10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended February 4, 2006

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 1-10204

CPI Corp.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)   1706 Washington Ave., St. Louis, Missouri (Address of principal executive offices) 43-1256674 (I.R.S. Employer Identification No.)   63103 (Zip Code)

Registrant’s telephone number, including area code: 314/231-1575

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

(Title of each class)	(Name of each exchange on which Registered)
Common Stock $.40 Par Value	New York Stock Exchange

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act	[  ] Yes	[X] No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.	[ ] Yes	[X] No

Note: Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

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.	[X] Yes	[   ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.	[X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act : (Check one): Large accelerated filer [  ] Accelerated filer [ X] Non-accelerated filer [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).[  ]

The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of the New York Stock Exchange on July 23, 2005, of $17.90, was approximately $122.0 million.

The number of shares outstanding of each of the registrant’s classes of Common Stock, as of April 13, 2006 was: Common Stock, par value $.40 - 6,309,688

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Proxy Statement relating to the Annual Meeting Of Shareholders to be held June 7, 2006 are incorporated by reference into Part III of this Report.

(THIS PAGE LEFT INTENTIONALLY BLANK)

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TABLE OF CONTENTS

PART I
Item 1.	Business	4
Item 1A.	Risk Factors	9
Item 1B.	Unresolved Staff Comments	11
Item 2.	Properties	12
Item 3.	Legal Proceedings	12
Item 4.	Submission of Matters to a Vote of Security Holders	12
PART II
Item 5.	Market for Registrant's Common Stock, Related Stockholder Matters and Issuer Purchases of Common Stock	13
Item 6.	Selected Financial Data	14
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 8.	Financial Statements and Supplemental Data	32
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	70
Item 9A.	Controls and Procedures	70
Item 9B.	Other Information	72
PART III
Item 10.	Directors and Executive Officers of the Registrant	72
Item 11.	Executive Compensation	72
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	72
Item 13.	Certain Relationships and Related Transactions	73
Item 14.	Principal Accounting Fees and Services	73
PART IV
Item 15.	Exhibits and Financial Statement Schedules	73
	Signatures	79

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The statements contained in this report, and in particular in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Act of 1995, and involve risks and uncertainties. Management wishes to caution the reader that these forward-looking statements, such as the Company’s outlook for portrait studios, future cash requirements, compliance with debt covenants, valuation allowances, reserves for charges and impairments and capital expenditures, are only predictions or expectations; actual events or results may differ materially as a result of risks facing the Company. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled “Risk Factors” beginning on page 9 of this report. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I

Item 1.Business

An Overview of the Company

CPI Corp. (“CPI”, the “Company” or “we”), a Delaware corporation formed in 1982, is a long-standing leader in the professional portrait photography of young children and families. At February 4, 2006, we operated 1,046 studios throughout the United States, Canada and Puerto Rico principally under license agreements with Sears, Roebuck and Co. (“Sears”). Our revenues of approximately $292 million in fiscal 2005 position us in the top tier of the estimated $1.2 billion pre-school photography market. Management has determined that the Company operates in one segment offering similar products and services in all locations.

We have provided professional portrait photography for Sears customers since 1959 and have been the only Sears portrait studio operator since 1986. Studios are located in all fifty states, Canada and Puerto Rico. Operations in the United States and Puerto Rico are conducted through the Company’s subsidiaries, Consumer Programs Incorporated and CPI Images, LLC, and a partnership, Texas Portraits, L.P. (owned by Consumer Programs Incorporated and another subsidiary, Consumer Programs Partner, Inc.), pursuant to a license agreement with Sears. Approximately $48.8 million of long-lived assets are used in our domestic operations as of February 4, 2006.

In Canada, we operate 114 Sears Portrait Studios through CPI Corp., which was originally organized under the laws of Ontario and which we reorganized under Nova Scotia law at the end of fiscal 2002. With 2005 sales of $22.8 million, our Canadian studios accounted for 7.8% of our revenues. Long-lived assets employed in the Company’s Canadian operations at February 4, 2006 amounted to $5.3 million.

During the second half of 2004, we made a strategic decision to exit both our Mexican and mobile photography businesses which began operating in 2002. This decision was made to allow us to focus on our Sears Portrait Studio business as well as to eliminate the significant operating dilution associated with these businesses. Further financial information on continuing and discontinued operations of the Company appears in Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and Part II, Item 8, "Financial Statements and Supplemental Data".

We operate two websites which support and complement our studio operations: searsphotos.com serves as a vehicle to archive, share portraits via email (after a portrait session), and order additional portraits and products and searsportrait.com serves as a marketing and information resource conveying details about our products and services, as well as special offers, available in our studios. In 2005, revenues from on-line sales and services were approximately $4.9 million.

The Company’s Products and Services

During 2005, the Company completed its conversion of all U.S. studios to a full digital format and began conversions to the digital format in Canada. We believe this has enabled the Company to elevate the overall customer experience, offer same-day fulfillment of portrait orders in the studio, develop a range of new product and service offerings and drive significant work-flow efficiencies, all leading to renewed differentiation in our market segment as well as the ability to tap new customer categories.

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We offer Sears Portrait Studio customers a wide range of products and portrait choices. From each session, customers may select a “package” sitting or a “custom” sitting. The package sitting includes a fixed number of portraits, all of the same pose, for a fixed, relatively low price, and an unlimited number of subjects in the portrait for a session fee of $14.99. Package customers may purchase additional portrait sheets at an additional cost. A custom sitting offers portraits by the sheet, a variety of poses and backgrounds, and an unlimited number of people in the portrait for a session fee of $14.99. Customers who enroll in the Company’s Smile Savers Plan® for a one-time fee of $29.99 pay no sitting or session fees for two years and receive additional value savings on other products. We designed this plan to promote loyalty and encourage frequent return visits.

After the customer selects a package or custom session and their preferred backgrounds, the photographer captures images of multiple poses. After the image capture portion of the portrait session is completed, the images are transferred to a monitor at a sales table where a studio associate reviews the images captured with the customer and describes the various product options. In most of our studios, which are digital, customer orders are either printed immediately in the studio and/or high-resolution images are transmitted electronically to one of our processing facilities for central fulfillment. However, in our film studios, all of which are in Canada, the customer’s order is transmitted electronically to our processing facility in Brampton, Ontario, Canada and the film is then shipped to that facility. We then complete the customer’s orders to their specifications and return them to the studio for pick-up. In the digital environment, centrally-filled orders are generally available for pick-up in less than two weeks from the time of order, while it takes approximately 2 1/2 weeks in the film environment.

Most studios can upload images captured in a Sears Portrait Studio session to our searsphotos.com website. With a code and individualized passwords, our customers can view their images from home, share them via email with friends and family, and place orders online for portraits or portrait-related gifts such as personalized t-shirts, mugs, mouse pads and more.

The Company’s Relationship with Sears

We have enjoyed a strong relationship with Sears for more than 40 years under a series of license agreements. Over that period, except in connection with Sears store closings, Sears has never terminated the operation of any of our studios. While we are materially dependent on a continuing relationship with Sears, we have no reason to believe that Sears will terminate or materially reduce the scope of our license. As a Sears licensee, we enjoy the benefits of using the Sears name, access to prime retail locations, Sears' daily cashiering and bookkeeping system, store security services and Sears’ assumption of credit card fees and credit and check authorization risks. Our customers have the convenience of using their Sears credit cards to purchase our products or services.

As of February 4, 2006, the Company operated 894 studios, which are located in 858 of full-line Sears stores and 36 Sears Essential/Grand stores in the United States under a license agreement that runs through December 31, 2008. Under this agreement, we pay Sears a license fee of 15% of total annual net sales for studios located in Sears stores. We provide all studio furniture, equipment, fixtures and advertising, and we are responsible for hiring, training and compensating our employees. We have agreed to indemnify Sears against claims arising from our operation of Sears Portrait Studios except to the extent any injury or damage is caused solely by Sears’ negligence.

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

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As of February 4, 2006, we operated 35 freestanding studios in the United States under the Sears name in locations not within a Sears store. The Company pays Sears a license fee of 7.5% of total annual net sales per studio in these locations. We pay rent and utilities at each of these locations and provide all studio furniture, equipment, fixtures, leasehold improvements and advertising. We are also responsible for hiring, training and compensating our employees.

All 114 Canadian studios operate under a license agreement with Sears Canada, Inc., a subsidiary of Sears. A three-year agreement, dated January 1, 2003, stated in Canadian dollars, which has been extended six months to June 30, 2006, governs our Canadian studio operations. We are currently in negotiations with Sears Canada with the intention of entering into a new agreement on terms mutually acceptable. For 2003, the license fee was set at the greater of $4.4 million or 13% of the first $30 million of annual net sales and 8% of annual net sales above $30 million. In 2004 and 2005, the license fee was 13% of the first $30 million of annual net sales and 8% for annual net sales greater than $30 million. The Company provides all studio furniture, equipment, fixtures and advertising and is responsible for hiring, training and compensating our employees.

In September 2004, Sears acquired 50 stores from Kmart Holding Corporation (“Kmart”). This acquisition represented a significant step in Sears’ strategy to grow its store base through off-mall expansion. In March 2005, Sears and Kmart merged into a major new retail company named Sears Holdings Corporation (“Holdings”). In February 2005, primarily as a result of the aforementioned Kmart store acquisition, Sears announced the launch of a new, mid-sized, off-mall format — Sears Essentials — to offer products integral to home and family life, such as appliances, lawn and garden, tools, home electronics, apparel and home fashions as well as convenience items such as health and beauty, pantry, household and paper products, pet supplies and toys. We opened 32 new portrait studios in Sears Essential/Grand store formats in 2005. These studios, generally occupying a smaller footprint and containing only one camera room, are fully digital from inception. In February 2006, Sears announced that it will discontinue the Sears Essential format in favor of the Sears Grand format and such stores will carry some food and media items in addition to products previously sold at Sears Essentials. Current Sears Essential stores will become Sears Grand stores and an additional 14 Sears Grand stores are planned to open in May 2006 in former Kmart sites. At the current time we have been invited to open studios in four of these new locations.

Under the terms of our existing license agreement with Sears in the United States, Sears is under no contractual obligation to invite us to open portrait studios in new Sears Essential/Grand stores or any other new Sears stores. Once we do establish a portrait studio in a new Sears store, that studio is then governed by the terms of our existing license agreement.

While Sears has not indicated to us any specific intentions to close a significant number of its existing full-line, mall-based stores that contain our portrait studios, there can be no assurance that some such closures may not occur in the future thus resulting in the concurrent closure of some of our existing portrait studios. The closure of a significant number of Sears full-line, mall-based stores that result in the closing of related portrait studios, to the extent such closures are not offset by openings of portrait studios in new Sears Essential/Grand stores could have an adverse impact on the Company’s operations.

Industry Background and Competition

Through our relationship with Sears, we believe that we have been at the forefront of developing the now highly-competitive professional portrait photography market. Although our primary portrait subjects are pre-school children, we also attract families, school-age children and adults. During the 1990’s, the mass-market professional portrait studio industry became intensely competitive in the United States, as the number of permanent studios grew from an estimated 2,555 (including 867 Sears Portrait Studios) in 1990 to approximately 4,800 (including 902 Sears Portrait Studios) in the late 90’s. As of February 4, 2006, we estimate that there were just under 5,000 permanent studios in operation in the United States. The rapid expansion of the marketplace was accompanied by highly promotional offers featuring large packages of portraits for a low, fixed price.

There are presently five major participants in the preschool portrait segment of the industry. In addition to CPI, the largest players in our industry are Portrait Corporation of America, Inc. (“PCA”), which operates principally in Wal-Mart stores, LifeTouch, which operates principally in J.C. Penney and Target stores, Olan Mills, which operates studios principally in Kmart as well as freestanding locations, and Picture People, which operates independent, mall-based locations. Independent photographers compose most of the balance of the competition though several regionally-based all-digital portrait providers have recently entered into the industry as well.

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Industry players compete generally on the basis of price, service, quality, location, product mix and convenience (including the immediate fulfillment of finished portraits at the time of the portrait sitting). Many competitors focus heavily on price and commonly feature large portrait packages at aggressively low prices in weekly mass marketing promotions. Some of these same competitors have additionally eliminated charges for the portrait capture, generally characterized as a sitting or session fee. Except for targeted promotions to new mothers, we have not followed this practice because we believe a sitting fee is justified by the professionalism of our photographers, the quality of our equipment, our commitment to service and our overall studio experience. Furthermore, while our products and services are competitively priced, they are not generally the lowest priced in the industry as we focus on offering a better value proposition. Other competitors, notably Picture People, have emphasized convenience and experience over low price and, especially, the immediate fulfillment of orders in the studio as opposed to the longer lead times of central lab fulfillment.

The industry remains in a major transformation today brought about by significant advances in digital photographic technology. New digital technologies, among other things, have made it possible to capture, manipulate, store and print high-resolution digital images in a distributed, decentralized environment. These evolving capabilities have required that industry incumbents review and adjust their business models and have also encouraged a number of new digital entrants to enter our marketplace. Likewise, the proliferation of amateur digital photography appears to be making customers more discerning and demanding and may possibly be impacting overall portrait activity/frequency.

Seasonality and Inflation

Our business is highly seasonal, with the largest volume occurring in the fourth fiscal quarter, between Thanksgiving and Christmas. For fiscal years 2005, 2004 and 2003, fourth quarter sales accounted for 35%, 35% and 34%, respectively, of total net sales for the year. In addition, in each of the last three fiscal years all of the net earnings for the year were generated in the fourth fiscal quarter. The timing of Easter, another seasonally important time for portraiture sales, can have a significant impact on the timing of recognition of sales revenues between the Company’s first and second fiscal quarters. Most of the Company’s Easter-related sales in 2005, 2004 and 2003, years with earlier Easters, were recognized as revenues, in accordance with the Company’s revenue recognition policies reflected in Note 1 in the accompanying Notes to Consolidated Financial Statements, in the first fiscal quarter. The moderate rate of inflation over the past three years has not had a significant effect on the Company’s revenues and profitability.

Suppliers

To ensure consistent, high quality finished portraits, we purchase photographic paper and processing chemistry from three major manufacturers. Eastman Kodak provides photographic paper for all central lab fulfillment for Sears Portrait Studios pursuant to an agreement in effect through March 31, 2006 which, subsequent to fiscal 2005 year-end, has been extended until March 31, 2008. Dye sublimation paper used for proof sheets, portrait collages and full portrait orders delivered at the end of a sitting in digital studios is provided primarily by Sony, and we purchase processing chemistry from Fuji-Hunt. We purchase camera and lens components, monitors, computers, printers and other equipment and materials from a number of leading suppliers.

