                                             |  |                  |         |   |            |   |         |                       |  |   | 12,214                |   |  |              | 40      |       |  |   |        |  |   | 12,254   |  
|Deferred income taxes                                   |  |                  |         |   |            |   |         |                       |  |   | 3,124                 |   |  |              |        |       |  |   |        |  |   | 3,124    |  
|Prepaid expenses and other assets                       |  |                  |         |   |            |   |         |                       |  |   | 3,884                 |   |  |              | 390     |       |  |   |        |  |   | 4,274    |  
|                                                        |  |                  |          |   |            |   |          |                       |  |   |                       |   |  |              |         |       |  |   |         |  |   |          |  
|Total current assets                                    |  |                  |         |   |            |   |         |                       |  |   | 25,884                |   |  |              | 1,865   |       |  |   |        |  |   | 27,749   |  
|                                                        |  |                  |          |   |            |  
|Investments and intercompany receivables                |  |                  | (87,874  | ) |            |   | 61,824   |                       |  |   | (65,998               | ) |  |              | (10,016 | )     |  |   | 102,064 |  |   |         |  
|Property and equipment, net                             |  |                  |         |   |            |   |         |                       |  |   | 67,210                |   |  |              | 5,343   |       |  |   |        |  |   | 72,553   |  
|Goodwill, intangible and other assets, net              |  |                  |         |   |            |   |         |                       |  |   | 51,652                |   |  |              | 6       |       |  |   | 3       |  |   | 51,661   |  
|Deferred financing costs, net                           |  |                  | 1,510    |   |            |   | 6,162    |                       |  |   |                      |   |  |              |        |       |  |   |        |  |   | 7,672    |  
|Deferred income taxes, noncurrent                       |  |                  |         |   |            |   |         |                       |  |   | 16,650                |   |  |              |        |       |  |   |        |  |   | 16,650   |  
|                                                        |  |                  |          |   |            |   |          |                       |  |   |                       |   |  |              |         |       |  |   |         |  |   |          |  
|Total assets                                            |  | $                | (86,364  | ) |            | $ | 67,986   |                       |  | $ | 95,398                |   |  | $            | (2,802  | )     |  | $ | 102,067 |  | $ | 176,285  |  
|                                                        |  |                  |          |   |            |   |          |                       |  |   |                       |   |  |              |         |       |  |   |         |  |   |          |  
|Liabilities and shareholders equity (deficiency):      |  |                  |          |   |            |   |          |                       |  |   |                       |   |  |              |         |       |  |   |         |  |   |          |  
|Short-term borrowings                                   |  | $                |         |   |            | $ | 7,300    |                       |  | $ |                      |   |  | $            |        |       |  | $ |        |  | $ | 7,300    |  
|Current portion of long-term debt                       |  |                  |         |   |            |   |         |                       |  |   | 242                   |   |  |              |        |       |  |   |        |  |   | 242      |  
|Accounts payable - trade                                |  |                  |         |   |            |   |         |                       |  |   | 31,165                |   |  |              | 252     |       |  |   |        |  |   | 31,417   |  
|Accrued insurance                                       |  |                  |         |   |            |   |         |                       |  |   | 4,396                 |   |  |              |        |       |  |   |        |  |   | 4,396    |  
|Accrued income taxes                                    |  |                  |         |   |            |   |         |                       |  |   | 693                   |   |  |              | 2       |       |  |   |        |  |   | 695      |  
|Accrued compensation                                    |  |                  |         |   |            |   |         |                       |  |   | 4,547                 |   |  |              | 56      |       |  |   |        |  |   | 4,603    |  
|Accrued interest                                        |  |                  |         |   |            |   | 10,114   |                       |  |   | 52                    |   |  |              |        |       |  |   |        |  |   | 10,166   |  
|Other accrued liabilities                               |  |                  |         |   |            |   |         |                       |  |   | 12,017                |   |  |              | 97      |       |  |   |        |  |   | 12,114   |  
|                                                        |  |                  |          |   |            |   |          |                       |  |   |                       |   |  |              |         |       |  |   |         |  |   |          |  
|Total current liabilities                               |  |                  |         |   |            |   | 17,414   |                       |  |   | 53,112                |   |  |              | 407     |       |  |   |        |  |   | 70,933   |  
|                                                        |  |                  |          |   |            |  
|Long-term debt, less current portion                    |  |                  | 40,302   |   |            |   | 187,639  |                       |  |   |                      |   |  |              |        |       |  |   |        |  |   | 227,941  |  
|Other liabilities                                       |  |                  | 661      |   |            |   |         |                       |  |   | 4,573                 |   |  |              |        |       |  |   |        |  |   | 5,234    |  
|Series A redeemable convertible preferred stock         |  |                  | 15,000   |   |            |   |         |                       |  |   |                      |   |  |              |        |       |  |   |        |  |   | 15,000   |  
|Total shareholders equity (deficiency)                 |  |                  | (142,327 | ) |            |   | (137,067 | )                     |  |   | 37,713                |   |  |              | (3,209  | )     |  |   | 102,067 |  |   | (142,823 | )
|                                                        |  |                  |          |   |            |   |          |                       |  |   |                       |   |  |              |         |       |  |   |         |  |   |          |  
|Total liabilities and shareholders equity (deficiency) |  | $                | (86,364  | ) |            | $ | 67,986   |                       |  | $ | 95,398                |   |  | $            | (2,802  | )     |  | $ | 102,067 |  | $ | 176,285  |  
|                                                        |  |                  |          |   |            |   |          |                       |  |   |                       |   |  |              |         |       |  |   |         |  |   |          |  



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PORTRAIT CORPORATION OF AMERICA, INC.