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

In 2003 and to a lesser extent in 2004 following our U.S. studio computer hardware and printer upgrade, aging analog film equipment in our studios created difficulties both in repairing and acquiring replacement parts. The above-mentioned studio hardware upgrade alleviated problems with computers and printers and the conversion to digital format for most studios has diminished the support challenges for film cameras caused by scarce replacement parts and a lack of outside maintenance resources. For remaining film locations, all in Canada, we have internalized most repairs and have built an internal knowledge base and repair capability to support our studio equipment. Additionally, retirements of analog studio equipment have added to our store of replacement parts. The computer and digital equipment used by us in the digital format consists of standard components that are readily available from multiple suppliers.

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CPI has successfully converted 100% of our U.S. studios and piloted 8% of the Canadian studios to the full digital platform utilizing the software of a single vendor for our studio photography and manufacturing fulfillment digital systems. Our contract with our software vendor allows CPI to scale the use of the software as necessary to support all of our current and prospective studios and labs. Our vendor successfully met our peak season 2005 volume requirements while we continue working with them to improve workflow efficiency.

Intellectual Property

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

The Company’s Employees

As of February 4, 2006, we had approximately 7,100 employees, including approximately 4,400 part-time and temporary employees.

The Company Website and Periodic Reports

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

Environmental Regulation

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

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Item 1A.Risk Factors

We wish to caution readers that in addition to the important factors described elsewhere in this Annual Report on Form 10-K, the following important factors, among others, sometimes have affected, or in the future could affect, our actual results and could cause our actual consolidated results during fiscal 2006, and beyond, to differ materially from those expressed in any forward-looking statements made by us or on our behalf.

We are materially dependent upon Sears.

Substantially all of our sales for fiscal 2005 were derived from sales in Sears stores. Therefore, we are materially dependent upon our relationship with Sears, the continued goodwill of Sears and the integrity of the Sears brand name in the retail marketplace. Any deterioration in our Sears relationship could have a material adverse effect on us.

Because we represent only a small fraction of Sears’ revenues, any deterioration of our relationship with Sears would have a far greater effect on us than on Sears.

In addition, our competitive posture could be weakened with negative changes in Sears’ competitive posture.

Our business practices and operations need to be acceptable to Sears.

Because of the importance of our Sears relationship to us, our business practices and procedures must at all times be acceptable to Sears. In addition, under our license agreements Sears has substantial contractual rights, which it can exercise in a manner that can have a material adverse effect on us. Consequently, in the future, we may make changes to our business practices and procedures, including with regards to advertising and promotions, pricing, product offerings, studio facilities, technology, management and employment practices in response to Sears’ requests that would not be in our best interests and could materially and adversely affect our sales, costs, margins, business development or other aspects of our business.

Sears or Sears Canada may terminate, breach, otherwise limit or increase our expenses under our license agreements.

Our Sears permanent studios in the U.S. and Canada are operated pursuant to license agreements. As of February 4, 2006, our license agreements with Sears and Sears Canada have the following expiration dates: for our U.S. and Puerto Rico Sears studios, December 2008; and for our Canadian Sears studios, June 2006. These agreements are more fully described in “Item 1. The Company’s Relationship with Sears.”

Sears is under no obligation to renew these licenses. Sears may also increase the license fees we pay under our license agreements upon renewal of the agreements. In addition, license fees under our Canadian agreement increase periodically if certain sales or other conditions are met. We do not have the contractual right to close any poorly performing locations without Sears’ consent. In addition, our license agreements do not prohibit Sears from selling many of the tangible goods we sell, or from processing film or digital photos, in other departments within its stores. Furthermore, there is always the risk that Sears might breach one or both of our license agreements. The loss or breach of the licenses from Sears could have a material adverse effect on us. An adverse change in any other aspects of our business relationship with Sears, including the reduction of the number of studios operated pursuant to such arrangements or a decision by Sears to license studios to other persons could have a material adverse effect on us. See “Item 1. The Company’s Relationship with Sears.”

An economic downturn, a reduction in consumer spending or decreased customer traffic in our host stores could materially adversely affect our business.

Portrait photography services may be affected by negative trends in the general economy. Any reduction in consumer confidence or disposable income in general may affect companies in this specialty retail service industry. In addition, our portrait studios in Sears stores are somewhat dependent on customer traffic generated by the host stores. The host stores, as part of the retail industry, may be affected by a downturn in the economy and a decrease in discretionary income of potential customers. A reduction in host store traffic could adversely affect us.

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If our key suppliers become unable to continue to provide us supplies under our current contract, we will need to obtain an alternative source of supplies. If we enter into an agreement to obtain such supplies at less desirable terms, our financial condition and results of operations could be materially adversely affected.

As described in “Item 1. Suppliers,” the Company has an agreement with Eastman Kodak for photographic paper. It also purchases dye sublimation paper used for on-site printing primarily from Sony and processing chemistry from Fuji-Hunt. Additionally, the Company utilizes the software of a single vendor for our studio photography and manufacturing fulfillment for digital systems.   If these companies become unable to continue to provide us supplies or services under our current arrangements or if prices are increased dramatically, we will need to obtain alternative sources of supplies or services.

Although management believes that the available alternative sources of supplies are adequate, there can be no assurance we would be able to obtain such supplies at the same or similar terms to those we currently have in place. If we enter into an agreement to obtain such supplies at less desirable terms, our financial condition and results of operations could be materially adversely affected.

Should the Company be forced to replace its digital software vendor, related costs could increase and production could be disrupted for a period of time, which could have a material adverse impact on the results of operations.

Our inability to remain competitive could have a detrimental impact on our results of operations.

The professional portrait photography industry is highly competitive. Certain of our competitors and potential competitors benefit from strong name recognition and have a strategy focused principally on lower prices. Moreover, evolving technology and business relationships may make it easier and cheaper for our competitors and potential competitors to develop products or services similar to ours or to sell competing products or services in our markets.

The companies in our industry compete on the basis of price, service, quality, location, product mix and convenience of retail distribution channel. With conversion to digital technology, we have implemented various offer changes and targeted price increases. These changes have contributed to a reduced level of customer sittings, which has been more than offset by increased order averages. If the Company cannot continue to provide perceived value for our customers, this could have a material adverse impact on sales and profitability. To compete successfully, we must continue to remain competitive in areas of price, service, quality, location, product mix and convenience of distribution.

If we lose our key personnel, our business may be adversely affected.

Our continued success depends upon, to a large extent, the efforts and abilities of our key employees, particularly our executive management team. We cannot assure you of the continued employment of any members of management. Competition for qualified management personnel is intense. The loss of the services of our key employees or the failure to retain qualified employees when needed could materially adversely affect us.

Our fourth quarter sales and income are disproportionately high and we are vulnerable to downturns in consumer holiday spending that can adversely affect our business.

Our business is highly seasonal, with the largest volume occurring in the fourth fiscal quarter, between Thanksgiving and Christmas. The fourth quarters in fiscal 2005 and 2004 have accounted for approximately 35% of our annual sales. As a result, fourth quarter operating results significantly impact annual operating results. Our fourth quarter operating results may fluctuate significantly based on many factors, including holiday spending patterns and weather conditions.

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A significant increase in piracy of our photographs could materially adversely affect our business, financial condition or results of operations.

We rely on copyright laws to protect our proprietary rights in our portrait photographs. However, our ability to prevent piracy and enforce our proprietary rights in our photographs is limited. We are aware that unauthorized copying of photographs occurs within our industry. A significant increase in the frequency of unauthorized copying of our photographs could materially adversely affect our business, financial condition and results of operations by reducing revenues from photograph sales.

Any disruption in our manufacturing process could have a material adverse impact on our business.

We are dependent upon the efficient operation of our portrait processing facilities to maintain our portrait quality, timeliness of delivery and low cost operation. Our U.S. full digital platform utilizes the software of a single vendor for our studio photography and manufacturing fulfillment digital systems.   Any material delay in the vendor’s networking environment, coupled with a failure to identify and implement alternative solutions, could have an adverse effect upon the operations of the business. Additionally, should this vendor no longer operate, the Company may be forced to find another source of this support, which could be more costly and could delay production for a period of time. Although on-site printing is an available alternative to central printing, it currently would be difficult and costly for on-site printing to replace central fulfillment during the holiday busy season. Any disruption of our processing systems for any reason could adversely impact our business, financial condition and results of operations.

Widespread equipment failure in our portrait studios could materially adversely impact the financial condition or results of operations.

The Company has recently installed new digital equipment in all U.S. studios which has operated effectively throughout the 2005 holiday season and is beginning to install such equipment in Canadian studios. Should there be a widespread defect in such equipment that prevents the use of such equipment, production could be delayed for a period of time. This could materially adversely impact the financial conditions and results of operations of the Company.

The agreements governing our debt impose restrictions on our business.

Our credit agreement contains covenants and requires financial ratios and tests, which impose restrictions on our business. These covenants, ratios and tests are summarized in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” Our ability to comply with these restrictions may be affected by events beyond our control, including, but not limited to, prevailing economic, financial and industry conditions. The breach of any of these covenants or restrictions, as well as any failure to make a payment of interest or principal when due, could result in a default under the credit agreement. Such a default would permit our lenders to declare all amounts borrowed from them to be due and payable, together with accrued and unpaid interest, and the ability to borrow under this agreement could be terminated. If we are unable to repay debt to our lenders, these lenders could proceed against the collateral securing that debt.

Item 1B.Unresolved Staff Comments

Not applicable.

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Item 2.Properties

The following table sets forth certain information concerning the Company’s principal facilities:

		APPROXIMATE AREA			OWNERSHIP
LOCATION		IN SQUARE FEET		PRIMARY USES	OR LEASE
St. Louis, Missouri			270,000	Administration and Photo processing	Owned
St. Louis, Missouri			155,000	Parking Lots	Owned
St. Louis, Missouri			56,000	Warehousing	Leased	(1)
Brampton, Ontario			40,000	Administration, Warehousing and Photo processing	Owned
Thomaston, Connecticut			25,000	Administration and Photo processing	Owned
(1)	Lease term expires on June 30, 2008

As of February 4, 2006, the Company operated 894 portrait studios in Sears stores in the United States pursuant to the license agreements with Sears and 114 studios in Canada under a separate license agreement with Sears Canada, Inc. The Company pays Sears a license fee based on total annual net sales. This license fee covers the Company’s use of space in the Sears stores, the use of Sears’ name and related intellectual property, and all services provided by Sears. No separate amounts are paid to Sears expressly for the use of space. The Company operates 35 portrait studios in shopping centers that do not have Sears stores, which are generally leased for at least three years with some having renewal options. See Part I, Item 1. "BUSINESS, The Company’s Relationship with Sears" for more information on the Sears license agreements.

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

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

Item 3.Legal Proceedings

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

Item 4.Submission of Matters to a Vote of Security Holders

No matters were submitted to stockholders for a vote during the fourth quarter of fiscal year 2005.

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PART II

Item 5. Market for Registrant's Common Stock, Related Stockholder Matters and Issuer Purchases of Common Stock

Price Range of Common Stock and Dividends

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

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

FISCAL YEAR 2005
(ending February 4, 2006)	HIGH		LOW		DIVIDEND
First Quarter	$	16.75	$	14.80	$	0.16
Second Quarter		18.88		16.22		0.16
Third Quarter		18.31		17.15		0.16
Fourth Quarter		19.90		17.40		0.16
FISCAL YEAR 2004
(ending February 5, 2005)		HIGH		LOW		DIVIDEND
First Quarter	$	22.25	$	15.34	$	0.16
Second Quarter		16.15		12.89		0.16
Third Quarter		13.42		11.40		0.16
Fourth Quarter		15.61		13.24		0.16

Shareholders of Record

As of April 13, 2006, the market price of the Company's common stock was $20.33 per share with 6,309,688 shares outstanding and 1,481 holders of record.

Dividends

The Company intends, from time to time, to pay cash dividends on its common stock, as its Board of Directors deems appropriate, after consideration of the Company's operating results, financial condition, cash requirements, restrictions imposed by credit agreements, general business conditions and such other factors as the Board of Directors deems relevant.

Issuer Repurchases of Equity Securities

The Company did not repurchase any equity securities during the fourth quarter of fiscal year 2005.  However, effective December 21, 2005, the Company’s Board of Directors authorized the repurchase of up to 1,500,000 shares of its common stock through a Dutch Auction self-tender offer. On February 8, 2006, the Company purchased 1,658,607 shares at $19.50 per share or a total consideration of approximately $32.4 million as a result of the tender offer, which consisted of the 1,500,000 shares CPI offered to purchase in the tender offer and 158,607 shares purchased pursuant to CPI’s right to purchase up to an additional 2% of the outstanding shares as of February 1, 2006.

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Item 6. Selected Financial Data

The summary historical consolidated financial data as of and for each of the fiscal years in the five-year period ended February 4, 2006 set forth below have been derived from the Company’s audited consolidated financial statements. The information presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included herein.

thousands except per share data
	2005			2004			2003			2002			2001
STATEMENT OF OPERATIONS (1)
Net sales	$	291,984		$	281,865		$	299,044		$	308,625		$	319,168
Cost of sales		35,129			36,899			40,070			40,618			43,280
Selling, general and administrative expenses		222,094			219,381			227,251			228,470			233,909
Depreciation and amortization		19,952			16,377			16,793			20,042			23,628
Other charges and impairments (2)		2,767			15,679			5,515			6,042			5,640
Income (loss) from continuing operations		12,042			(6,471	)		9,415			13,453			12,711
Interest expense, net		983			954			1,240			1,569			2,451
Impairment and related obligations of preferred secuirty interest (3)		-			9,789			-			-			-
Loss from debt extinguishment (4)		529			-			-			-			-
Other income, net (5)		247			263			850			111			303
Income tax expense (benefit)		4,388			(2,189	)		3,183			4,212			3,540
Net earnings (loss) from continuing operations		6,389			(14,762	)		5,842			7,783			7,023
Net loss from discontinued operations (1)		-			(3,746	)		(4,624	)		(1,243	)		(482	)
Net earnings (loss)	$	6,389		$	(18,508	)	$	1,218		$	6,540		$	6,541
SHARE AND PER SHARE DATA (1)
Net earnings (loss) from continuing operations - diluted (6)	$	0.81		$	(1.87	)	$	0.72		$	0.96		$	0.88
Net earnings (loss) from continuing operations - basic (6)		0.81			(1.87	)		0.72			0.97			0.90
Net earnings (loss) - diluted		0.81			(2.35	)		0.15			0.80			0.82
Net earnings (loss) - basic		0.81			(2.35	)		0.15			0.81			0.84
Dividends	$	0.64		$	0.64		$	0.60		$	0.56		$	0.56
Average shares outstanding - diluted		7,881			7,888			8,148			8,086			7,939
Average shares outstanding - basic		7,854			7,888			8,082			8,040			7,841
CASH FLOW DATA (continuing operations only)
Net cash provided by operating activities	$	18,697		$	16,477		$	32,118		$	29,386		$	29,305
Net cash used in investing activities	$	(17,633	)	$	(6,597	)	$	(14,840	)	$	(6,131	)	$	(12,936	)
Net cash used in financing activities (6)	$	(1,223	)	$	(24,827	)	$	(13,929	)	$	(10,644	)	$	(7,522	)
Capital expenditures (9)	$	20,235		$	15,157		$	19,405		$	8,878		$	14,964