CONDENSED CONSOLIDATING BALANCE SHEET

February 1, 2004



|                                                        |  |                  |          |   |            |   |          |                       |  |   |                           |   |  |              |        |       |  |   |         |  |   |          |  
|------------------------------------------------------- |  | ---------------- | -------- | - | ---------- | - | -------- | --------------------- |  | - | ------------------------- | - |  | ------------ | ------ | ----- |  | - | ------- |  | - | -------- | -
|                                                        |  | Parent/Guarantor |          |   | Co-issuers |   |          | GuarantorSubsidiaries |  |   | Non-guarantorSubsidiaries |   |  | Eliminations |        | Total | 
|Assets:                                                 |  |                  |          |   |            |   |          |                       |  |   |                           |   |  |              |        |       |  |   |         |  |   |          |  
|Cash and cash equivalents                               |  | $                |         |   |            | $ |         |                       |  | $ | 4,441                     |   |  | $            | 379    |       |  | $ |        |  | $ | 4,820    |  
|Accounts receivable                                     |  |                  |         |   |            |   |         |                       |  |   | 2,136                     |   |  |              | 213    |       |  |   |        |  |   | 2,349    |  
|Inventories                                             |  |                  |         |   |            |   |         |                       |  |   | 12,163                    |   |  |              | 73     |       |  |   |        |  |   | 12,236   |  
|Deferred income taxes                                   |  |                  |         |   |            |   |         |                       |  |   | 3,124                     |   |  |              |       |       |  |   |        |  |   | 3,124    |  
|Prepaid expenses and other assets                       |  |                  |         |   |            |   |         |                       |  |   | 3,702                     |   |  |              | 316    |       |  |   |        |  |   | 4,018    |  
|                                                        |  |                  |          |   |            |   |          |                       |  |   |                           |   |  |              |        |       |  |   |         |  |   |          |  
|Total current assets                                    |  |                  |         |   |            |   |         |                       |  |   | 25,566                    |   |  |              | 981    |       |  |   |        |  |   | 26,547   |  
|                                                        |  |                  |          |   |            |  
|Investments and intercompany receivables                |  |                  | (88,000  | ) |            |   | 58,458   |                       |  |   | (76,172                   | ) |  |              | (7,724 | )     |  |   | 113,438 |  |   |         |  
|Property and equipment, net                             |  |                  |         |   |            |   |         |                       |  |   | 62,843                    |   |  |              | 5,197  |       |  |   |        |  |   | 68,040   |  
|Goodwill, intangible and other assets, net              |  |                  |         |   |            |   |         |                       |  |   | 51,655                    |   |  |              | 22     |       |  |   |        |  |   | 51,677   |  
|Deferred financing costs, net                           |  |                  | 1,581    |   |            |   | 6,885    |                       |  |   |                          |   |  |              |       |       |  |   |        |  |   | 8,466    |  
|Deferred income taxes, noncurrent                       |  |                  |         |   |            |   |         |                       |  |   | 10,316                    |   |  |              |       |       |  |   |        |  |   | 10,316   |  
|                                                        |  |                  |          |   |            |   |          |                       |  |   |                           |   |  |              |        |       |  |   |         |  |   |          |  
|Total assets                                            |  | $                | (86,419  | ) |            | $ | 65,343   |                       |  | $ | 74,208                    |   |  | $            | (1,524 | )     |  | $ | 113,438 |  | $ | 165,046  |  
|                                                        |  |                  |          |   |            |   |          |                       |  |   |                           |   |  |              |        |       |  |   |         |  |   |          |  
|Liabilities and shareholders equity (deficiency):      |  |                  |          |   |            |   |          |                       |  |   |                           |   |  |              |        |       |  |   |         |  |   |          |  
|Short-term borrowings                                   |  | $                |         |   |            | $ | 10,000   |                       |  | $ |                          |   |  | $            |       |       |  | $ |        |  | $ | 10,000   |  
|Current portion of long-term debt                       |  |                  |         |   |            |   |         |                       |  |   | 279                       |   |  |              |       |       |  |   |        |  |   | 279      |  
|Accounts payable - trade                                |  |                  |         |   |            |   |         |                       |  |   | 23,425                    |   |  |              | 247    |       |  |   |        |  |   | 23,672   |  
|Accrued insurance                                       |  |                  |         |   |            |   |         |                       |  |   | 4,055                     |   |  |              |       |       |  |   |        |  |   | 4,055    |  
|Accrued income taxes                                    |  |                  |         |   |            |   |         |                       |  |   | 859                       |   |  |              | (1     | )     |  |   |        |  |   | 858      |  
|Accrued compensation                                    |  |                  |         |   |            |   |         |                       |  |   | 5,195                     |   |  |              | 75     |       |  |   |        |  |   | 5,270    |  
|Accrued interest                                        |  |                  |         |   |            |   | 10,129   |                       |  |   | 68                        |   |  |              |       |       |  |   |        |  |   | 10,197   |  
|Other accrued liabilities                               |  |                  |         |   |            |   |         |                       |  |   | 10,069                    |   |  |              | 59     |       |  |   |        |  |   | 10,128   |  
|                                                        |  |                  |          |   |            |   |          |                       |  |   |                           |   |  |              |        |       |  |   |         |  |   |          |  
|Total current liabilities                               |  |                  |         |   |            |   | 20,129   |                       |  |   | 43,950                    |   |  |              | 380    |       |  |   |        |  |   | 64,459   |  
|                                                        |  |                  |          |   |            |  
|Long-term debt, less current portion                    |  |                  | 37,088   |   |            |   | 182,407  |                       |  |   | 163                       |   |  |              |       |       |  |   |        |  |   | 219,658  |  
|Other liabilities                                       |  |                  | 628      |   |            |   |         |                       |  |   | 5,051                     |   |  |              |       |       |  |   |        |  |   | 5,679    |  
|Series A redeemable convertible preferred stock         |  |                  | 15,000   |   |            |   |         |                       |  |   |                          |   |  |              |       |       |  |   |        |  |   | 15,000   |  
|Total shareholders equity (deficiency)                 |  |                  | (139,135 | ) |            |   | (137,193 | )                     |  |   | 25,044                    |   |  |              | (1,904 | )     |  |   | 113,438 |  |   | (139,750 | )
|                                                        |  |                  |          |   |            |   |          |                       |  |   |                           |   |  |              |        |       |  |   |         |  |   |          |  
|Total liabilities and shareholders equity (deficiency) |  | $                | (86,419  | ) |            | $ | 65,343   |                       |  | $ | 74,208                    |   |  | $            | (1,524 | )     |  | $ | 113,438 |  | $ | 165,046  |  
|                                                        |  |                  |          |   |            |   |          |                       |  |   |                           |   |  |              |        |       |  |   |         |  |   |          |  



12



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##### Table of Contents

PORTRAIT CORPORATION OF AMERICA, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Thirteen Weeks Ended
August 1, 2004



|                                                                |  |                  |        |   |            |   |        |                       |  |   |                           |   |  |              |       |   |       |   |        |   |  |   |        |  
|--------------------------------------------------------------- |  | ---------------- | ------ | - | ---------- | - | ------ | --------------------- |  | - | ------------------------- | - |  | ------------ | ----- | - | ----- | - | ------ | - |  | - | ------ | -
|                                                                |  | Parent/Guarantor |        |   | Co-issuers |   |        | GuarantorSubsidiaries |  |   | Non-guarantorSubsidiaries |   |  | Eliminations |       |   | Total |  
|Sales                                                           |  | $                |       |   |            | $ |       |                       |  | $ | 65,980                    |   |  | $            | 2,462 |   |       | $ |       |   |  | $ | 68,442 |  
|Cost of sales                                                   |  |                  |       |   |            |   |       |                       |  |   | 54,785                    |   |  |              | 2,630 |   |       |   |       |   |  |   | 57,415 |  
|                                                                |  |                  |        |   |            |   |        |                       |  |   |                           |   |  |              |       |   |       |   |        |   |  |   |        |  
|Gross profit                                                    |  |                  |       |   |            |   |       |                       |  |   | 11,195                    |   |  |              | (168  | ) |       |   |       |   |  |   | 11,027 |  
|General and administrative                                      |  |                  |       |   |            |   |       |                       |  |   | 9,719                     |   |  |              | 430   |   |       |   |       |   |  |   | 10,149 |  
|                                                                |  |                  |        |   |            |   |        |                       |  |   |                           |   |  |              |       |   |       |   |        |   |  |   |        |  
|Income (loss) from operations                                   |  |                  |       |   |            |   |       |                       |  |   | 1,476                     |   |  |              | (598  | ) |       |   |       |   |  |   | 878    |  
|Interest income                                                 |  |                  |       |   |            |   |       |                       |  |   | 2                         |   |  |              |      |   |       |   |       |   |  |   | 2      |  
|Interest expense                                                |  |                  | (1,658 | ) |            |   | (6,149 | )                     |  |   | (139                      | ) |  |              |      |   |       |   |       |   |  |   | (7,946 | )
|Investment income (loss) in equity of wholly-owned subsidiaries |  |                  | (357   | ) |            |   | 5,792  |                       |  |   | (598                      | ) |  |              |      |   |       |   | (4,837 | ) |  |   |       |  
|                                                                |  |                  |        |   |            |   |        |                       |  |   |                           |   |  |              |       |   |       |   |        |   |  |   |        |  
|Income (loss) before income taxes                               |  |                  | (2,015 | ) |            |   | (357   | )                     |  |   | 741                       |   |  |              | (598  | ) |       |   | (4,837 | ) |  |   | (7,066 | )
|Income tax benefit                                              |  |                  |       |   |            |   |       |                       |  |   | 5,051                     |   |  |              |      |   |       |   |       |   |  |   | 5,051  |  
|                                                                |  |                  |        |   |            |   |        |                       |  |   |                           |   |  |              |       |   |       |   |        |   |  |   |        |  
|Net income (loss)                                               |  | $                | (2,015 | ) |            | $ | (357   | )                     |  | $ | 5,792                     |   |  | $            | (598  | ) |       | $ | (4,837 | ) |  | $ | (2,015 | )
|                                                                |  |                  |        |   |            |   |        |                       |  |   |                           |   |  |              |       |   |       |   |        |   |  |   |        |  