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Item 6. Selected Consolidated Financial Data (continued)

thousands
	2005		2004		2003		2002		2001
BALANCE SHEET
Cash and cash equivalents	$	34,269	$	33,883	$	51,011	$	57,922	$	46,555
Current assets		69,629		72,868		93,215		96,522		82,804
Net fixed assets		41,282		41,658		52,735		47,502		63,708
Assets of business transferred under contractual arrangements (7)		-		-		8,975		10,041		11,587
Assets of supplemental retirement plan (8)		3,706		6,141		11,491		13,761		14,406
Other assets		9,044		14,433		2,052		11,464		9,056
Total assets		123,661		135,100		168,468		179,290		181,561
Current liabilities		58,264		71,761		68,799		66,490		65,982
Other liabilities		23,540		23,403		22,254		24,501		16,896
Long-term debt, less current maturities		15,747		17,050		25,589		34,116		42,639
Stockholders' equity (6)		26,110		22,886		51,826		54,183		56,044

(1)   Following are business areas classified as discontinued operations and for which prior year’s consolidated financial statements were reclassified to reflect these changes:

-   In 2004, mobile photography operations and the Mexican Portrait Studio business

-   In 2002, the former Technology Development segment

(2)Other charges and impairments:

thousands	2005			2004		2003		2002		2001
Accruals related to accelerated vesting of supplemental retirement
plan benefits and guaranteed bonuses for 2004 (a)	$	-		$	3,656	$	-	$	-	$	-
Impairment charges (b)		567			6,516		-		4,171		-
Reserves for severance and related costs (c )		2,546			3,430		1,346		889		5,640
Pension plan curtailment (d)		-			-		2,385		-		-
Consent solicitation costs (e)		-			816		1,663		-		-
Production facility closure (f)		-			-		121		982		-
Contract terminations and settlements (g)		(346	)		1,261		-		-		-
	$	2,767		$	15,679	$	5,515	$	6,042	$	5,640

(a)	Consists of costs related to accelerated vesting of executive benefits and bonuses.
(b)	Consists of 2002 and 2004 write-offs and write-downs of certain previously capitalized technology costs and 2005 parts and film
	inventory and other asset write-offs resulting from the conversion from an analog film environment to the full digital format.
(c)	Consists principally of expenses and related costs for employee severance, retirements and repositioning.
(d)	Consists of the charge related to the freeze of future benefit accruals under the pension plan.
(e)	Consists of professional fees relative to the proxy consent solicitation.
(f)	Consists of expenses related to employee severance and retirement, asset abandonment write-offs and a remaining lease
	obligation accrual.
(g)	Consists of expenses related to non-refundable loan commitment fees as well as charges related to early contract
	terminations and settlements with certain of the Company's vendors and consultants.

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Item 6. Selected Consolidated Financial Data (continued)

(3)	In 2004, the Company recorded a $7.7 million valuation reserve against the carrying value of its preferred security interest and $2.1 million of additional accrued
	lease liability obligations relating to its lease guarantees on certain of Prints Plus' retail stores.
(4)	Consists of a make-whole fee totaling $457,000 and the write-off of unamortized fees, both related to the early redemption of the Company's Senior Notes in
	November, 2005.
(5)	In 2003, the Company recognized $503,000 in other income related to a liquidating distribution of the Company's membership interest in General American Life
	Insurance Co. ("GA") when GA's stock was sold to MetLife and $118,000 in other income related to death benefits received from a company-owned life insurance
	policy on a former executive.   In 2001, the Company, recognized $218,000 in other income related to the termination of a merger agreement.
(6)	The Company recorded the repurchase of:
	-	406,780 shares of common stock for $6.0 million in 2004 and
	-	54,200 shares of common stock for $935,000 in 2003.
(7)	Assets of business transferred under contractual arrangements resulted from the sale of the discontinued Wall Décor operation.  As a result of the deteriorating
	financial performance of Prints Plus and its subsequent bankruptcy declaration, in 2004 certain assets related to the Company's preferred security interest in
	Prints Plus totaling $7.7 million were written off and the Company’s revolving line of credit to Prints Plus was repaid in full and then terminated.
(8)	Represents a benefit trust established in 2000 to fund supplemental retirement benefits for certain current and former executives.
(9)	2003 includes $7.3 million representing an accrued commitment for computer equipment and peripherals that were purchased in the fourth quarter of 2003 and
	paid for in 2004.

Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to provide the reader of the financial statements with a narrative on the Company’s results of operations, financial position and liquidity, significant accounting policies and critical estimates, and the future impact of accounting standards that have been issued but are not yet effective. Management’s Discussion and Analysis is presented in the following sections: Executive Overview; Results of Operations; Liquidity and Capital Resources; and Accounting Pronouncements and Policies. You should read Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the consolidated financial statements and related notes thereto contained elsewhere in this document.

Unless otherwise noted, 2005 and 2004 results reflect a 52-week period while 2003 results reflect a 53-week period. All references to earnings per share relate to diluted earnings per common share.

EXECUTIVE OVERVIEW

The Company’s Operations

CPI Corp. is a long-standing leader, based on sittings and related revenues, in the professional portrait photography of young children and families. From the single studio opened by our predecessor company in 1942, we have grown to 1,046 studios throughout the United States, Canada and Puerto Rico principally under license agreements with Sears. We have provided professional portrait photography for Sears customers since 1959 and have been the only Sears portrait studio operator since 1986.

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As of the end of the last three fiscal years, the Company’s studio counts were:

	2005		2004		2003
United States and Puerto Rico:
Within full-line Sears stores		858		860		854
Locations not within Sears stores		38		40		48
Within Sears Essential/Grand stores		36		4		-
Canada		114		117		119
Total		1,046		1,021		1,021

During 2005, the Company completed its transition of all its U.S. studios to full digital technology and opened new, all-digital portrait studios in 32 Sears Essential and/or Sears Grand formats, bringing the total of such new studios to 36.

Competitive Factors/Trends/Challenges

As previously discussed, the mass-market professional portrait studio industry is facing challenging and difficult industry conditions. These include relatively slow category growth, industry sitting declines, heavy promotional activity, the heightened efforts of relatively new category competitors and the rapid evolution of both amateur and professional digital technology.

The competitive and other external factors cited above, coupled with customer service issues over the past several years due to technology and support challenges caused in part by an aging studio infrastructure and certain other operational issues, resulted in a declining sittings trend in our Sears Portrait Studios. The move to a digital format has significantly eliminated the impact of the aging studio infrastructure within the U.S., but aggressive competitor pricing as well as our own offer strategies continues to put pressure on the level of sittings. Our sittings volumes declined by nearly 25% from 2003 to 2005.

Although a portion of the sittings decline has been offset by increases in our average customer sales, overall net sales over the same time period have declined from $299.0 million in 2003 to $292.0 million in 2005, reaching a low level of $281.9 million in 2004 before recovery to the aforementioned $292.0 million in 2005.

On March 24, 2004, the Knightspoint Group successfully completed their consent solicitation resulting in, among other things, a change of control of the Company’s then-existing directors. Shortly thereafter, the Company’s new Board conducted a comprehensive review of the Company’s operations and competitive position and formulated a range of new operating initiatives for the Company. As a result of that review, the Company has taken the following actions, among others, in 2004, in an effort to improve operations, increase customer satisfaction and retention and reverse the declining trend in sales:

·   Exited the Mexican and mobile photography businesses that were draining scarce managerial and financial resources from the core Sears Portrait Studio business.

·   Terminated a major internal software development project intended to be the foundation for the Company’s ultimate transition to a digital format and instead pursued outsourcing options with third-party vendors.

·   Upgraded computer hardware in all U.S. studios, improving the performance of legacy DOS-based systems while preparing the way for a transition to digital.

·   Restored coverage, training and retention hours in the studios that had been reduced in 2003 in response to declining sales.

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·   Raised prices and tapped more efficient advertising vehicles.

·   Introduced several new products that contributed approximately $1 million in busy season sales.

·   Converted 128 of our U.S. studios to full digital format prior to the 2004 busy season.

During 2005, the following actions were taken to further the objectives referred to above:

·   Successfully converted all of the remaining U.S. studios to full digital format.

·   Leveraged our recently-installed digital technology to provide customers greater variety in posing and effects, speedier (including same-day) fulfillment of portrait orders, a range of new product and service options, and an improved overall experience.

·   Implemented on-going extensive changes in our marketing program designed to transition to everyday value, reduce dependence on coupons and promotional activity and prepare the way for a repositioning of the Sears Portrait Studio brand in conjunction with the completion of the digital rollout. At the same time, we have broadly tested various offer changes, including higher prices, designed to reflect the differentiated value proposition offered in our digital studios.

·   Implemented various field initiatives to drive improvement in quality, customer service, productivity and customer retention.

The foregoing initiatives have shown tangible benefits. Late in the third quarter of 2004, we experienced a partial reversal in the negative sales performance we reported in the first half of the year, and for fiscal 2005 we reported a 3.6% increase in sales from 2004, the first such increase since 2000. And more importantly, income from operations increased to $12.0 million in 2005 as compared to a loss of $6.5 million in 2004.

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RESULTS OF OPERATIONS

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

thousands, except share and per share data	2005			2004			2003
Net sales	$	291,984		$	281,865		$	299,044
Cost and expenses:
Cost of sales (exclusive of depreciation and amortization shown below)		35,129			36,899			40,070
Cost of sales as a percentage of net sales		12.0	%		13.1	%		13.4	%
Gross margin as a percentage of net sales		88.0	%		86.9	%		86.6	%
Selling, general and administrative expenses		222,094			219,381			227,251
Selling, general and administrative expenses as a percentage of net sales		76.1	%		77.8	%		76.0	%
Depreciation and amortization		19,952			16,377			16,793
Other charges and impairments		2,767			15,679			5,515
		279,942			288,336			289,629
Income (loss) from continuing operations		12,042			(6,471	)		9,415
Interest expense		1,680			2,180			2,949
Interest income		697			1,226			1,709
Impairment and related obligations of preferred security interest		-			9,789			-
Loss from debt extinguishment		529			-			-
Other income, net		247			263			850
Earnings (loss) from continuing operations before income tax expense (benefit)		10,777			(16,951	)		9,025
Income tax expense (benefit)		4,388			(2,189	)		3,183
Net earnings (loss) from continuing operations		6,389			(14,762	)		5,842
Net loss from discontinued operations, net of income tax benefit of $2,201 in 2004 and $2,518 in 2003		-			(3,746	)		(4,624	)
NET EARNINGS (LOSS)	$	6,389		$	(18,508	)	$	1,218
Net earnings (loss) per share - diluted	$	0.81		$	(2.35	)	$	0.15

Net sales totaled $292.0 million, $281.9 million and $299.0 million in 2005, 2004 and 2003, respectively.

·   Net sales for 2005 increased $10.1 million, or 3.6%, to $292.0 million from the $281.9 million reported in 2004. The overall increase in sales is due to a 22.9% increase in average sales per customer sitting, partially offset by a 16.0% year-over-year decline in sittings.

The Company believes its increase in average sale per customer sitting in 2005 is principally attributable to its customers’ positive response to the differentiated value proposition created in the new digital studio environment. This has resulted in an expanded assortment and related increased sales of higher-value, new and specialty products and services, as well as additional on-site printing and digital enhancement fees.

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The Company attributes the sittings decline to several internal and external factors. The Company’s marketing program has undergone extensive changes designed to transition to everyday value, reduce dependence on coupons and promotional activity and prepare the way for a significant repositioning of the Sears Portrait Studio brand in conjunction with the completion of the digital rollout. At the same time, the Company has broadly tested various offer changes, including higher prices, designed to reflect the differentiated value proposition offered in its digital studios. While positively impacting average transaction size, these offer changes have resulted in the loss of more price-sensitive customers to lower-priced competitors. The Company also believes the continuing proliferation of amateur digital photography may be reducing portrait activity, especially during periods such as the Company’s third quarter, which are marked by the absence of significant holidays. Finally, sittings were also negatively impacted by the severe hurricane season that principally affected studios in Alabama, Florida, Louisiana, Mississippi and Texas.

·   Net sales in 2004 declined $17.1 million, or 6%, to $281.9 million compared to the $299.0 million reported in 2003. This decline in sales is attributable to a continued decline in customer sittings and the absence of the additional week of sales that was reported in 2003, a 53-week fiscal year, both partially offset by an increase in the average sales per customer sitting. Average sales per customer sitting in 2004 increased approximately 5% while customer sittings declined 11%, both compared to the 2003 fiscal year.

The Company experienced a nearly 12% sales decline during the first half of 2004 based on both sittings and average sale declines. Through the first half of 2004, the average sale per customer sitting was down 4% compared to the first half of 2003 due largely to increased discounting of offers in response to competitive pressures. The negative first half average sales trend was totally reversed in the third quarter of 2004 when for that quarter the Company reported average sales per customer sitting increased 6% compared to the comparable quarter in 2003. As a result, the Company’s negative sales trend moderated to just over a 2% decline. During the fourth quarter of 2004, the Company benefited from an approximate 14% increase in its average sale per customer sitting.

The Company believes the reversal in the negative sales trends experienced from late 2003 into 2004 is largely attributable to the impact of theinitiatives undertaken in 2004 under the direction of the new Board of Directors as outlined in the Executive Overview under "Competitive Factors/Trends/Challenges".

Costs and expenses were $279.9 million in 2005, compared with $288.3 million in 2004 and $289.6 million in 2003.

·   Cost of sales, excluding depreciation and amortization expense, as a percentage of net sales was 12.0% in 2005 compared to 13.1% in 2004 and 13.4% in 2003. Correspondingly, gross margin rates were 88.0% in 2005, 86.9% in 2004 and 86.6% in 2003.

The decrease in cost of sales from 2004 to 2005, despite higher sales, resulted primarily from lower overall production levels due to the decline in sittings and savings on film and shipping costs that resulted directly from the digital conversion. In addition, the Company incurred lower workers compensation costs as a result of more favorable loss experience for the year. These decreases were partially offset by increased costs associated with the production and shipping of new and specialty products not previously available in the analog film environment and increased third party production costs related to outsourced greeting card production in 2005.

The decrease in cost of sales from 2003 to 2004 is primarily the result of reduced levels of sittings and productivity improvements generated from improved manufacturing processes surrounding the second year of production of digitally enhanced products. The decreases were partially offset by markdowns on merchandise sales of frames and accessories in an effort to clear older inventory, higher effective media costs associated both with new digital studios as well as inefficiencies related to start-up operations of new digital printers in the analog studios and the reversal in the third quarter of 2003 of a previously-accrued liability. This reversal related to the favorable renegotiation of the Company’s supply contract with a vendor amounting to approximately $600,000.

·   Selling, general and administrative expenses were $222.1 million, $219.4 million and $227.2 million for fiscal years 2005, 2004 and 2003, respectively. As a percentage of sales, these expenses were 76.1% in 2005, 77.8% in 2004 and 76.0% in 2003.

The increase in selling, general and administrative expenses is principally the result of increases in studio employment costs ($4.5 million), sales commissions paid to Sears resulting from increased sales ($1.4 million), incentive compensation accruals ($835,000) and increased amortization expenses related to periodic vesting of previously-granted restricted stock awards ($796,000). These increases were partially offset by decreases in advertising costs ($902,000), employee medical insurance costs ($1.3 million), professional service costs ($630,000), lower corporate and non-studio employment costs ($1.1 million), lower supplemental executive retirement costs ($430,000) and net decreases in various other expense categories resulting from the Company’s ongoing cost containment efforts.

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Studio employment increased due to the restoration of labor hour reductions that were initiated the first half of 2004, an increased number of hours invested during the Christmas selling season and an increase in the average hourly wage rate. As a result of the digital conversion, on-site printing capabilities were expanded and central fulfillment lead times were reduced resulting in an extended holiday selling season requiring the commitment of additional labor hours. These increases to studio employment were partially offset by the positive impact of initiatives launched in the first half of 2005 to improve labor scheduling and productivity. Advertising costs declined principally as a result of the elimination of broadcast media and related production costs in the current year. In addition, a more targeted focus in terms of type and frequency of media utilized resulted in reduced spending. Medical costs have decreased as a result of lower claim volumes and an absence of high individual claims during the year. Professional service costs have declined primarily due to the completion or elimination of projects underway in 2004. Lower corporate and non-studio employment costs were achieved through cost containment efforts. Supplemental retirement costs decreased due to lower participation and non-recurring 2004 charges resulting from the 2004 change in control.

The $7.8 million decrease in selling, general and administrative costs in 2004 from 2003 is principally the result of $3.3 million in planned net reductions in advertising costs, lower corporate employment costs of $1.1 million, and $6.3 million of net decreases in various other categories of expenses such as travel and meetings, studio supplies, and postage and freight. These decreases were partially offset by net increases in studio employment costs of $621,000 related to the broad restoration of coverage and training hours as well as the startup operation of digital studios, costs and inefficiencies associated both the Company’s digital conversion efforts as well as with the implementation of the system-wide studio hardware upgrade project, increases of $1.7 million in health insurance costs and approximately $600,000 in costs related to professional services incurred in conjunction with the first year of required internal control reporting under Section 404 of the Sarbanes-Oxley Act.

The decline in advertising expenses resulted from a comprehensive evaluation of the productivity of the various vehicles utilized, the result of which was the elimination of high-cost, low productivity vehicles and reinvestment in more cost-effective vehicles that are anticipated to also be more productive and targeted. The decline in corporate employment costs resulted from the executive and other corporate staff reductions that took place principally in the first and second quarters of 2004. The net decreases in the various other categories mentioned above resulted from the Company’s ongoing cost reduction initiatives. The increase in studio employment costs resulted from a strategic decision to restore coverage, training and retention hours in the studio, especially in the second half of 2004 that had been substantially reduced in the second half of 2003 in response to the declining sales environment.

·   Depreciation and amortization was $20.0 million in 2005, compared to $16.4 million in 2004 and $16.8 million in 2003. The increase in depreciation and amortization is attributable to significant investments that have been made in connection both with a studio-wide hardware and printer upgrade in 2004 and the recently completed digital conversion of U.S. studios. The slight net decrease in depreciation expense between 2003 and 2004 resulted from certain assets becoming fully depreciated in 2003, partially offset by increased depreciation charges related to increased levels of capital spending in 2003 and 2004.

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·   Other charges and impairments reflect costs incurred from strategic actions implemented by the Company to restructure its operations, costs that are unpredictable and atypical of the Company’s operations and additional charges due to asset impairments. Actions taken over the past three years are as follows:

 

thousands	2005			2004		2003
Recorded as a component of income (loss) from operations:
Accruals related to accelerated vesting of supplemental retirement plan benefits and
guaranteed bonuses for 2004	$	-		$	3,656	$	-
Impairment charges		567			6,516		-
Reserves for severance and related costs		2,546			3,430		1,346
Pension plan curtailment		-			-		2,385
Consent soliciation costs		-			816		1,663
Production facility closure		-			-		121
Contract terminations and settlements		(346	)		1,261		-
		2,767			15,679		5,515
Recorded as a component of other expenses following income (loss) from operations:
Impairment and related obligations of preferred security interest		-			9,789		-
Total Other Charges and Impairments	$	2,767		$	25,468	$	5,515

·   Accelerated Vesting of Supplemental Retirement Plan Benefits and Guaranteed Bonuses for 2004

In the first quarter of 2004, change of control provisions in executive employment contracts were triggered as a result of the change in the composition of the Company’s Board of Directors resulting from the completion of the consent solicitation, which is more fully discussed in Note 3 in the accompanying Notes to Consolidated Financial Statements. As a result, the Company accrued $3.3 million in the first quarter of 2004 related to the accelerated vesting of executives’ benefits covered by the Company’s supplemental retirement plan and $318,000 in 2004 related to guaranteed bonuses provided for in employment contracts for those covered executives whose employment continued with the Company.

·   Impairment Charges

During 2005, the completion of the U.S. digital conversion necessitated the write-down or write-off of certain parts and film inventories and equipment previously utilized in the analog film environment amounting to a total of $567,000.

During 2004, the Company made a decision to materially alter the in-process technology platform that was to serve as the foundation for the conversion to full digital technology in the portrait studios. As a result of this decision, certain previously capitalized software development costs related to the development of the previous platform that no longer had future utility to the Company were written off resulting in a charge of $3.1 million. Additional strategic decisions were made in 2004 regarding the Company’s technology platform that necessitated the write-off or write-down of certain other technology-related assets to their anticipated fair value, thus resulting in charges totaling $3.4 million.

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·   Reserves for Severance and Related Costs

During 2005 and 2003, the Company recognized $1.0 million and $659,000, respectively, in expense consisting principally of severance pay and supplemental retirement plan benefits related to the early retirement of senior executives. Also in 2005, ongoing litigation costs related to the 2004 dismissal of certain former executives totaling $1.4 million and the cost of an executive search for the CEO position totaling $165,000. In 2004, the Company established reserves in the amount of $3.0 million for severance and related costs consisting principally of potential benefits related to severance pay and supplemental retirement plan costs associated with the dismissal of certain executives.

In 2004 and 2003, a number of support positions in the Company’s corporate headquarters were eliminated resulting in employee severance accruals of approximately $457,000 and $687,000, respectively.

·   Pension Plan Curtailment

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

·   Consent Solicitation Costs

During the second half of 2003 and the first quarter of 2004, the Company incurred $1.7 million and $816,000, respectively, of professional services costs related to the then-ongoing consent solicitation. Included in the 2004 costs was $152,000 of total consent-related costs incurred by the Knightspoint Group, which the Company reimbursed.

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

·   Contract Termination and Settlements

The net credit in 2005 of $346,000 relates principally to the favorable settlement of a claim resulting in a $400,000 refund related to previously-paid loan commitment fees and costs as is more fully discussed in the following paragraph.

In March 2004, prior to the change of control, the Company received a lending commitment related to the proposed refinancing of its then-existing debt structure. In exchange for that commitment, the Company paid a $200,000 non-refundable loan commitment fee. Subsequent to the receipt of the commitment and prior to its funding, the consent solicitation was completed resulting in the installation of a new Board of Directors and the lending commitment expired, necessitating the write-off of the previously capitalized non-refundable fee during the first quarter of 2004. In November 2004, the Company received a subsequent lending commitment to refinance its existing debt structure that was withdrawn by the lender requiring the write-off of the $100,000 non-refundable commitment fee paid to the lender at the time of the commitment.

23

During 2004, the Company recorded $961,000 of charges related to early contract terminations and settlements with certain of the Company’s vendors and consultants as a result of strategic decisions to modify such relationships. Included in this amount is an accrual relating to the potential settlement of a compensation claim by a former consultant to the Company, which was subsequently settled in 2005 for $250,000. This former consultant is a relative of the Company’s Chairman of the Board.

·   Impairment and Related Obligations of Preferred Security Interest

The impairment and related obligations of preferred security interest represents charges recorded in 2004 related to an investment in and operating lease guarantees associated with the Company’s former Wall Décor Segment, Prints Plus, totaling $9.8 million. These charges were necessitated by the significant deteriorating financial performance of Prints Plus during the third quarter of 2004 and are more fully discussed in Note 13 in the accompanying Notes to Consolidated Financial Statements.

·   Interest expense was $1.7 million in 2005, compared to $2.2 million in 2004 and $2.9 million in 2003. The reduction in interest expense is principally the result of scheduled annual principal payments of $8.6 million made annually in June of each year on the Company’s Senior Notes.

·   Interest income was $697,000 in 2005 as compared to $1.2 million in 2004 and $1.7 million in 2003. The decrease in interest income in 2005 compared to 2004 is principally the result of the absence of any income in 2005 related to the Company’s preferred security interest in its former Wall Décor segment, Prints Plus, partially offset by the impact of higher interest rates earned on investable cash balances in 2005. In 2004, interest income related to the Company’s preferred security interest in Prints Plus amounting to $628,000 was recorded and then fully reserved along with the preferred security by recording an expense for impairment of related obligations of preferred security interest in the accompanying Consolidated Statements of Operations. The decrease in interest income in 2004 compared to 2003 is primarily due to lower average invested cash balances and the absence of interest income on an income tax refund received and recorded in 2003, partially offset by the impact of slightly higher interest rates earned.

·   The loss from extinguishment of debt recorded in 2005 totaling $529,000 represents the payment of a make-whole fee of $457,000 and the write-off of unamortized fees of $72,000, both related to the refinancing of the Company’s Senior Notes in the fourth quarter of 2005. This is more fully discussed in the section of Management’s Discussion and Analysis entitled “Net Cash Used in Investing Activities” which follows.

·   The income tax expense on earnings from continuing operations totaled $4.4 million in 2005. The provision for income taxes from continuing operations in 2004 and 2003 was a benefit of $2.2 million and an expense of $3.2 million, respectively. These benefits/provisions resulted in effective tax rates of 40.7% in 2005, 12.9% in 2004 and 35.3% in 2003. The initiation of a dividend reinvestment plan to repatriate qualified earnings related to the Company’s Canadian subsidiary and amounting to $4.6 million increased the effective tax rate by approximately 3.6% in 2005. The lower 2004 effective income tax rate resulted from the recording of a valuation allowance on the Company’s foreign tax credit and capital loss carry forwards, the tax effects of the Company’s foreign operations and a realignment of the Company’s officer life insurance program. These benefit reductions were partially offset by an increased current provision relating to an assessment of taxes on prior years resulting from an Internal Revenue Service exam.

·   Net losses from discontinued operations were $3.7 million in 2004 and $4.6 million in 2003. These discontinued operations relate to the Company’s previously existing Mexican and mobile photography operations and Technology Development segment and are further discussed below.

During the second quarter of 2004, the Company’s Board of Directors made a strategic decision to exit both the Mexican and mobile photography operations which began operations in 2002. This decision was made to allow the Company to enhance focus on the core Sears Portrait Studios business as well as to eliminate the ongoing operating dilution associated with these businesses. The Company executed and completed its plan to exit both its Mexican and mobile photography operations during 2004 and recorded the combined losses on the operations of its Mexican and mobile operations, including the loss on disposition, net of tax, of $3.7 million, as a separate component after net loss from continuing operations. The prior years’ operating activities for these operations have been reclassified to discontinued operations in the accompanying Consolidated Statements of Operations. The $3.7 million loss in 2004 compares to a $4.6 million loss from such operations in 2003.

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LIQUIDITY AND CAPITAL RESOURCES

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

thousands	2005			2004			2003
Net cash provided by (used in):
Operating activities (1)	$	18,697		$	13,738		$	24,623
Investing activities (2)		(17,633	)		(6,626	)		(18,199	)
Financing activities		(1,223	)		(24,827	)		(13,929	)
Effect of exchange rate changes on cash		545			587			594
Net increase (decrease) in cash	$	386		$	(17,128	)	$	(6,911	)

 

(1)   Includes cash flows used in discontinued operations of $2,739 and $7,495 in 2004 and 2003, respectively.

(2)   Includes cash flows used in discontinued operations of $29 and $3,359 in 2004 and 2003, respectively.

Net Cash Provided By Operating Activities

Net cash provided by operating activities was $18.7 million in 2005 as compared to $13.7 million and $24.6 million in 2004 and 2003, respectively. Cash flows in 2005 exceed 2004 levels primarily due to improved operating results and the timing of payments related to changes in various balance sheet accounts totaling $13.5 million as well as the absence in 2005 of cash used in discontinued operations which amounted to $2.7 million in 2004. Offsetting these positive impacts are increased tax payments of $4.3 million, lower tax refunds of $1.1 million, a $3.7 million increase in 2005 payments related to other charges and impairments and a pension contribution of $2.1 million.

The decrease in cash provided in 2004 compared to 2003 resulted primarily from lower earnings in 2004 offset by non-cash impairment charges of $5.1 million, the impairment and related obligations of the preferred security interest in Prints Plus of $9.8 million and accelerated vesting of supplemental retirement benefits of $3.3 million. In addition, deferred tax assets increased $6.8 million due to an increase in net operating loss carry forwards, partially offset by additional deferred tax liability associated with bonus tax depreciation in 2004. Also, there was a net decrease in liabilities of $5.9 million due principally to an accrual for the purchase commitment for computer equipment and peripherals that was recorded in the fourth quarter of 2003 (see below) and paid for in 2004.

Net Cash Used In Investing Activities

Net cash used in investing activities during 2005 was $17.6 million. This compares with cash used in investing activities of $6.6 million and $18.2 million in 2004 and 2003, respectively. The $11.0 million increase in cash used for investing activities in 2005 compared to 2004 is primarily related to a $5.1 million increase in capital expenditures during 2005, decreased proceeds from the Rabbi Trust (the funding vehicle for the Company’s supplemental executive retirement plan) of $3.1 million, the absence in 2005 of loan payments from Prints Plus which totaled $1.9 million in 2004 and the reduction in 2005 compared to 2004 in proceeds from sales of property, equipment and other assets by $1.1 million. The increase in capital expenditures is primarily the result of the Company’s conversion of studios to digital technology while the decrease in the loan payments from Prints Plus is the result of the repayment of such loans in 2004 and the concurrent termination of the revolving credit agreement with them. The decrease in 2005 funds from the Rabbi Trust as compared to 2004 resulted from lower receipts used to fund retirement obligations under the Company’s supplemental retirement plan of $1.1 million and a reduction of $2.0 million in cash received from the Rabbi Trust to be used for general corporate purposes. Asset sales in 2004 and 2005 relate primarily to assets which, as a result of the conversion to digital technology, were no longer of operating utility to the Company.