PORTRAIT CORPORATION
OF AMERICA, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Thirteen Weeks Ended August 3, 2003



|                                                                |  |                  |        |   |            |   |        |                       |  |   |                           |   |  |              |       |   |       |   |        |   |  |   |        |  
|--------------------------------------------------------------- |  | ---------------- | ------ | - | ---------- | - | ------ | --------------------- |  | - | ------------------------- | - |  | ------------ | ----- | - | ----- | - | ------ | - |  | - | ------ | -
|                                                                |  | Parent/Guarantor |        |   | Co-issuers |   |        | GuarantorSubsidiaries |  |   | Non-guarantorSubsidiaries |   |  | Eliminations |       |   | Total |  
|Sales                                                           |  | $                |       |   |            | $ |       |                       |  | $ | 69,079                    |   |  | $            | 2,230 |   |       | $ |       |   |  | $ | 71,309 |  
|Cost of sales                                                   |  |                  |       |   |            |   |       |                       |  |   | 53,016                    |   |  |              | 2,268 |   |       |   |       |   |  |   | 55,284 |  
|                                                                |  |                  |        |   |            |   |        |                       |  |   |                           |   |  |              |       |   |       |   |        |   |  |   |        |  
|Gross profit                                                    |  |                  |       |   |            |   |       |                       |  |   | 16,063                    |   |  |              | (38   | ) |       |   |       |   |  |   | 16,025 |  
|General and administrative                                      |  |                  |       |   |            |   |       |                       |  |   | 10,545                    |   |  |              | 312   |   |       |   |       |   |  |   | 10,857 |  
|                                                                |  |                  |        |   |            |   |        |                       |  |   |                           |   |  |              |       |   |       |   |        |   |  |   |        |  
|Income (loss) from operations                                   |  |                  |       |   |            |   |       |                       |  |   | 5,518                     |   |  |              | (350  | ) |       |   |       |   |  |   | 5,168  |  
|Interest income                                                 |  |                  |       |   |            |   |       |                       |  |   | 2                         |   |  |              | 1     |   |       |   |       |   |  |   | 3      |  
|Interest expense                                                |  |                  | (1,443 | ) |            |   | (6,212 | )                     |  |   | (4                        | ) |  |              |      |   |       |   |       |   |  |   | (7,659 | )
|Investment income (loss) in equity of wholly-owned subsidiaries |  |                  | 49     |   |            |   | 6,261  |                       |  |   | (349                      | ) |  |              |      |   |       |   | (5,961 | ) |  |   |       |  
|                                                                |  |                  |        |   |            |   |        |                       |  |   |                           |   |  |              |       |   |       |   |        |   |  |   |        |  
|Income (loss) before income taxes                               |  |                  | (1,394 | ) |            |   | 49     |                       |  |   | 5,167                     |   |  |              | (349  | ) |       |   | (5,961 | ) |  |   | (2,488 | )
|Income tax benefit                                              |  |                  |       |   |            |   |       |                       |  |   | 1,094                     |   |  |              |      |   |       |   |       |   |  |   | 1,094  |  
|                                                                |  |                  |        |   |            |   |        |                       |  |   |                           |   |  |              |       |   |       |   |        |   |  |   |        |  
|Net income (loss)                                               |  | $                | (1,394 | ) |            | $ | 49     |                       |  | $ | 6,261                     |   |  | $            | (349  | ) |       | $ | (5,961 | ) |  | $ | (1,394 | )
|                                                                |  |                  |        |   |            |   |        |                       |  |   |                           |   |  |              |       |   |       |   |        |   |  |   |        |  



13



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##### Table of Contents

PORTRAIT CORPORATION OF AMERICA, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Twenty-Six Weeks
Ended August 1, 2004



|                                                                |  |                  |        |   |            |   |         |                       |  |   |                           |   |  |              |        |   |       |   |         |   |  |   |         |  
|--------------------------------------------------------------- |  | ---------------- | ------ | - | ---------- | - | ------- | --------------------- |  | - | ------------------------- | - |  | ------------ | ------ | - | ----- | - | ------- | - |  | - | ------- | -
|                                                                |  | Parent/Guarantor |        |   | Co-issuers |   |         | GuarantorSubsidiaries |  |   | Non-guarantorSubsidiaries |   |  | Eliminations |        |   | Total |  
|Sales                                                           |  | $                |       |   |            | $ |        |                       |  | $ | 143,333                   |   |  | $            | 5,005  |   |       | $ |        |   |  | $ | 148,338 |  
|Cost of sales                                                   |  |                  |       |   |            |   |        |                       |  |   | 114,763                   |   |  |              | 5,358  |   |       |   |        |   |  |   | 120,121 |  
|                                                                |  |                  |        |   |            |   |         |                       |  |   |                           |   |  |              |        |   |       |   |         |   |  |   |         |  
|Gross profit                                                    |  |                  |       |   |            |   |        |                       |  |   | 28,570                    |   |  |              | (353   | ) |       |   |        |   |  |   | 28,217  |  
|General and administrative                                      |  |                  |       |   |            |   |        |                       |  |   | 20,840                    |   |  |              | 1,029  |   |       |   |        |   |  |   | 21,869  |  
|                                                                |  |                  |        |   |            |   |         |                       |  |   |                           |   |  |              |        |   |       |   |         |   |  |   |         |  
|Income (loss) from operations                                   |  |                  |       |   |            |   |        |                       |  |   | 7,730                     |   |  |              | (1,382 | ) |       |   |        |   |  |   | 6,348   |  
|Interest income                                                 |  |                  |       |   |            |   |        |                       |  |   | 3                         |   |  |              | 1      |   |       |   |        |   |  |   | 4       |  
|Interest expense                                                |  |                  | (3,318 | ) |            |   | (12,418 | )                     |  |   | (142                      | ) |  |              |       |   |       |   |        |   |  |   | (15,878 | )
|Investment income (loss) in equity of wholly-owned subsidiaries |  |                  | 126    |   |            |   | 12,544  |                       |  |   | (1,381                    | ) |  |              |       |   |       |   | (11,289 | ) |  |   |        |  
|                                                                |  |                  |        |   |            |   |         |                       |  |   |                           |   |  |              |        |   |       |   |         |   |  |   |         |  
|Income (loss) before income taxes                               |  |                  | (3,192 | ) |            |   | 126     |                       |  |   | 6,210                     |   |  |              | (1,381 | ) |       |   | (11,289 | ) |  |   | (9,526  | )
|Income tax benefit                                              |  |                  |       |   |            |   |        |                       |  |   | 6,334                     |   |  |              |       |   |       |   |        |   |  |   | 6,334   |  
|                                                                |  |                  |        |   |            |   |         |                       |  |   |                           |   |  |              |        |   |       |   |         |   |  |   |         |  
|Net income (loss)                                               |  | $                | (3,192 | ) |            | $ | 126     |                       |  | $ | 12,544                    |   |  | $            | (1,381 | ) |       | $ | (11,289 | ) |  | $ | (3,192  | )
|                                                                |  |                  |        |   |            |   |         |                       |  |   |                           |   |  |              |        |   |       |   |         |   |  |   |         |  



PORTRAIT CORPORATION
OF AMERICA, INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

For the Twenty-Six Weeks Ended August 3, 2003



|                                                                |  |                  |        |   |            |   |         |                       |  |   |                           |   |  |              |       |   |       |   |         |   |  |   |         |  
|--------------------------------------------------------------- |  | ---------------- | ------ | - | ---------- | - | ------- | --------------------- |  | - | ------------------------- | - |  | ------------ | ----- | - | ----- | - | ------- | - |  | - | ------- | -
|                                                                |  | Parent/Guarantor |        |   | Co-issuers |   |         | GuarantorSubsidiaries |  |   | Non-guarantorSubsidiaries |   |  | Eliminations |       |   | Total |  
|Sales                                                           |  | $                |       |   |            | $ |        |                       |  | $ | 138,590                   |   |  | $            | 4,275 |   |       | $ |        |   |  | $ | 142,865 |  
|Cost of sales                                                   |  |                  |       |   |            |   |        |                       |  |   | 106,226                   |   |  |              | 4,420 |   |       |   |        |   |  |   | 110,646 |  
|                                                                |  |                  |        |   |            |   |         |                       |  |   |                           |   |  |              |       |   |       |   |         |   |  |   |         |  
|Gross profit                                                    |  |                  |       |   |            |   |        |                       |  |   | 32,364                    |   |  |              | (145  | ) |       |   |        |   |  |   | 32,219  |  
|General and administrative                                      |  |                  |       |   |            |   |        |                       |  |   | 21,961                    |   |  |              | 409   |   |       |   |        |   |  |   | 22,370  |  
|                                                                |  |                  |        |   |            |   |         |                       |  |   |                           |   |  |              |       |   |       |   |         |   |  |   |         |  
|Income (loss) from operations                                   |  |                  |       |   |            |   |        |                       |  |   | 10,403                    |   |  |              | (554  | ) |       |   |        |   |  |   | 9,849   |  
|Interest income                                                 |  |                  |       |   |            |   |        |                       |  |   | 4                         |   |  |              | 1     |   |       |   |        |   |  |   | 5       |  
|Interest expense                                                |  |                  | (2,870 | ) |            |   | (12,455 | )                     |  |   | (8                        | ) |  |              |      |   |       |   |        |   |  |   | (15,333 | )
|Investment income (loss) in equity of wholly-owned subsidiaries |  |                  | (210   | ) |            |   | 12,245  |                       |  |   | (553                      | ) |  |              |      |   |       |   | (11,482 | ) |  |   |        |  
|                                                                |  |                  |        |   |            |   |         |                       |  |   |                           |   |  |              |       |   |       |   |         |   |  |   |         |  
|Income (loss) before income taxes                               |  |                  | (3,080 | ) |            |   | (210    | )                     |  |   | 9,846                     |   |  |              | (553  | ) |       |   | (11,482 | ) |  |   | (5,479  | )
|Income tax benefit                                              |  |                  |       |   |            |   |        |                       |  |   | 2,399                     |   |  |              |      |   |       |   |        |   |  |   | 2,399   |  
|                                                                |  |                  |        |   |            |   |         |                       |  |   |                           |   |  |              |       |   |       |   |         |   |  |   |         |  
|Net income (loss)                                               |  | $                | (3,080 | ) |            | $ | (210    | )                     |  | $ | 12,245                    |   |  | $            | (553  | ) |       | $ | (11,482 | ) |  | $ | (3,080  | )
|                                                                |  |                  |        |   |            |   |         |                       |  |   |                           |   |  |              |       |   |       |   |         |   |  |   |         |  



14



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##### Table of Contents

PORTRAIT CORPORATION OF AMERICA, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Twenty-Six Weeks
Ended August 1, 2004



|                                                    |  |                  |   |            |   |        |                       |  |   |                           |   |  |              |       |   |       |   |     |   |  |   |         |  
|--------------------------------------------------- |  | ---------------- | - | ---------- | - | ------ | --------------------- |  | - | ------------------------- | - |  | ------------ | ----- | - | ----- | - | --- | - |  | - | ------- | -
|                                                    |  | Parent/Guarantor |   | Co-issuers |   |        | GuarantorSubsidiaries |  |   | Non-guarantorSubsidiaries |   |  | Eliminations |       |   | Total |  
|Net cash provided by (used in) operating activities |  | $                |  |            | $ | (2,263 | )                     |  | $ | 10,894                    |   |  | $            | 1,260 |   |       | $ | 85  |   |  | $ | 9,976   |  
|                                                    |  |                  |   |            |   |        |                       |  |   |                           |   |  |              |       |   |       |   |     |   |  |   |         |  
|Net cash used in investing activities               |  |                  |  |            |   |       |                       |  |   | (10,607                   | ) |  |              | (610  | ) |       |   |    |   |  |   | (11,217 | )
|                                                    |  |                  |   |            |   |        |                       |  |   |                           |   |  |              |       |   |       |   |     |   |  |   |         |  
|Net cash provided by (used in) financing activities |  |                  |  |            |   | 2,263  |                       |  |   | (200                      | ) |  |              |      |   |       |   |    |   |  |   | 2,063   |  
|                                                    |  |                  |   |            |   |        |                       |  |   |                           |   |  |              |       |   |       |   |     |   |  |   |         |  
|Effect of exchange rate changes on cash             |  |                  |  |            |   |       |                       |  |   | 174                       |   |  |              | 217   |   |       |   | (85 | ) |  |   | 306     |  
|                                                    |  |                  |   |            |   |        |                       |  |   |                           |   |  |              |       |   |       |   |     |   |  |   |         |  
|Increase in cash and cash equivalents               |  |                  |  |            |   |       |                       |  |   | 261                       |   |  |              | 867   |   |       |   |    |   |  |   | 1,128   |  
|Cash and cash equivalents at beginning of period    |  |                  |  |            |   |       |                       |  |   | 4,441                     |   |  |              | 379   |   |       |   |    |   |  |   | 4,820   |  
|                                                    |  |                  |   |            |   |        |                       |  |   |                           |   |  |              |       |   |       |   |     |   |  |   |         |  
|Cash and cash equivalents at end of period          |  | $                |  |            | $ |       |                       |  | $ | 4,702                     |   |  | $            | 1,246 |   |       | $ |    |   |  | $ | 5,948   |  
|                                                    |  |                  |   |            |   |        |                       |  |   |                           |   |  |              |       |   |       |   |     |   |  |   |         |  



PORTRAIT CORPORATION
OF AMERICA, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