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The decrease in cash used for investing activities in 2004 as compared to 2003 is due to decreased accrual basis capital expenditures of $4.2 million from continuing operations and a $3.3 million decrease in investing activities from discontinued operations partially offset by proceeds of $1.3 million from the sale of equipment. In addition, there were increases in net cash provided by proceeds from the Rabbi Trust as described above and a net decrease of $3.4 million in amounts due under the loan receivable with Prints Plus.

Net Cash Used In Financing Activities

Net cash used in financing activities was $1.2 million in 2005, $24.8 million in 2004 and $13.9 million in 2003. The $23.6 million decrease in net cash used in 2005 compared to 2004 was primarily related to increased long-term borrowings of $7.9 million, a $12.4 million fluctuation in cash related to funds required to be held as collateral for outstanding letters of credit in 2004 and released in 2005, and a $6.0 million repurchase of the Company shares in a negotiated transaction in the second half of 2004. These decreases in net cash used were partially offset by the establishment of a $1.0 million restricted cash compensating balance under the Company’s amended credit agreement, the payment of debt issuance costs totaling $1.1 million relative to refinancing of the Company’s debt structure, a make whole payment in connection with debt extinguishment of $457,000 and a $151,000 decrease in cash proceeds from option exercises.

The increase in net cash used in 2004 compared to 2003 was primarily a result of a repurchase of shares of the Company’s common stock in a negotiated transaction in the amount of $6.0 million and $6.2 million of restricted cash deposited as collateral with the issuing bank of the Company’s outstanding letters of credit in the same amount.

In 2004, the Company terminated its then-existing $7.5 million revolving credit facility, which was used solely to support outstanding letters of credit used in its self-insurance programs. As a result of the termination of the revolving credit facility, the Company deposited $6.2 million in cash as collateral with the bank that issued the outstanding letters of credit. On April 15, 2005, the Company entered into a new $30.0 million (reducing to $25 million in February 2006 and $20 million in February 2007) unsecured bank revolving credit facility (the “Credit Agreement”), scheduled to expire on April 13, 2007 and carrying a variable interest rate charged at either LIBOR or prime rate funds, with an applicable margin added. On May 17, 2005, the Company replaced its outstanding letters of credit with new letters of credit issued under the Credit Agreement, thus allowing restricted cash to be returned to the Company for general corporate purposes.

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

Effective November 30, 2005, the Company amended and restated the Credit Agreement to become a three-year, term and revolving credit facility in an amount up to $43 million, consisting of an $18 million term loan and a $25 million revolving loan with a sub-facility for letters of credit in an amount not to exceed $15 million. The obligations of the Company under the Credit Agreement are secured by (i) a guaranty from certain material direct and indirect domestic subsidiaries of the Company, and (ii) substantially all of the assets of the Company and such subsidiaries. Borrowings and letters of credit under the Credit Agreement bear interest, at the Company’s option, at a variable rate based on either LIBOR or an alternative rate (as described in the Credit Agreement), with an applicable margin added. The revolving loan is charged a non-use fee, which varies based on the Company’s leverage ratio. Unless sooner paid, the outstanding principal balance of the term loan is to be repaid in five equal semi-annual installments beginning on June 30, 2006 and a final payment on November 30, 2008. The proceeds of the term loan were used to repay in full all of the outstanding principal, accrued and unpaid interest and make-whole amount due and owing under the Company’s Senior Note Agreement.

In connection with the redemption of the Company’s Senior Notes in the fourth quarter of 2005, the Company recorded a $529,000 loss from extinguishment of debt consisting of a make-whole fee totaling $457,000 and the write-off of unamortized fees totaling $72,000.

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On January 25, 2006, the Company again amended and restated the Credit Agreement to expand the term loan portion of the Credit Agreement from $18 million to $25 million. Under a best efforts commitment, the Company could further expand the term loan portion of the Credit Agreement up to a total of $40 million in 2006. The incremental $7 million from the funding of the term loan was used along with then-existing cash on hand to purchase shares in the Dutch Auction self-tender offer totaling $32.4 million on February 8, 2006, which is more fully described in Note 7 of the Notes to Consolidated Financial Statements. The Credit Agreement requires the Company to maintain a $1.0 million compensating cash balance.

The Credit Agreement contains a number of covenants imposing certain restrictions on our business. The most significant of these covenants require specific minimums or maximums, which vary over time, as outlined in the agreement and are measured on the last day of the fiscal quarter for the following:

·   Earnings before interest, taxes, depreciation and amortization, as defined, (“EBITDA”),

·   The ratio of Funded Debt, as defined, to EBITDA,

·   Net worth, adjusted for issuance and repurchase activities,

·   Capital Expenditures, and 

·   The ratio of EBITDA to certain Fixed Charges, as defined, for the most recent four fiscal quarters, calculated on the last day of each fiscal quarter.

As of February 4, 2006, the Company was in compliance with all debt covenants.

Off-Balance Sheet Arrangements

Other than stand-by letters of credit primarily used to support our various self-insurance programs and the ongoing guarantee of certain operating real estate leases of Prints Plus, both of which are more fully discussed in the “Other Commitments” table below, the Company has no additional off-balance sheet arrangements.

Future Cash Flows

To facilitate an understanding of the Company’s contractual obligations and other commitments, the following table is provided. We also have license agreements with Sears and Sears Canada which require us to pay them a percentage of our sales on a monthly basis. In addition, we are self-insured with stop-loss coverage for workers’ compensation and general insurance and we have established reserves for claims under these plans that have been reported but not paid and have been incurred but not reported. As of February 4, 2006, $5.2 million represented the estimated reserves for these claims. These reserves have been excluded from the following table, as we are uncertain as to the timing of when cash payments may be required.

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The table also does not include our deferred income tax liability and accrued pension benefits because it is not certain when these liabilities will become due. The Company contributed $2.1 million to the pension plan in 2005, but does not expect to contribute to the pension plan in 2006. Future contributions to our pension plan will be dependent upon recently passed legislation, future changes in discount rates and the earnings performance of our plan assets.

			PAYMENTS DUE BY PERIOD
thousands									2011 &
	Total		2006		2007-08		2009-10		Beyond
Contractual obligations:
Long-term debt	$	25,000	$	8,333	$	16,667	$	-	$	-
Operating leases		2,571		1,178		1,117		276		-
Purchase obligations for materials and services (1)		4,288		3,511		712		65		-
Other liabilities (2)		730		730		-		-		-
TOTAL	$	32,589	$	13,752	$	18,496	$	341	$	-
	AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
thousands										2011 &
		Total		2006		2007-08		2009-10		Beyond
Other commitments:
Standby letters of credit (3)	$	6,309	$	6,309	$	-	$	-	$	-
Contingent lease obligations (4)		2,549		2,549		-		-		-
TOTAL	$	8,858	$	8,858	$	-	$	-	$	-

(1) Amount represents outstanding purchase commitments at February 4, 2006. The purchase commitments principally relate to future services to be received related to marketing, database maintenance and telecommunications. In addition, they relate to commitments for inventory purchases of such items as photographic paper, frames and accessories. Subsequent to February 4, 2006, the Company entered into a two-year contract to purchase all photographic paper for central fulfillment from its current vendor at agreed-upon terms and pricing. The Company anticipates that it will spend approximately $4.0 million per year under this arrangement.

(2) Amounts consist primarily of accruals for severance and related costs. Approximately $543,000 resulted from activity, which includes accruals related to severance pay and related costs for executive retirements and dismissals, all recorded in our February 4, 2006 balance sheet and described in Note 8 to the Consolidated Financial Statements. The Company is contesting certain of these severance amounts. Notwithstanding the potential reduction of certain of these amounts through settlement negotiations and litigation, such amounts are recorded at the contractual amounts due. Approximately $187,000 of other severance and related costs are recorded for employee headcount reductions in the normal course of business.

As indicated in Note 10 in the accompanying Notes to Consolidated Financial Statements, the projected benefit obligation of the Company’s pension plan exceeded plan assets by $19.2 million at the end of 2005 and $17.5 million at the end of 2004. This $1.7 million increase in the underfunded status between 2005 and 2004 resulted from a $3.0 million growth in the projected benefit obligation from $49.9 million to $52.9 million being only partially offset by a growth in the fair value of plan assets of $1.4 million.  Theprojected benefit obligation grew as a result of annual costs associated with service costs, interest costs and actuarial losses all determined in accordance with Statement of Financial Accounting Standards No. 87. The $1.4 million growth in fair value of plan assets in 2005 resulted from actual returns on plan assets of $1.4 million and Company contributions of $2.1 million offset by benefit payments of $2.1 million. As noted above, the Company does not expect to contribute to the pension plan in 2006. The Critical Accounting Estimates section and Note 10 in the accompanying Notes to Consolidated Financial Statements provide a more complete description of the status of the Company’s pension plan. 

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(3) We primarily use stand-by letters of credit to support our various self-insurance programs. The letters of credit generally have a one-year maturity and are renewed annually.

(4) In July 2001, the Company announced the completion of the sale of its Wall Décor segment, which included the ongoing guarantee of certain operating real estate leases of Prints Plus. As of February 4, 2006, the maximum future obligation to the Company under its guarantee of remaining leases is $2.6 million. To recognize the risk associated with these leases based upon the Company’s past experience with renegotiating lease obligations and the significant deterioration in the financial performance of Prints Plus, including its bankruptcy filing, all of which is more fully described in Note 13 to the Consolidated Financial Statements, the Company has recorded lease obligation reserves totaling $2.6 million at February 4, 2006. Based on the progress of the bankruptcy case to-date and the continued operations of selected locations of Prints Plus, the Company believes that the $2.6 million reserve is adequate to cover the potential losses to be realized under the Company’s operating lease guarantees.

Liquidity

Cash flows from operations, cash and cash equivalents on hand and the seasonal borrowing capacity under the revolving portion of the Company’s Credit Agreement, represent expected sources of funds in 2006 to meet our obligations and commitments, including debt service, annual dividends to shareholders, planned capital expenditures which are estimated to be approximately $5.0 million in fiscal 2006 and normal operating needs.

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ACCOUNTING PRONOUNCEMENTS AND POLICIES

Adoption of New Accounting Standards

In November 2004, SFAS No. 151, “Inventory Costs,” was issued. This statement amends the guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect the adoption of the interpretation to have a material impact on the consolidated financial statements.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets”, an amendment of APB Opinion No. 29, “Accounting for Nonmonetary Transactions”. SFAS No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 is effective for fiscal periods beginning after June 15, 2005. The Company does not expect the adoption of the interpretation to have a material impact on the consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123(R) (revised 2004), “Share-Based Payments”. This statement replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and requires compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost is to be measured based on the grant-date fair value of the equity or liability instruments issued. In addition, liability awards are remeasured each reporting period. Compensation is to be recognized over the period that an employee provides service in exchange for the award. This standard is effective for the first annual period beginning after June 15, 2005. Historically, the Company has elected to follow the intrinsic value method in accounting for its employee stock options and employee stock purchase plans. No stock-based compensation costs were reflected in net income, as no options granted under those plans had an exercise price less than the market value of the underlying common stock on the date of grant. Upon the adoption of SFAS No. 123(R), the Company will be required to expense stock options over the vesting period in its statement of operations. In addition, the Company will need to recognize expense over the remaining vesting period associated with unvested options outstanding on the date of adoption. For 2005, 2004 and 2003, total stock-based employee compensation expense, net of related tax effects, determined under this new standard would have increased expense by $27,000, $621,000 and $179,000, respectively.

In December 2004, FASB issued FASB Staff Position (“FSP”) No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“FSP 109-2”), which provides guidance under FASB Statement No. 109, “Accounting for Income Taxes,” with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the “AJCA”) on enterprises’ income tax expense and deferred tax liability. The AJCA was enacted on October 22, 2004. The AJCA created a temporary incentive for U.S. multinationals to repatriate accumulated earnings outside the United States by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. The Company’s 2005 Statement of Operations includes $472,000 of additional taxes related to repatriation of foreign earnings under provisions of the AJCA.

In March 2005, FASB issued FASB Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations.” FIN No. 47 clarifies that the term conditional asset retirement obligation as used in SFAS No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN No. 47 was effective no later than the end of fiscal years ending after December 15, 2005. The impact of FIN No. 47 has not been material to the Company's consolidated financial statements.

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In May 2005, SFAS No. 154, “Accounting Changes and Error Corrections,” was issued. This statement applies to all voluntary changes in accounting principle and requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless this would be impracticable. This statement also makes a distinction between “retrospective application” of an accounting principle and the “restatement” of financial statements to reflect the correction of an error. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of this interpretation to have a material impact on its financial position, cash flows and results of operations.

Application of Critical Accounting Policies

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

Self-insurance reserves

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

Income taxes

The Company provides deferred income tax assets and liabilities based on the estimated future tax effects of differences between the financial and tax bases of assets and liabilities based on currently enacted tax laws. The tax balances and income tax expense recognized by the Company are based on management’s interpretation of the tax laws of multiple jurisdictions. Income tax expense also reflects the Company’s best estimates and assumptions regarding, among other things, the level of future taxable income, interpretation of the tax laws, and tax planning. The Company assesses temporary differences that result from differing treatments of certain items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are shown on our consolidated balance sheet. The Company must assess the likelihood that deferred tax assets will be realized. To the extent the Company believes that realization is not likely, a valuation allowance is established. When a valuation allowance is established or increased in an accounting period, a corresponding tax expense is recorded in our consolidated statement of operations.

Defined benefit retirement plans

The plan obligations and related assets of defined benefit retirement plans are presented in Note 10 in the accompanying Notes to Consolidated Financial Statements. Plan assets, which consist primarily of marketable equity and debt instruments, are valued using market quotations. Plan obligations and the annual pension expense are determined by independent actuaries and through the use of a number of assumptions. Key assumptions in measuring the plan obligations include the discount rate, the rate of salary increases and the estimated future return on plan assets. In determining the discount rate, the Company utilizes the yield on high-quality, fixed-income investments currently available with maturities corresponding to the anticipated timing of the benefit payments. Salary increase assumptions are based upon historical experience and anticipated future management actions. Asset returns are based upon the anticipated average rate of earnings expected on the invested funds of the plans. At February 4, 2006, the actuarial assumptions of the Company’s plans were: discount rate for benefit cost 5.75%; discount rate for benefit obligations 5.50%; long-term rate of return on plan assets 8.50%; and assumed rate of salary increases 3.75%.

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

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

Item 7A.Quantitative and Qualitative Disclosures About Market Risk

Market risks relating to the Company's operations result primarily from changes in interest rates and changes in foreign exchange rates and are minimal. At February 4, 2006, the Company’s debt obligations have floating interest rates. The impact of a 1% change in interest rates affecting the Company’s debt would increase or decrease interest expense by approximately $250,000. At February 5, 2005, the Company's debt obligations had primarily fixed interest rates; therefore, the Company's exposure to changes in interest rates in 2005 was minimal. The Company's exposure to changes in foreign exchange rates relative to the Canadian operations is also minimal, as Canadian operations constitute only 5.6% of the Company's total assets and 7.8% of the Company's total sales as of and for the year ended February 4, 2006.

Item 8.    Financial Statements and Supplemental Data

(a)	INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
	-	Report of Independent Registered Public Accounting Firm	33
	-	Consolidated Balance Sheets as of February 4, 2006 and February 5, 2005	34-35
	-	Consolidated Statements of Operations for the fiscal years ended February 4, 2006, February 5, 2005 and February 7, 2004	36
	-	Consolidated Statements of Changes in Stockholders' Equity for the fiscal years ended February 4, 2006,  February 5, 2005 and February 7, 2004	37
	-	Consolidated Statements of Cash Flows for the fiscal years ended February 4, 2006, February 5, 2005 and February 7, 2004	38-40
	-	Notes to Consolidated Financial Statements	41-69

The Company's fiscal year ends the first Saturday of February. Accordingly, fiscal years 2005 and 2004 ended February 4, 2006 and February 5, 2005, respectively, and consisted of 52 weeks and fiscal year 2003 ended February 7, 2004 and consisted of 53 weeks. Throughout the "FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA" section, reference to 2005, 2004 or 2003 will mean the fiscal year ended February 4, 2006, February 5, 2005, and February 7, 2004, respectively.

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Report of Independent Registered Public Accounting Firm

To the Board of Directors

CPI Corp.:

We have audited the accompanying consolidated balance sheets of CPI Corp. (the Company) as of February 4, 2006 and February 5, 2005, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended February 4, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CPI Corp. as of February 4, 2006 and February 5, 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended February 4, 2006, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of February 4, 2006, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated April 18, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/ KPMG LLP

____________

KPMG LLP

St. Louis, Missouri

April 18, 2006

33

CPI CORP.

Consolidated Balance Sheets - Assets

thousands	February 4, 2006			February 5, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	34,269		$	33,883
Restricted cash		1,000			6,154
Accounts receivable:
Due from licensor stores		7,944			7,365
Other		289			326
Inventories		9,271			10,521
Prepaid expenses and other current assets		4,958			6,905
Deferred tax assets		11,898			7,714
Total current assets		69,629			72,868
Property and equipment:
Land		2,765			2,765
Building improvements		26,472			26,684
Leasehold improvements		4,531			6,005
Photographic, sales and manufacturing equipment		126,132			183,979
Total		159,900			219,433
Less accumulated depreciation and amortization		118,618			177,775
Property and equipment, net		41,282			41,658
Assets of business transferred under contractual arrangements:
Preferred security		7,000			7,000
Accrued interest on preferred security		1,317			689
Impairment reserve related to preferred security interest		(8,317	)		(7,689	)
Other investments - supplemental retirement plan		3,706			6,141
Deferred tax assets		7,727			12,815
Other assets, net of amortization of $1,359 at both  February 4, 2006 and February 5, 2005		1,317			1,618
TOTAL ASSETS	$	123,661		$	135,100
See accompanying notes to consolidated financial statements.

34

CPI CORP.

Consolidated Balance Sheets - Liabilities and Stockholders’ Equity

thousands, except share and per share data	February 4, 2006			February 5, 2005
LIABILITIES
Current liabilities:
Current maturities of long-term debt	$	8,333		$	8,580
Accounts payable		9,068			13,011
Accrued employment costs		13,016			12,463
Customer deposit liability		18,315			21,828
Accrued severance		730			4,205
Income taxes payable		1,263			2,872
Sales taxes payable		2,435			1,886
Accrued advertising expenses		768			1,568
Accrued expenses and other liabilities		4,336			5,348
Total current liabilities		58,264			71,761
Long-term debt, less current maturities		15,747			17,050
Accrued pension obligations		15,813			13,993
Supplemental retirement plan obligations		3,833			4,512
Customer deposit liability		3,335			4,334
Other liabilities		559			564
Total liabilities		97,551			112,214
STOCKHOLDERS' EQUITY
Preferred stock, no par value, 1,000,000 shares authorized; no shares outstanding		-			-
Preferred stock, Series A, no par value, 200,000 shares authorized; no shares outstanding		-			-
Common stock, $.40 par value, 50,000,000 shares authorized; 18,569,964 and 18,432,779 shares issued  at February 6, 2004 and February 5, 2005, respectively		7,428			7,373
Additional paid-in capital		55,588			53,301
Retained earnings		208,183			206,812
Accumulated other comprehensive loss		(11,171	)		(10,505	)
		260,028			256,981
Treasury stock - at cost, 10,639,543 and 10,672,236 shares at February 4, 2006 and February 5, 2005, respectively		(233,541	)		(234,031	)
Unamortized deferred compensation- restricted stock		(377	)		(64	)
Total stockholders' equity		26,110			22,886
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	123,661		$	135,100
See accompanying notes to consolidated financial statements.

35

CPI CORP.

Consolidated Statements of Operations

Fifty-two weeks ended February 4, 2006 and February 5, 2005, and Fifty-three weeks ended February 7, 2004

thousands, except share and per share data	2005		2004			2003
Net sales	$	291,984	$	281,865		$	299,044
Cost and expenses:
Cost of sales (exclusive of depreciation and amortization shown below)		35,129		36,899			40,070
Selling, general and administrative expenses		222,094		219,381			227,251
Depreciation and amortization		19,952		16,377			16,793
Other charges and impairments		2,767		15,679			5,515
		279,942		288,336			289,629
Income (loss) from continuing operations		12,042		(6,471	)		9,415
Interest expense		1,680		2,180			2,949
Interest income		697		1,226			1,709
Impairment and related obligations of preferred security interest		-		9,789			-
Loss from debt extinguishment		529		-			-
Other income, net		247		263			850
Earnings (loss) from continuing operations before income tax expense (benefit)		10,777		(16,951	)		9,025
Income tax expense (benefit)		4,388		(2,189	)		3,183
Net earnings (loss) from continuing operations		6,389		(14,762	)		5,842
Net loss from discontinued operations, net of income tax benefit of $2,201 in 2004 and $2,518 in 2003		-		(3,746	)		(4,624	)
NET EARNINGS (LOSS)	$	6,389	$	(18,508	)	$	1,218
NET EARNINGS (LOSS) PER COMMON SHARE
Net earnings (loss) per share from continuing operations - diluted	$	0.81	$	(1.87	)	$	0.72
Net loss per share from discontinued operations - diluted		-		(0.48	)		(0.57	)
Net earnings (loss) per share - diluted	$	0.81	$	(2.35	)	$	0.15
Net earnings (loss) per share from continuing operations - basic	$	0.81	$	(1.87	)	$	0.72
Net loss per share from discontinued operations - basic		-		(0.48	)		(0.57	)
Net earnings (loss) per share - basic	$	0.81	$	(2.35	)	$	0.15
Dividends per share	$	0.64	$	0.64		$	0.60
Weighted average number of common and common equivalent shares outstanding-diluted		7,881,060		7,888,404			8,148,164
Weighted average number of common and common equivalent shares outstanding-basic		7,854,192		7,888,404			8,081,619
See accompanying notes to consolidated financial statements.

36

CPI CORP.

Consolidated Statements of Changes in Stockholders' Equity

Fifty-two weeks ended February 4, 2006 and February 5, 2005, and Fifty-three weeks ended February 7, 2004

			Additional					Accumulated other			Treasury			Deferred compensation -
thousands, except share and per share data	Common		paid-in		Retained			comprehensive			stock,			restricted
	stock		capital		earnings			income (loss)			at cost			stock			Total
Balance at February 1, 2003	$	7,315	$	51,211	$	234,022		$	(10,703	)	$	(227,642	)	$	(20	)	$	54,183
Net earnings		-		-		1,218			-			-			-			1,218
Total other comprehensive income, net of tax effect		-		-		-			1,104			-			-			1,104
Total comprehensive income																		2,322
Issuance of common stock to employee stock plans and option
exercises (72,232 shares)		29		1,061		-			-			-			-			1,090
Dividends ($0.60 per common share)		-		-		(4,846	)		-			-			-			(4,846	)
Purchase of treasury stock (54,200 shares)		-		-		-			-			(935	)		-			(935	)
Amortization of deferred compensation - restricted stock		-		-		-			-			-			12			12
Balance at February 7, 2004	$	7,344	$	52,272	$	230,394		$	(9,599	)	$	(228,577	)	$	(8	)	$	51,826
Net loss		-		-		(18,508	)		-			-			-			(18,508	)
Total other comprehensive loss, net of tax effect		-		-		-			(906	)		-			-			(906	)
Total comprehensive loss																		(19,414	)
Issuance of common stock to employee benefit plans, restricted
stock awards and option exercises (99,588 shares),
net of tax effect		29		1,029		-			-			554			(70	)		1,542
Dividends ($0.64 per common share)		-		-		(5,074	)		-			-			-			(5,074	)
Purchase of treasury stock, at cost (406,780 shares)		-		-		-			-			(6,008	)		-			(6,008	)
Amortization of deferred compensation - restricted stock		-		-		-			-			-			14			14
Balance at February 5, 2005	$	7,373	$	53,301	$	206,812		$	(10,505	)	$	(234,031	)	$	(64	)	$	22,886
Net earnings		-		-		6,389			-			-			-			6,389
Total other comprehensive loss, net of tax effect		-		-		-			(666	)		-			-			(666	)
Total comprehensive income																		5,723
Issuance of common stock to employee benefit plans,
restricted stock awards and option exercises (169,878   shares), net of tax effect		55		2,287		-			-			490			(1,041	)		1,791
Dividends ($0.64 per common share)		-		-		(5,018	)		-			-			-			(5,018	)
Amortization of deferred compensation - restricted stock		-		-		-			-			-			728			728
Balance at February 4, 2006	$	7,428	$	55,588	$	208,183		$	(11,171	)	$	(233,541	)	$	(377	)	$	26,110
See accompanying notes to consolidated financial statements.

37

CPI CORP.

Consolidated Statements of Cash Flows

Fifty-two weeks ended February 4, 2006 and February 5, 2005 and Fifty-three weeks ended February 7, 2004

thousands	2005				2004			2003
					(Revised)			(Revised)
Reconciliation of net earnings (loss) to cash flows provided by operating activities:
Net earnings (loss)	$	6,389		$	(18,508	)	$	1,218
Adjustments for items not requiring cash:
Depreciation and amortization		19,952			16,377			16,793
Loss from discontinued operations		-			3,746			4,624
Stock-based compensation expense		811			190			12
Loss from extinguishment of debt		529			-			-
Loss on disposition of property, plant and equipment		507			1,437			303
Gain on sale of assets held for sale		(9	)		(391	)		-
Deferred income tax provision		2,353			(5,653	)		242
Pension, supplemental retirement plan and profit sharing expense		2,198			2,457			4,026
Accrued interest on Preferred Security		-			(629	)		5
Impairment and related obligations of preferred security interest		-			9,789			-
Accelerated vesting of supplemental retirement plan benefits		-			3,338			-
Other impairment charges		-			5,083			-
Pension plan curtailment expense		-			-			2,385
Other		323			40			53
Increase (decrease) in cash flow from operating assets and liabilities:
Receivables and inventories		709			683			1,519
Refundable income taxes		-			2,166			4,646
Prepaid expenses and other current assets		1,436			(345	)		(880	)
Accounts payable		(3,943	)		(2,425	)		5,146
Contribution to pension plan		(2,050	)		-			-
Supplemental retirement plan payments		(989	)		(1,517	)		(3,574	)
Accrued expenses and other liabilities		(4,098	)		952			(3,112	)
Income taxes payable		(1,609	)		2,872			-
Deferred revenues and related costs		(3,856	)		(2,899	)		(2,887	)
Other		44			(286	)		1,599
Cash flows provided by continuing operations		18,697			16,477			32,118
Cash flows used in discontinued operations		-			(2,739	)		(7,495	)
Cash flows provided by operating activities	$	18,697		$	13,738		$	24,623
See accompanying notes to consolidated financial statements.

38

CPI CORP.

Consolidated Statements of Cash Flows (continued)

Fifty-two weeks ended February 4, 2006 and February 5, 2005 and Fifty-three weeks ended February 7, 2004

	2005			2004			2003
thousands				(Revised)			(Revised)
Cash flows provided by operating activities	$	18,697		$	13,738		$	24,623
Cash flows provided by (used in) financing activities:
Repayment of long-term obligations		(25,680	)		(8,580	)		(8,580	)
Proceeds from long-term borrowings		25,000			-			-
Payment of debt issuance costs		(1,087	)		-			-
Make-whole payment to extinguish long-term debt		(457	)		-			-
Restricted cash - collateral for outstanding letters of credit		6,154			(6,154	)		-
Restricted cash - compensating balance under Credit Agreement		(1,000	)		-			-
Proceeds from borrowings against cash surrender value of life insurance		-			-			289
Repayment of borrowings against cash surrender value of life insurance		-			-			(337	)
Issuance of common stock to employee stock plans and option exercises		865			989			480
Cash dividends		(5,018	)		(5,074	)		(4,846	)
Purchase of treasury stock		-			(6,008	)		(935	)
Cash flows used in financing activities		(1,223	)		(24,827	)		(13,929	)
Cash flows (used in) provided by investing activities:
Additions to property and equipment		(20,235	)		(15,157	)		(19,405	)
Proceeds from sale of property and equipment		118			362			-
Proceeds from sale of assets held for sale		49			932			-
Redemptions of preferred security		-			-			2,500
Changes in loan receivable:
Borrowings		-			(43,380	)		(61,079	)
Repayments		-			45,295			59,639
Increase in assets held by Rabbi Trust		(286	)		(455	)		(2,843	)
Proceeds from Rabbi Trust used for supplemental retirement plan payments		891			2,006			6,348
Distribution of Rabbi Trust funds in excess of related obligations		1,830			3,800			-
Cash flows used in investing activities - continuing operations		(17,633	)		(6,597	)		(14,840	)
Cash flows used in investing activities - discontinued operations		-			(29	)		(3,359	)
Cash flows used in investing activities		(17,633	)		(6,626	)		(18,199	)
Effect of exchange rate changes on cash and cash equivalents		545			587			594
Net increase (decrease) in cash and cash equivalents		386			(17,128	)		(6,911	)
Cash and cash equivalents at beginning of year		33,883			51,011			57,922
Cash and cash equivalents at end of year	$	34,269		$	33,883		$	51,011

39

CPI CORP.