For the Twenty-Six Weeks Ended August 3, 2003



|                                                    |  |                  |     |   |            |   |         |                       |  |   |                           |   |  |              |       |   |       |   |     |   |  |   |         |  
|--------------------------------------------------- |  | ---------------- | --- | - | ---------- | - | ------- | --------------------- |  | - | ------------------------- | - |  | ------------ | ----- | - | ----- | - | --- | - |  | - | ------- | -
|                                                    |  | Parent/Guarantor |     |   | Co-issuers |   |         | GuarantorSubsidiaries |  |   | Non-guarantorSubsidiaries |   |  | Eliminations |       |   | Total |  
|Net cash provided by (used in) operating activities |  | $                | (10 | ) |            | $ | (18,718 | )                     |  | $ | 13,812                    |   |  | $            | 1,231 |   |       | $ | 12  |   |  | $ | (3,673  | )
|                                                    |  |                  |     |   |            |   |         |                       |  |   |                           |   |  |              |       |   |       |   |     |   |  |   |         |  
|Net cash used in investing activities               |  |                  |    |   |            |   |        |                       |  |   | (10,825                   | ) |  |              | (912  | ) |       |   |    |   |  |   | (11,737 | )
|                                                    |  |                  |     |   |            |   |         |                       |  |   |                           |   |  |              |       |   |       |   |     |   |  |   |         |  
|Net cash provided by (used in) financing activities |  |                  | 10  |   |            |   | 18,718  |                       |  |   | (45                       | ) |  |              |      |   |       |   |    |   |  |   | 18,683  |  
|                                                    |  |                  |     |   |            |   |         |                       |  |   |                           |   |  |              |       |   |       |   |     |   |  |   |         |  
|Effect of exchange rate changes on cash             |  |                  |    |   |            |   |        |                       |  |   | 179                       |   |  |              | (327  | ) |       |   | (12 | ) |  |   | (160    | )
|                                                    |  |                  |     |   |            |   |         |                       |  |   |                           |   |  |              |       |   |       |   |     |   |  |   |         |  
|Increase (decrease) in cash and cash equivalents    |  |                  |    |   |            |   |        |                       |  |   | 3,121                     |   |  |              | (8    | ) |       |   |    |   |  |   | 3,113   |  
|Cash and cash equivalents at beginning of period    |  |                  |    |   |            |   |        |                       |  |   | 2,312                     |   |  |              | 210   |   |       |   |    |   |  |   | 2,522   |  
|                                                    |  |                  |     |   |            |   |         |                       |  |   |                           |   |  |              |       |   |       |   |     |   |  |   |         |  
|Cash and cash equivalents at end of period          |  | $                |    |   |            | $ |        |                       |  | $ | 5,433                     |   |  | $            | 202   |   |       | $ |    |   |  | $ | 5,635   |  
|                                                    |  |                  |     |   |            |   |         |                       |  |   |                           |   |  |              |       |   |       |   |     |   |  |   |         |  



15



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##### Table of Contents

13. SUBSEQUENT EVENT



On August 6, 2004, PCA International, Inc., a North Carolina corporation (PCA North Carolina), merged (the Merger) with and into the Company, a
Delaware corporation, with the Company as the surviving company. The purpose of the Merger was to reincorporate PCA North Carolina from North Carolina to Delaware.



In the Merger, (i) each share of the common stock, par value of $.20 per share (the Existing Common Stock), of PCA North
Carolina was converted into one share of common stock, par value $0.01 per share (the New Common Stock), of the Company, (ii) each share of Series A Convertible Preferred Stock, par value $10 per share (the Existing Series A
Preferred Stock), of PCA North Carolina was converted into one share of Series A redeemable Convertible Preferred Stock, par value $0.01 per share (the New Series A Preferred Stock), of the Company and (iii) each outstanding option
or warrant to purchase on share of Existing Common Stock or Existing Series A Preferred Stock now constitutes an option or warrant, as the case may be, to purchase one share of New Common Stock or one share of New Series A Preferred Stock,
respectively.



16



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##### Table of Contents

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



Results of Operations



Twenty-Six Weeks Ended August 1, 2004 Compared With Twenty-Six Weeks Ended August 3, 2003.



Sales for the twenty-six weeks ended August 1, 2004 (first half of 2004) increased 3.8%, or $5.4 million, to $148.3 million from $142.9
million for the twenty-six weeks ended August 3, 2003 (first half of 2003). The increase in total sales was a result of the following:



|                    |      |   |                 |                                                                                           
|------------------- | ---- | - | --------------- | ------------------------------------------------------------------------------------------
|Amount(in millions) |      |   | Attributable to
|$                   | 11.2 |   |                 | 220 new Wal-Mart permanent portrait studios not yet included in the same studio sales base
|                    | (3.2 | ) |                 | 2.6% decrease in same studio sales in Wal-Mart permanent portrait studios                 
|                    | (2.1 | ) |                 | Decrease in sales in our Wal-Mart traveling locations due to fewer locations visited      
|                    |      |   |                 |                                                                                           
|                    | 5.9  |   |                 | Total increase attributable to our Wal-Mart business                                      
|                    | (0.5 | ) |                 | Other                                                                                     
|                    |      |   |                 |                                                                                           
|$                   | 5.4  |   |                 | Total increase in sales                                                                   
|                    |      |   |                 |                                                                                           



Gross profit for first
half of 2004 decreased 12.4% to $28.2 million from $32.2 million in first half of 2003. Gross profit as a percentage of sales was 19.0% and 22.6% in first half of 2004 and first half of 2003, respectively. The decline in gross profit as a percentage
of sales was principally attributable to the following:



|     |    |  |                                                                                                             
|---- | -- |  | ------------------------------------------------------------------------------------------------------------
|%    |    |  | Attributable to                                                                                             
|(1.5 | )% |  | Increase in retail photography and sales labor as a percentage of sales due to decrease in same studio sales
|0.6  |    |  | Decrease in portrait manufacturing cost due to an increase in productivity                                  
|(0.5 | )  |  | Increase in U.S. Wal-Mart permanent studio license fee percentage                                           
|(0.5 | )  |  | Change in our product mix                                                                                   
|(0.5 | )  |  | Increase in general studio supplies as a percentage of sales due to decrease in same studio sales           
|(0.4 | )  |  | Increase in depreciation expense due to studio expansion                                                    
|(0.3 | )  |  | Increase in marketing and advertising as a percentage of sales due to decrease in same studio sales         
|(0.3 | )  |  | Increase in life and health insurance costs for retail employees                                            
|(0.1 | )  |  | Increase in workers compensation expense pertaining to retail employees                                    
|(0.1 | )  |  | Other                                                                                                       
|     |    |  |                                                                                                             
|(3.6 | )% |  | Total decrease in gross profit percentage                                                                   
|     |    |  |                                                                                                             



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##### Table of Contents

The decrease in our gross profit percentage attributable to the change in product mix is a result of
continued favorable customer acceptance of our expanded digital and canvas product offerings, which have lower profit margins than traditional printed portraits. If customer acceptance of these new product offerings continues to increase at a
greater percentage rate than traditional printed portraits, we would expect this product mix to negatively impact our gross profit percentage. The decrease in gross profit percentage attributable to the license fee for U.S. Wal-Mart permanent
studios is the result of a contractual increase in the fee as a percentage of sales.