Consolidated Statements of Cash Flows (continued)

Fifty-two weeks ended February 4, 2006 and February 5, 2005 and Fifty-three weeks ended February 7, 2004

	2005		2004		2003
thousands			(Revised)		(Revised)
Supplemental cash flow information:
Interest paid	$	1,496	$	2,236	$	2,907
Income taxes paid	$	4,668	$	321	$	1,519
Supplemental non-cash financing activities:
Issuance of common stock under the employee Profit Sharing Plan	$	-	$	-	$	610
Issuance of treasury stock under the employee Profit Sharing Plan	$	490	$	554	$	-
Issuance of restricted and unrestricted stock to employees and directors	$	1,300	$	70	$	-
Repayment of borrowings against cash surrender value of life
insurance via liquidation of related policies	$	-	$	1,548	$	-
Executive retirement stock option modification	$	177	$	-	$	-
See accompanying notes to consolidated financial statements.

40

CPI CORP.

Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

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

The Company operates 1,046 (“unaudited”) professional portrait studios as of February 4, 2006 throughout the United States, Canada and Puerto Rico principally under license agreements with Sears, Roebuck and Co. ("Sears"). The Company also operates searsphotos.com, a vehicle for the Company’s customers to archive, share portraits via email and order additional portraits and products.

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. Certain items in prior years have been reclassified to conform to the current year presentation. In 2005, the Company has separately disclosed in the Consolidated Statements of Cash Flows the operating and investing portions of the cash flows attributable to its discontinued operations, which in prior periods were not segregated for investing activities.

Fiscal Year

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

Fiscal year	Ended	Weeks
2005	February 4, 2006	52
2004	February 5, 2005	52
2003	February 7, 2004	53

Business Concentrations

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

Revenues - Substantially all of the Company’s revenues in 2005, 2004 and 2003 were derived from sales at permanent portrait studios operating under the Sears Portrait Studio name. These studios operate under agreements with Sears in the United States, Canada and Puerto Rico that require the Company to pay license fees to Sears based on net sales.

Sources of supply - The Company purchases photographic paper and chemicals from three major manufacturers. The Company purchases software for its digital studios and its digital manufacturing system from a single vendor. The Company purchases other equipment and materials for all its operations from a number of suppliers and is not dependent upon any other supplier for any specific kind of equipment or materials. The Company has had no difficulty in the past obtaining sufficient products and materials to conduct its operations and believes its relationships with suppliers are good.

Foreign operations - Included in the Company’s consolidated balance sheets at February 4, 2006 and February 5, 2005 are long-lived assets of $5.3 million and $5.1 million, respectively employed in the Company’s Canadian operations. Net sales related to the Canadian operations were $22.8 million, $20.7 million and $22.1 million in fiscal 2005, 2004 and 2003, respectively.

41

CPI CORP.

Notes to Consolidated Financial Statements

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include, but are not limited to workers’ compensation and employee health insurance liability self-insurance reserves; depreciation; recoverability of long-lived assets; establishing restructuring, income tax and other reserves; and defined benefit retirement plan assumptions. Actual results could differ from those estimates.

Foreign Currency Translations

Assets and liabilities of foreign operations are translated into U.S. dollars at the exchange rate in effect on the balance sheet date, while income and expense accounts are translated at the average rates in effect during each fiscal year. Gains and losses on foreign currency translations are included in the determination of accumulated other comprehensive income (loss) for the year. These gains amounted to $948,000, $620,000 and $1.7 million in 2005, 2004 and 2003, respectively.

Cash and Cash Equivalents

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

Accounts Receivable

For all stores operating within Sears, collections (cash, check and credit sales) are deposited with Sears and subsequently remitted to CPI by Sears. Sears’ remittances are reconciled to CPI receivables and any differences are resolved and recorded as appropriate. There was no allowance for doubtful accounts at February 4, 2006 and February 5, 2005 as substantially all accounts receivable relate to amounts to be remitted by Sears, and management has a high level of assurance of the collectibility of these amounts.

Inventories

Inventories are stated at the lower of cost or market, with cost of substantially all inventories being determined by the first-in, first-out (FIFO) method and the remainder by the last-in, first-out (LIFO) method. Material and production costs incurred relating to portraits processed pending delivery to customers, or in-process, are inventoried and expensed when the related sales revenue is recognized.

Property and Equipment

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

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

Building improvements	15 to 19 years
Leasehold improvements	5 to 15 years
Photographic, sales and manufacturing equipment	2 to 10 years

42

CPI CORP.

Notes to Consolidated Financial Statements

During 2004, the Company removed from service and wrote-off the related assets and accumulated depreciation totaling $28.2 million representing fully depreciated property and equipment primarily related to its replacement of computer hardware in all U.S. studios and the conversion of 128 studios to full digital format. In 2005, additional write-offs of $75.5 million were recognized related to the completion of the conversion of U.S. studios to full digital format.

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

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

Long-lived Asset Recoverability

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

Self-Insurance Reserves

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

Revenue Recognition and Deferred Costs

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

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

Advertising Costs

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

43

CPI CORP.

Notes to Consolidated Financial Statements

The consolidated balance sheets include capitalized direct-response advertising costs of $463,000 and $914,000 at February 4, 2006 and February 5, 2005, respectively. Advertising expense for 2005, 2004 and 2003 was $29.1 million, $30.0 million and $33.3 million, respectively.

Defined Benefit Plans

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

Income Taxes

The Company provides deferred income tax assets and liabilities based on the estimated future tax effects of operating losses and tax credit carry forwards, as well as the differences between the financial and tax bases of assets and liabilities based on currently enacted tax laws. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The tax balances and income tax expense are based on management’s interpretation of the tax laws of multiple jurisdictions. Income tax expense also reflects the Company’s best estimates and assumptions regarding, among other things, the level of future taxable income, interpretation of the tax laws, and tax planning.

Stock-based Compensation Plans

At February 4, 2006, the Company had various stock-based employee compensation plans, which are described more fully in Note 9. The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25, to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exercised exceeded the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation and SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As permitted by existing accounting standards, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123, as amended. The Company recognizes expense for restricted stock grants on a straight-line basis over the vesting period based on the market value at the date of grant, which will not differ from expense to be recognized under SFAS No. 123. For stock option grants, no stock-based employee compensation cost is generally reflected in net income, as no options granted had an exercise price different than the market value of the underlying common stock on the date of grant. During 2005, the term to exercise a stock option grant was extended for a retiring executive and as a result, $176,500 of stock-based employee compensation was recognized.

44

CPI CORP.

Notes to Consolidated Financial Statements

The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123.

thousands, except per share data	2005			2004			2003
Net earnings (loss) - as reported	$	6,389		$	(18,508	)	$	1,218
Less: Additional stock-based employee compensation expense determined under fair      value based method for all awards, net of  related taxes		(27	)		(621	)		(179	)
Net earnings (loss) - pro forma	$	6,362		$	(19,129	)	$	1,039
Earnings (loss) per common share - basic
As reported	$	0.81		$	(2.35	)	$	0.15
Pro forma	$	0.81		$	(2.42	)	$	0.13
Earnings (loss) per common share - diluted
As reported	$	0.81		$	(2.35	)	$	0.15
Pro forma	$	0.81		$	(2.42	)	$	0.13

Per Share Calculations

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

NOTE 2 - RECENTLY ISSUED ACCOUNTING STANDARDS

In November 2004, SFAS No. 151, “Inventory Costs,” was issued. This statement amends the guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect the adoption of this interpretation to have a material impact on its consolidated financial statements.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets”, an amendment of APB Opinion No. 29, “Accounting for Nonmonetary Transactions”. SFAS No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 is effective for fiscal periods beginning after June 15, 2005. The Company does not expect the adoption of this interpretation to have a material impact on its consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123(R) (revised 2004), “Share-Based Payments”. This statement replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and requires compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost is to be measured based on the grant-date fair value of the equity or liability instruments issued. In addition, liability awards are remeasured each reporting period. Compensation cost is to be recognized over the period that anemployee provides service in exchange for the award. This standard is effective for the first annual period beginning after June 15, 2005.  Historically, the Company has elected to follow the intrinsic value method in accounting for its employee stock options and employee stock purchase plans. No stock-based compensation costs were reflected in net income, as no options granted under those plans had an exercise price less than the market value of the underlying common stock on the date of grant. Upon the adoption of SFAS No. 123(R), the Company will be required to expense stock options over the vesting period in its statement of operations. In addition, the Company will need to recognize expense over the remaining vesting period associated with unvested options outstanding on the date of adoption. For 2005, 2004 and 2003, total stock-based employee compensation expense, net of related tax effects, determined under this new standard would have increased expense by $27,000, $621,000 and $179,000, respectively.

45

CPI CORP.

Notes to Consolidated Financial Statements

In December 2004, FASB issued FASB Staff Position (“FSP”) No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“FSP 109-2”), which provides guidance under FASB Statement No. 109, “Accounting for Income Taxes,” with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the “AJCA”) on enterprises’ income tax expense and deferred tax liability. The AJCA was enacted on October 22, 2004. The AJCA created a temporary incentive for U.S. multinationals to repatriate accumulated earnings outside the United States by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. The Company’s 2005 Statement of Operations includes $472,000 of additional taxes related to repatriation of foreign earnings under provisions of the AJCA.

In March 2005, FASB issued FASB Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations.” FIN No. 47 clarifies that the term conditional asset retirement obligation as used in SFAS No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN No. 47 was effective no later than the end of fiscal years ending after December 15, 2005. The impact of FIN No. 47 has not been material to the Company's consolidated financial statements.

In May 2005, SFAS No. 154, “Accounting Changes and Error Corrections,” was issued. This statement applies to all voluntary changes in accounting principle and requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless this would be impracticable. This statement also makes a distinction between “retrospective application” of an accounting principle and the “restatement” of financial statements to reflect the correction of an error. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of this interpretation to have a material impact on its financial position, cash flows and results of operations.

NOTE 3 - CHANGE OF CONTROL

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

46

CPI CORP.

Notes to Consolidated Financial Statements

The material change in the composition of the Board resulting from the Knightspoint Group’s successful consent solicitation triggered change of control provisions in various employment and stock option agreements between the Company and certain of its executives and employees. As a result of the change of control, in the first quarter of 2004 the Company accrued $3.3 million related to the accelerated vesting of executives’ benefits covered by the Company’s supplemental retirement plan. In 2004, the Company also accrued $318,000 of guaranteed bonuses provided for in employment contracts for those covered executives whose employment continues with the Company.

NOTE 4 - DISCONTINUED OPERATIONS

Mexican and Mobile Photography Operations

During the second quarter of 2004, the Company’s Board of Directors made a strategic decision to exit both the Mexican and mobile photography operations which began operations in 2002. This decision was made to allow the Company to enhance focus on the core Sears Portrait Studios business as well as to eliminate the ongoing operating dilution associated with these businesses.

The Company executed and completed its plan to exit both its Mexican and mobile photography operations during the second quarter of 2004 and recorded the combined losses on the operations of its Mexican and mobile operations, including the loss on disposition, net of tax, of $3.7 million, as a loss from discontinued operations. The $3.7 million loss in 2004 compares to a $4.6 million loss from such operations in 2003. The prior years’ operating activities for these operations have been reclassified to discontinued operations in the accompanying Consolidated Statements of Operations.

.

47

CPI CORP.Notes to Consolidated Financial Statements

Sales and operating results for the former Mexican and mobile photography operations included in discontinued operations are presented in the following table:

			Mexican Operation
thousands	2004			2003
Net Sales	$	781		$	731
Operating loss	$	(948	)	$	(1,319	)
Loss on disposition		(2,528	)		-
Tax benefit		1,287			462
Net loss from discontinued operations	$	(2,189	)	$	(857	)
	Mobile Photography Operation
		2004			2003
Net Sales	$	1,020		$	1,908
Operating loss	$	(1,550	)	$	(5,823	)
Loss on disposition		(921	)		-
Tax benefit		914			2,056
Net loss from discontinued operations	$	(1,557	)	$	(3,767	)
		Total Discontinued Operations
		2004			2003
Net Sales	$	1,801		$	2,639
Operating loss	$	(2,498	)	$	(7,142	)
Loss on disposition		(3,449	)		-
Tax benefit		2,201			2,518
Net loss from discontinued operations	$	(3,746	)	$	(4,624	)

48

CPI CORP.

Notes to Consolidated Financial Statements

The loss on disposition of the former Mexican and mobile photography operations consist of the following costs:

	Non-cash Charges				Accruals/Proceeds						Total Loss on Disposition
thousands	Mexico		Mobile		Mexico			Mobile			Mexico			Mobile
Asset disposals, impairments and write-offs	$	2,136	$	848	$	-		$	-		$	2,136		$	848
Proceeds on sale of assets		-		-		(120	)		(94	)		(120	)		(94	)
Lease settlements		-		-		92			-			92			-
Employee severance		-		-		407			154			407			154
Other		-		-		13			13			13			13
Total loss on disposition	$	2,136	$	848	$	392		$	73		$	2,528		$	921

There were no reserve balances related to discontinued operations included in the Company’s Consolidated Balance Sheet as of February 4, 2006 or February 5, 2005.

NOTE 5 - INVENTORIES

Inventories consist of:

thousands	February 4, 2006		February 5, 2005
Raw materials - film, paper, chemicals	$	4,110	$	3,750
Portraits in process		939		1,555
Finished portraits pending delivery		407		496
Frames and accessories		1,069		1,286
Studio supplies		2,143		2,197
Other		603		1,237
Total	$	9,271	$	10,521

These balances are net of reserves totaling $337,000 and $142,000 at February 4, 2006 and February 5, 2005, respectively.

NOTE 6 - BORROWINGS

Short-term

There were no short-term borrowings outstanding at February 4, 2006 or February 5, 2005. In the fourth quarter of 2004, the Company terminated its then-existing $7.5 million revolving credit facility, which was used solely to support outstanding letters of credit used in its self-insurance programs. As a result of the termination of the revolving credit facility, the Company deposited $6.2 million in cash as collateral with the bank that issued the outstanding letters of credit. On April 15, 2005, the Company entered into a new $30.0 million (reducing to $25 million in February 2006 and $20 million in February 2007) unsecured bank revolving credit facility (the “Credit Agreement”), scheduled to expire on April 13, 2007 and carrying a variable interest rate charged at either LIBOR or prime rate funds, with an applicable margin added. On May 17, 2005, the Company replaced its outstanding letters of credit with new letters of credit issued under the Credit Agreement thus allowing the Company to reclaim its cash collateral.

49

CPI CORP.