General and administrative expenses for first half of 2004 decreased 2.2%, or $0.5 million, to $21.9 million from $22.4 million in first half of 2003. General and administrative expenses as a percentage of sales were
14.7% and 15.7% for first half of 2004 and first half of 2003, respectively. The decrease in total general and administrative expenses was a result of the following:



|                    |      |   |                 |                                                                                                                              
|------------------- | ---- | - | --------------- | -----------------------------------------------------------------------------------------------------------------------------
|Amount(in millions) |      |   | Attributable to
|$                   | 1.1  |   |                 | Increase in workers compensation expense pertaining to general and administrative employees and in general casualty expenses
|                    | (1.1 | ) |                 | Savings related to termination of benefit plan for certain retired employees                                                 
|                    | (0.8 | ) |                 | Decrease in payroll cost as a result of decreases in commission and bonus compensation                                       
|                    | 0.4  |   |                 | Increase in foreign currency transaction loss                                                                                
|                    | (0.3 | ) |                 | Decrease in seminar costs primarily as the result of the timing of our International Photography and Sales Meeting           
|                    | 0.2  |   |                 | Increase in life and health expense insurance for general and administrative employees                                       
|                    |      |   |                 |                                                                                                                              
|$                   | (0.5 | ) |                 | Total decrease in general and administrative expenses                                                                        
|                    |      |   |                 |                                                                                                                              



Income from operations
for first half of 2004 decreased 35.5% to $6.3 million from $9.8 million in first half of 2003. Income from operations as a percentage of sales decreased to 4.3% in first half of 2004 from 6.9% in first half of 2003. This decrease reflects the net
effect of changes in gross profit and general and administrative expenses as described above.



Interest expense for first half of 2004 increased 3.6%, or $0.6 million, to $15.9 million from $15.3 million in first half of 2003 as a result of the following:



|                    |     |                 |                                                                                                                         
|------------------- | --- | --------------- | ------------------------------------------------------------------------------------------------------------------------
|Amount(in millions) |     | Attributable to
|$                   | 0.5 |                 | Increase from Parent Notes issued in June 2002 due to paid-in-kind interest increasing the principal amount of the Notes
|                    | 0.1 |                 | Increase in usage fees due to additional outstanding letters of credit                                                  
|                    |     |                 |                                                                                                                         
|$                   | 0.6 |                 | Total increase in interest expense                                                                                      
|                    |     |                 |                                                                                                                         



The weighted average
interest rate on our outstanding debt was 12.05% in first half of 2004 as compared to 11.77% in first half of 2003.



Income tax benefit for first half of 2004 and first half of 2003 was $6.3 million and $2.4 million, respectively. We anticipate taxable income for the
fiscal year ending January 30, 2005 (fiscal 2004). As a result, we recognized an income tax benefit in Q2 2004 based on our anticipated effective income tax rate of 66.5% for fiscal 2004. Our blended estimated income tax rate of 38.6% is
adversely impacted by the non-deductible portion of interest expense, $2.3 million on an annual basis, related to our high yield debt obligations resulting in a much higher effective income tax rate.



Net loss increased to $3.2 million in first half of 2004 from $3.1 million in
first half of 2003. The increase in net loss is a result of the net effect of changes in income from operations, net interest expense, and income taxes described above.



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##### Table of Contents

Thirteen Weeks Ended August 1, 2004 Compared With Thirteen Weeks Ended August 3, 2003.



As a result of the timing of the Easter holiday, the twenty-six weeks ended
August 1, 2004 and August 3, 2003 provide a more meaningful comparison than the thirteen weeks ended August 1, 2004 and August 3, 2003.



Sales for the thirteen weeks ended August 1, 2004 (Q2 2004) decreased 4.0%, or $2.9 million, to $68.4 million from $71.3 million for the
thirteen weeks ended August 3, 2003 (Q2 2003). The decrease in total sales was a result of the following:



|                    |      |   |                 |                                                                                           
|------------------- | ---- | - | --------------- | ------------------------------------------------------------------------------------------
|Amount(in millions) |      |   | Attributable to
|$                   | (6.0 | ) |                 | 9.7% decrease in same studio sales in Wal-Mart permanent portrait studios                 
|                    | 4.7  |   |                 | 220 new Wal-Mart permanent portrait studios not yet included in the same studio sales base
|                    | (1.2 | ) |                 | Decrease in sales in our Wal-Mart traveling locations due to fewer locations visited      
|                    |      |   |                 |                                                                                           
|                    | (2.5 | ) |                 | Total decrease attributable to our Wal-Mart business                                      
|                    | (0.4 | ) |                 | Other                                                                                     
|                    |      |   |                 |                                                                                           
|$                   | (2.9 | ) |                 | Total decrease in sales                                                                   
|                    |      |   |                 |                                                                                           



Same studio sales for
Q2 2004 were impacted by the timing of the Easter holiday and our revenue recognition policy to record sales when portraits are delivered to customers. The Easter holiday occurred in fiscal week ten in Q1 2004 compared to fiscal week eleven in Q1
2003. By the end of Q1 2004, 85.4% of customers photographed during the week of Easter were delivered while 12.0% were delivered by the end of Q1 2003.



Gross profit for Q2 2004 decreased 31.2% to $11.0 million from $16.0 million in Q2 2003. Gross profit as a percentage of sales was 16.1% and 22.5% in Q2
2004 and Q2 2003, respectively. The decline in gross profit as a percentage of sales was principally attributable to the following:



|     |    |  |                                                                                                             
|---- | -- |  | ------------------------------------------------------------------------------------------------------------
|%    |    |  | Attributable to                                                                                             
|(2.9 | )% |  | Increase in retail photography and sales labor as a percentage of sales due to decrease in same studio sales
|(0.7 | )  |  | Increase in general studio supplies as a percentage of sales due to decrease in same studio sales           
|(0.6 | )  |  | Change in our product mix                                                                                   
|(0.6 | )  |  | Increase in depreciation expense due to studio expansion                                                    
|(0.6 | )  |  | Increase in marketing and advertising as a percentage of sales due to decrease in same studio sales         
|(0.5 | )  |  | Increase in life and health insurance costs for retail employees                                            
|(0.4 | )  |  | Increase in U.S. Wal-Mart permanent studio license fee percentage                                           
|(0.2 | )  |  | Increase in workers compensation expense pertaining to retail employees                                    
|0.1  |    |  | Other                                                                                                       
|     |    |  |                                                                                                             
|(6.4 | )% |  | Total decrease in gross profit percentage                                                                   
|     |    |  |                                                                                                             



The decrease in our
gross profit percentage attributable to the change in product mix is a result of continued favorable customer acceptance of our expanded digital and canvas product offerings, which have lower profit margins than traditional printed portraits. If
customer acceptance of these new product offerings continues to increase at a greater percentage rate than traditional printed portraits, we would expect this product mix to negatively impact our gross profit percentage. The decrease in gross profit
percentage attributable to the license fee for U.S. Wal-Mart permanent studios is the result of a contractual increase in the fee as a percentage of sales.



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General and administrative expenses for Q2 2004 decreased 6.5%, or $0.7 million, to $10.2 million from
$10.9 million in Q2 2003. General and administrative expenses as a percentage of sales were 14.8% and 15.2% for Q2 2004 and Q2 2003, respectively. The decrease in total general and administrative expenses was a result of the following:



|                    |      |   |                 |                                                                                                                           
|------------------- | ---- | - | --------------- | --------------------------------------------------------------------------------------------------------------------------
|Amount(in millions) |      |   | Attributable to
|$                   | (1.1 | ) |                 | Savings related to termination of benefit plan for certain retired employees                                              
|                    | 0.6  |   |                 | Increase in workers compensation expense pertaining to general and administrative employees and general casualty expenses
|                    | 0.5  |   |                 | Increase in life and health expense insurance costs for general and administrative employees                              
|                    | (0.3 | ) |                 | Decrease in payroll cost as a result of decreases in commission and bonus compensation                                    
|                    | (0.2 | ) |                 | Decrease in seminar costs related to our International Photography and Sales Meeting                                      
|                    | (0.1 | ) |                 | Decrease in foreign currency transaction loss                                                                             
|                    | (0.1 | ) |                 | Other                                                                                                                     
|                    |      |   |                 |                                                                                                                           
|$                   | (0.7 | ) |                 | Total decrease in general and administrative expenses                                                                     
|                    |      |   |                 |                                                                                                                           



Income from operations
for Q2 2004 decreased 83.0% to $.9 million from $5.2 million in Q2 2003. Income from operations as a percentage of sales decreased to 1.3% in Q2 2004 from 7.2% in Q2 2003. This decrease reflects the net effect of changes in gross profit and general
and administrative expenses as described above.



Interest
expense for Q2 2004 increased 3.8%, or $0.3 million, to $7.9 million from $7.6 million in Q2 2003 as a result of the following:



|                    |     |                 |                                                                                                                         
|------------------- | --- | --------------- | ------------------------------------------------------------------------------------------------------------------------
|Amount(in millions) |     | Attributable to
|$                   | 0.3 |                 | Increase from Parent Notes issued in June 2002 due to paid in-kind interest increasing the principal amount of the Notes
|                    |     |                 |                                                                                                                         



The weighted average
interest rate on our outstanding debt was 12.09% in Q2 2004 as compared to 11.65% in Q2 2003.



Income tax benefit for Q2 2004 and Q2 2003 was $5.1 million and $1.1 million, respectively. We anticipate taxable income for the fiscal year ending January 30, 2005 (fiscal 2004). As a result, we
recognized an income tax benefit in Q2 2004 based on our anticipated effective income tax rate of 66.5% for fiscal 2004. Our blended estimated income tax rate of 38.6% is adversely impacted by the non-deductible portion of interest expense, $2.3
million on an annual basis, related to our high yield debt obligations resulting in a much higher effective income tax rate.



Net loss increased to $2.0 million in Q2 2004 from $1.4 million in Q2 2003. The increase in net loss is a result of the net effect of changes in income
from operations, net interest expense, and income taxes described above.



Liquidity and Capital Resources



Liquidity. Our principal sources of liquidity are cash flow from operations and borrowings under our senior secured credit facility. Our principal uses of cash are capital expenditures and seasonal working capital. During first half
of 2004, we used $11.2 million in cash on capital expenditures as compared to $11.7 million used during first half of 2003. Our working capital deficit increased to $43.2 million at the end of first half of 2004 as compared to $37.9 million at the
end of first half of 2003.



Due to the seasonality of our
operations, cash is generally consumed during the first three fiscal quarters and generated during the remaining fourth fiscal quarter. During the Christmas season, which falls in our fiscal fourth quarter, families emphasize the need for portraits
as gifts and/or inclusions in holiday cards, making it our busiest quarter of the fiscal year.



On June 27, 2002, we issued an aggregate amount of $165 million 11.875% senior notes due 2009 through our wholly owned subsidiaries, PCA LLC and PCA Finance Corp. Payment of the senior notes is unconditionally
guaranteed, jointly and severally, by Portrait Corporation of America, Inc. and certain of PCA LLCs domestic subsidiaries. PCA LLC also entered into a senior secured credit facility on June 27, 2002, which allows it to borrow up to $50.0
million of which $25.0 million may be standby and commercial letters of credit. As of August 1, 2004, $22.3 million was outstanding in revolving loans in addition to $14.6 million in letters of credit. We had additional credit availability of $13.1
million. As of August 1, 2004, the weighted average interest rate on our senior secured credit facility was 4.8%. The senior secured credit facility is



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##### Table of Contents

guaranteed by Portrait Corporation of America, Inc. and certain of PCA LLCs domestic subsidiaries. In addition, on
June 27, 2002, PCA LLC issued $10.0 million of 13.75% senior subordinated notes (Opco Notes) due June 27, 2010. These notes are subordinated to the senior secured credit facility and the 11.875% senior notes due 2009 and are guaranteed
by Portrait Corporation of America, Inc. and certain of PCA LLCs domestic subsidiaries. These notes bear interest payable in cash semiannually, in arrears, at a rate of 13.75% per year. On June 27, 2002, Portrait Corporation of America, Inc.
issued $30.0 million of 16.5% senior subordinated discount notes (Parent Notes) due June 27, 2010. These notes are subordinated to Portrait Corporation of America, Inc.s guarantee of the senior secured credit facility and the
11.875% senior notes due 2009. These notes bear interest at a rate of 16.5% per year. Through June 27, 2007, interest will be added to the outstanding principal amount semiannually, in arrears. After June 27, 2007, interest will be payable in cash
semiannually in arrears at the rate of 16.5%. Each of these individual debt instruments contains covenants with which we were in compliance as of August 1, 2004.



Purchases of Property and Equipment. Purchases of property and equipment were $11.2 million in first half of 2004 as
compared to $11.7 million in first half of 2003. Purchases of property and equipment were principally for equipment and studio improvements in new permanent studios, as well as for expenditures for the upgrade of certain equipment in our two
laboratory and processing facilities. Purchases of property and equipment were financed from borrowings under our senior secured credit facility. The most significant purchases of property and equipment contemplated over the next five years will be
for new studio openings. We expect to incur approximately $25 million in purchases of property and equipment in fiscal 2004 and anticipate these purchases will be funded by operating cash flow and borrowings under our senior secured credit facility.



Net Cash Provided by (Used in) Operating Activities.
Net cash provided by operating activities was $10.0 million in first half of 2004 as compared to net cash used in operating activities of $3.7 million in first half of 2003. The increase in cash provided by (used in) operating activities of $13.6
million between first half of 2004 and first half of 2003 was primarily due to the $16.5 million increase in net cash provided by changes in operating assets and liabilities, the most significant changes being the $11.5 million change in accrued
interest; the effect of changes in account receivable of $0.9 million; the effect of changes in inventories of $1.1 million; the effect of changes in trade accounts payable of $5.1 million; and offset primarily by $0.9 million from other current
liabilities and $1.2 million from accrued expenses.



Net
Cash Used in Investing Activities. Net cash used in investing activities decreased to $11.2 million in first half of 2004 from $11.7 million in first half of 2003. The primary reason for this decrease is the result of timing of new studio
openings. We opened 20 fewer new studios in first half of 2004 than we did in first half of 2003. However, we anticipate our new studio openings for fiscal 2004 to be comparable to those of fiscal 2003.



Net Cash Provided by Financing Activities. Net cash provided by
financing activities was $2.1 million in first half of 2004 as compared to $18.7 million in first half of 2003. Financing activities in first half of 2004 and first half of 2003 were primarily related to the ordinary borrowings and repayments under
our senior secured credit facility.



Critical Accounting Policies



There have been no changes to our critical accounting
policies since we filed our Annual Report on Form 10-K for the fiscal year ended February 1, 2004.



Studio Openings



We
opened 34 studios in the thirteen weeks ended August 1, 2004, which was comprised of 30 studios in the U.S., 1 in Mexico, and 3 in Germany. We opened 71 studios in the twenty-six weeks ended August 1, 2004, which was comprised of 64 studios in the
U.S., 1 in Canada, 2 in Mexico, 3 in Germany, and 1 in the U.K. Expenses related to the opening of these studios were charged to operations as incurred.



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Subsequent Events



Merger



On August 6, 2004, PCA International, Inc., a North Carolina corporation (PCA North Carolina), merged (the Merger) with and into
Portrait Corporation of America, Inc., a Delaware corporation (the Company), with the Company as the surviving company. The purpose of the Merger was to reincorporate PCA North Carolina from North Carolina to Delaware.



In the Merger, (i) each share of the common stock, par value of $.20 per
share (the Existing Common Stock), of PCA North Carolina was converted into one share of common stock, par value $0.01 per share (the New Common Stock), of the Company, (ii) each share of Series A Convertible Preferred Stock,
par value $10 per share (the Existing Series A Preferred Stock), of PCA North Carolina was converted into one share of Series A redeemable Convertible Preferred Stock, par value $0.01 per share (the New Series A Preferred
Stock), of the Company and (iii) each outstanding option or warrant to purchase on share of Existing Common Stock or Existing Series A Preferred Stock now constitutes an option or warrant, as the case may be, to purchase one share of New
Common Stock or one share of New Series A Preferred Stock, respectively.



Impact of Hurricanes on Sales Performance



Subsequent to our second quarter, we experienced an adverse effect upon our sales performance as a direct result of Hurricanes Charley and Frances. As the Southeastern U.S. comprises over 20% of our sales, we are
susceptible to sales performance declines when hurricane watches and/or warnings are posted until well after the dangerous weather associated with these storms passes through the affected area. In addition to the impact we have realized as a result
of Hurricanes Charley and Frances, we are experiencing an adverse impact on our sales performance in the Southeastern U.S. associated with the approaching Hurricane Ivan.



Forward-Looking Statements



This Quarterly Report on Form 10-Q includes forward-looking statements, as defined by federal securities laws, with respect to our financial
condition, results of operations and business and our expectations or beliefs concerning future events. Words such as, but not limited to, believe, expects, anticipates, estimates, intends,
plans, targets, likely, will, would, could, and similar expressions identify forward-looking statements.



Forward-looking statements include, but are not limited to the following:



| |  | the statements in Item 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources that we expect
to incur approximately $25 million in purchases of property and equipment in fiscal 2004 and anticipate these purchases will be funded by operating cash flow and borrowings under our senior secured credit facility (Purchases of Property
and Equipment); and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the statements in Item 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources that we
anticipate our new studio openings for fiscal 2004 to be comparable to those of fiscal 2003.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Factors that may cause actual results to differ from expected results include, among others



| |  | risks associated with substantial indebtedness, leverage, debt service and liquidity;
| | - | -------------------------------------------------------------------------------------



| |  | risks associated with our relationship with Wal-Mart, our principal business relationship;
| | - | ------------------------------------------------------------------------------------------



| |  | performance of our new studios and their future operating results;
| | - | ------------------------------------------------------------------



| |  | risks of competition from companies including, but not limited to, those currently operating in other photography markets;
| | - | --------------------------------------------------------------------------------------------------------------------------



| |  | risks associated with the domestic professional portrait photography industry; and
| | - | ----------------------------------------------------------------------------------



| |  | other risks and uncertainties affecting Portrait Corporation of America, Inc. and its subsidiaries referred to in this Form 10-Q (see especially Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations and Item 3. Quantitative and Qualitative Disclosures About Market Risk) and in our other current and periodic filings with the Securities and Exchange
Commission, all of which are difficult or impossible to predict accurately and many of which are beyond our control.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



All future written and verbal forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety
by the cautionary statements contained or referred to in this section. We undertake no obligation, and specifically decline any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Quarterly Report on Form 10-Q might not occur.



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Item 3. Quantitative and Qualitative Disclosures About Market Risk



Our exposure to market risks from changes in interest rates relates primarily to the effects that changes in interest rates have on floating rate debt. To lower or limit overall borrowing costs, from time to time, we
may enter into interest rate hedging agreements to modify the interest characteristics of portions of our outstanding debt. As of August 1, 2004, we have not entered into any interest rate hedging agreements. In addition, a 100 basis point change in
the interest rate on our senior secured credit facility would have a $0.1 million effect on loss before taxes for Q2 2004 as well as the first half of 2004 based on the average outstanding balance on our senior secured credit facility for Q2 2004 as
well as the first half of 2004.



Item 4. Controls and Procedures



The
Companys Chief Executive Officer and Chief Financial Officer (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation that the Companys disclosure controls and procedures
(as defined in the Securities and Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) were effective as of the end of the period covered by this report to ensure that information required to be disclosed by the Company in the reports filed or
submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and include controls and procedures designed to ensure that
information required to be disclosed by the Company in such reports is accumulated and communicated to the Companys management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.



There has been no change in the Companys
internal control over financial reporting (as defined in the Securities Exchange Act of 1934 Rules 13a  15(f) and 15d  15(f)) that occurred during the Companys most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over financial reporting.



It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of
any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only reasonable assurance that our controls will succeed in achieving
their stated goals under all potential future conditions.



Part II. Other Information



Item 5. Other Information



The Company is not
required to file reports with the Securities and Exchange Commission pursuant to Section 13(a) or 15d of the Securities Exchange Act of 1934, as amended, but is filing this Quarterly Report on Form 10-Q on a voluntary basis. Accordingly, it is not
an issuer as defined in Section 2(a)(7) of the Sarbanes-Oxley Act of 2002.



Item 6. Exhibits and Reports on Form 8-K



|              |  |                                                                                                                                                                                                                                                                                                                            
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) Exhibits:
|              | 
|10.1          |  | Third Amendment to Master In-Store License, dated June 29, 2004, between Meijer Stores Limited Partnership and the Company (incorporated by reference to Exhibit 10.1 of the Form 8-K filed by
the Company on July 13, 2004) (portions of this exhibit have been omitted pursuant to a request for confidential treatment).
|              | 
|10.2          |  | Fourth Amendment to Master In-Store License, dated June 29, 2004, between Meijer, Inc. and the Company (incorporated by reference to Exhibit 10.2 of the Form 8-K filed by the Company on July
13, 2004) (portions of this exhibit have been omitted pursuant to a request for confidential treatment).                    
|              | 
|10.3          |  | Amendment Number Two to Wal-Mart Master In-Store license, dated June 24, 2004, between Wal-Mart Stores, Inc. and the Company (portions of this exhibit have been omitted pursuant to a request
for confidential treatment).                                                                                                
|              | 
|10.4          |  | Second Amendment to Credit Agreement and Consent, dated July 2, 2004, among PCA LLC (Borrower), PCA International, Inc., the Domestic Subsidiaries of the Borrower party, the
lenders and Bank of America, N.A., as Agent.                                                                                               
|              | 
|31.1          |  | Section 302 Certification of Principal Executive Officer                                                                                                                                                                                                                                                                   
|              | 
|31.2          |  | Section 302 Certification of Principal Financial Officer                                                                                                                                                                                                                                                                   



(b) Reports on Form 8-K:



On July 13, 2004, the Registrant filed a Current Report on Form 8-K announcing that PCA
International, Inc., entered into amendments to its existing license agreements with each of Meijer Stores Limited Partnership and Meijer, Inc.



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SIGNATURES



Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



Portrait Corporation of America, Inc.(Registrant)By:

/s/ Barry J. FeldBarry J. FeldPresident, Chief Executive Officer,and Chairman of the Board




By:

/s/ Don NorsworthyDon NorsworthyExecutive Vice President,Chief Financial Officer and TreasurerDated:

September 14, 2004




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