Notes to Consolidated Financial Statements

Long-term

At February 5, 2005, the Company had a $60.0 million Senior Note Agreement (the "Note Agreement") privately placed with two major insurance companies. The Note Agreement was entered into in June 1997. The notes issued pursuant to the Note Agreement called for annual principal payments beginning in 2001 with the final payment due in 2007. Interest on the notes was payable semi-annually, in June and December, at an average effective fixed rate of 7.46%. Concurrent with the closing of the Credit Agreement, the Company amended its existing Senior Note agreement to allow it to incur additional indebtedness without violating the debt to equity ratio covenant included in the original agreement. The covenants of the amended Senior Note Agreement then principally mirrored those included in the Credit Agreement.

Effective November 30, 2005, the Company amended and restated the Credit Agreement to become a three-year, term and revolving credit facility in an amount up to $43 million, consisting of an $18 million term loan and a $25 million revolving loan with a sub-facility for letters of credit in an amount not to exceed $15 million. The obligations of the Company under the Credit Agreement are secured by (i) a guaranty from certain material direct and indirect domestic subsidiaries of the Company, and (ii) substantially all of the assets of the Company and such subsidiaries. Borrowings and letters of credit under the Credit Agreement bear interest, at the Company’s option, at a variable rate based on either LIBOR or an alternative rate (as described in the Credit Agreement), with an applicable margin added. The revolving loan is charged a non-use fee, which varies based on the Company’s leverage ratio. Unless sooner paid, the outstanding principal balance of the term loan is to be repaid in five equal semi-annual installments beginning June 30, 2006 and a final payment on November 30, 2008. The Credit Agreement and other ancillary loan documents contain terms, provisions and events of default customary for transactions of this type. The proceeds of the term loan were used to repay in full all of the outstanding principal, accrued and unpaid interest and make-whole amount due and owing under the Company’s Senior Note Agreement. In connection with the redemption of the Company’s Senior Notes in the fourth quarter of 2005, the Company recorded a loss from extinguishment of debt consisting of a make-whole fee totaling $457,000 and the write-off of unamortized fees in the amount of $72,000.

On January 25, 2006, the Company amended and restated the Credit Agreement to expand the term loan portion of the Agreement from $18 million to $25 million. Under a best efforts commitment, the Company may further expand the term loan portion of the Agreement up to a total of $40 million in 2006. The incremental $7 million from the funding of the term loan was used along with then-existing cash on hand to purchase shares in the Dutch Auction self-tender offer on February 8, 2006 as described in Note 7.

The Company incurred $1.1 million in issuance costs associated with the Credit Agreement and its amendments. The term loan portion of these costs is being amortized using the effective interest method over the three-year life of the related debt. Fees associated with the revolving portion are being amortized on a straight-line basis over the life of the revolving commitment since there are no borrowings or repayments scheduled.

Restrictive covenants of the Credit Agreement include the maintenance of minimum earnings before interest, taxes, depreciation and amortization (“EBITDA”), minimum funded debt to EBITDA ratio, minimum net worth, as defined and excluding up to $35 million of share repurchases subsequent to November 30, 2005, capital expenditure limits and a minimum fixed charge coverage ratio, as defined. In addition, the Credit Agreement requires the Company to maintain a $1.0 million compensating cash balance, which is classified as Restricted Cash in the accompanying Consolidated Balance Sheets.

50

CPI CORP.

Notes to Consolidated Financial Statements

Outstanding debt obligations are as follows:
thousands	February 4, 2006		February 5, 2005
Senior notes, net of unamortized issuance costs	$	-	$	25,630
Term loan portion of the Credit Agreement, net of unamortized issuance costs		24,080		-
Less: current maturities		8,333		8,580
	$	15,747	$	17,050

As of February 4, 2006, long-term debt maturities for the next three fiscal years are as follows:

thousands
2006	$	8,333
2007		8,333
2008		8,334
	$	25,000
Unamortized issuance costs		920
	$	24,080

NOTE 7 - STOCKHOLDERS’ EQUITY

Share Repurchase Program

On June 3, 2003, the Board of Directors authorized the Company to repurchase up to 5% of its common shares on the open market from time to time depending on market conditions. Under this authorization, the Company purchased 54,200 shares of stock for $935,000 at an average price of $17.26 during 2003. As of February 4, 2006, the Company had remaining authorization to repurchase 350,843 shares.

In 2004, the Company purchased 406,780 shares of its common stock in a negotiated transaction. The Company paid $14.77 per share, for a total purchase price of $6.0 million.

Effective December 21, 2005, the Company’s Board of Directors authorized the repurchase of up to 1,500,000 shares of its common stock through a Dutch Auction self-tender offer. On February 8, 2006, the Company purchased 1,658,607 shares at $19.50 per share or a total consideration of approximately $32.4 million as a result of the tender offer, which consisted of the 1,500,000 shares CPI offered to purchase in the tender offer and 158,607 shares purchased pursuant to CPI’s right to purchase up to an additional 2% of the outstanding shares as of February 1, 2006. The Company funded the purchase of shares tendered in the tender offer through a combination of cash on hand and $7 million of incremental term loan funds derived from its Credit Agreement. Had the shares from this transaction been deducted from total shares outstanding as of February 2, 2002 (the beginning of fiscal 2003), pro forma diluted earnings (loss) per share would have been $1.03, ($2.97) and $0.19 per share for 2005, 2004 and 2003, respectively.

Shareholder Rights Plan

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

51

CPI CORP.

Notes to Consolidated Financial Statements

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

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

Comprehensive Income and Accumulated Other Comprehensive Loss

The following table shows the computation of comprehensive income (loss):

thousands	2005			2004			2003
Net earnings (loss)	$	6,389		$	(18,508	)	$	1,218
Other comprehensive (loss) income:
Foreign currency translation adjustments		947			620			1,668
Minimum pension liability (1)		(1,613	)		(1,526	)		(564	)
Total accumulated other comprehensive (loss) income		(666	)		(906	)		1,104
Total comprehensive income (loss)	$	5,723		$	(19,414	)	$	2,322

(1)Net of tax benefit of $989, $936 and $345 for 2005, 2004 and 2003, respectively.

The following table displays the components of accumulated other comprehensive loss as of February 4, 2006, February 5, 2005 and February 7, 2004:

thousands	2005		2004		2003
Foreign currency translation adjustments	$	638	$	1,585	$	2,205
Minimum pension liability, net of taxes		10,533		8,920		7,394
Accumulated other comprehensive loss	$	11,171	$	10,505	$	9,599

52

CPI CORP.

Notes to Consolidated Financial Statements

NOTE 8 - OTHER CHARGES AND IMPAIRMENTS

Other charges and impairments recorded as a component of income (loss) from operations included:

thousands	2005			2004		2003
Recorded as a component of income (loss) from operations:
Accruals related to accelerated vesting of supplemental retirement  plan benefits and guaranteed bonuses for 2004	$	-		$	3,656	$	-
Impairment charges		567			6,516		-
Reserves for severance and related costs		2,546			3,430		1,346
Pension plan curtailment		-			-		2,385
Consent solicitation costs		-			816		1,663
Production facility closure		-			-		121
Contract terminations and settlements		(346	)		1,261		-
		2,767			15,679		5,515
Recorded as a component of other expense following income (loss) from operations:
Impairment and related obligations of preferred security interest		-			9,789		-
Total Other Charges and Impairments	$	2,767		$	25,468	$	5,515

Accelerated Vesting of Supplemental Retirement Plan Benefits and Guaranteed Bonuses for 2004

In the first quarter of 2004, change of control provisions in executive employment contracts were triggered as a result of the change in the composition of the Company’s Board of Directors resulting from the completion of the consent solicitation, which is more fully discussed in Note 3 in the accompanying Notes to Consolidated Financial Statements. As a result, the Company accrued $3.3 million in the first quarter of 2004 related to the accelerated vesting of executives’ benefits covered by the Company’s supplemental retirement plan and $318,000 in 2004 related to guaranteed bonuses provided for in employment contracts for those covered executives whose employment continued with the Company.

Impairment Charges

During 2005, the completion of the U.S. digital conversion necessitated the write-down or write-off of certain parts and film inventories and equipment previously utilized in the analog film environment amounting to a total of $567,000.

During 2004, the Company made a decision to materially alter the in-process technology platform that was to serve as the foundation for the conversion to full digital technology in the portrait studios. As a result of this decision, certain previously capitalized software development costs related to the development of the previous platform that no longer had future utility to the Company were written off resulting in a charge of $3.1 million. Additional strategic decisions were made in 2004 regarding the Company’s technology platform that necessitated the write-off or write-down of certain other technology-related assets to their anticipated fair value, thus resulting in charges totaling $3.4 million.

53

CPI CORP.

Notes to Consolidated Financial Statements

Reserves for Severance and Related Costs

During 2005 and 2003, the Company recognized $1.0 million and $659,000, respectively, in expense consisting principally of severance pay and supplemental retirement plan benefits related to the early retirement of senior executives. Also in 2005, the Company incurred on-going litigation costs related to the 2004 dismissal of certain former executives totaling $1.4 million and the cost of an executive search for the CEO position totaling $165,000. In 2004, the Company established reserves in the amount of $3.0 million for severance and related costs consisting principally of potential benefits related to severance pay and supplemental retirement plan costs associated with the dismissal of certain executives.

In the 2004 and 2003, a number of support positions in the Company’s corporate headquarters were eliminated resulting in employee severance accruals of approximately $457,000 and $687,000, respectively.

Pension Plan Curtailment

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

Consent Solicitation Costs

During the second half of 2003 and the first quarter of 2004, the Company incurred $1.7 million and $816,000, respectively, of professional services costs related to the then-ongoing consent solicitation. Included in the 2004 costs was $152,000 of total consent-related costs incurred by the Knightspoint Group, which the Company reimbursed.

Production Facility Closure

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

Contract Termination and Settlements

The net credit in 2005 of $346,000 relates principally to the favorable settlement of a claim resulting in a $400,000 refund related to previously-paid loan commitment fees and costs as is more fully discussed in the following paragraph.

In March 2004, prior to the change of control, the Company received a lending commitment related to the proposed refinancing of its then-existing debt structure. In exchange for that commitment, the Company paid a $200,000 non-refundable loan commitment fee. Subsequent to the receipt of the commitment and prior to its funding, the consent solicitation was completed resulting in the installation of a new Board of Directors and the lending commitment expired, necessitating the write-off of the previously capitalized non-refundable fee during the first quarter of 2004. In November 2004, the Company received a subsequent lending commitment to refinance its existing debt structure that was withdrawn by the lender requiring the write-off of the $100,000 non-refundable commitment fee paid to the lender at the time of the commitment.

54

CPI CORP.

Notes to Consolidated Financial Statements

During 2004, the Company recorded $961,000 of charges related to early contract terminations and settlements with certain of the Company’s vendors and consultants as a result of strategic decisions to modify such relationships. Included in this amount is an accrual relating to the potential settlement of a compensation claim by a former consultant to the Company, which was subsequently settled in 2005 for $250,000. This former consultant is a relative of the Company’s Chairman of the Board.

Impairment and Related Obligations of Preferred Security Interest

The impairment and related obligations of preferred security interest represents charges recorded in 2004 related to an investment in and operating lease guarantees associated with the Company’s former Wall Décor Segment, Prints Plus, totaling $9.8 million. These charges were necessitated by the significant deteriorating financial performance of Prints Plus during the third quarter of 2004 and are more fully discussed in Note 13.

55

CPI CORP.

Notes to Consolidated Financial Statements

The following is a summary of the 2004 and 2005 activity in the reserves established in connection with the Company’s restructuring and other initiatives:

														Reclassify to
					Asset									Supplemental
thousands	Reserve Balance		2004		Write-Downs/			Cash			Reclassify to Accrued			Retirement Plan			Reserve Balance
	Feb. 7, 2004		Charges		Impairments			Payments			Severance			Obligations			Feb. 5, 2005
Recorded as a component of income (loss) from operations:
Accruals related to accelerated vesting of supplemental   retirement plan benefits and guaranteed bonuses for 2004	$	-	$	3,656	$	-		$	-		$	(1,326	)	$	(2,012	)	$	318
Impairment charges		-		6,516		(6,516	)		-			-			-			-
Reserves for severance and related costs		816		3,430		-			(1,269	)		1,326			-			4,303
Consent solicitation costs		467		816		-			(1,283	)		-			-			-
Production facility closure		214		-		-			(181	)		-			-			33
Contract terminations and settlements		-		1,261		-			(981	)		-			-			280
		1,497		15,679		(6,516	)		(3,714	)		-			(2,012	)		4,934
Recorded as a component of other expense following income  (loss) from operations:
Impairment and related obligations of preferred   security interest		1,000		9,789		(7,689	)		-			-			-			3,100
Total Other Charges and Impairments	$	2,497	$	25,468	$	(14,205	)	$	(3,714	)	$	-		$	(2,012	)	$	8,034

thousands	Reserve					Asset
	Balance		2005 Charges			Write-Downs/						Receipts from		Reserve Balance
	Feb. 5, 2005		(Credits)			Impairments			Cash Payments			Settlements		Feb. 4, 2006
Recorded as a component of income (loss) from   operations:
Reserves for severance, executive retirements/
repositioning and related costs	$	4,303	$	2,546		$	-		$	(6,306	)	$	-	$	543
Accruals related to accelerated vesting of   supplemental retirement plan benefits and   guaranteed bonuses		318		-			-			(318	)		-		-
Impairment charges		-		567			(567	)		-			-		-
Contract terminations and settlements		280		(346	)		-			(332	)		400		2
Production facility closure		33		-			-			(33	)		-		-
		4,934		2,767			(567	)		(6,989	)		400		545
Recorded as a component of other expense following   income (loss) from operations:
Impairment and related obligations of   preferred security interest		3,100		-			-			(470	)		-		2,630
Total Other Charges and Impairments	$	8,034	$	2,767		$	(567	)	$	(7,459	)	$	400	$	3,175

The remaining reserves related to severance, executive retirements/repositioning and related costs are expected to be paid or settled principally in 2006. The reserves relating to the Company’s guarantee of certain retail store leases of Prints Plus are expected to be paid or settled during 2006.

56

CPI CORP.

Notes to Consolidated Financial Statements

NOTE 9 - STOCK-BASED COMPENSATION PLANS

As of February 4, 2006, the Company offers a stock option and restricted stock plan, both of which have been approved by the Company’s shareholders. Expenses recognized for 2005, 2004 and 2003 with respect to the Restricted Stock Plan were $811,000, $190,000 and $12,000, respectively. In 2005, the term to exercise a stock option grant was extended for a retiring executive. The $176,500 of expense related to this extension was recorded in other charges and impairments along with the related additional separation costs incurred. In 2004 and 2003, no expenses were recognized for the Stock Option Plan.

The following descriptions reflect pertinent information with respect to the individual plans:

Stock Option Plan

The Company has an amended and restated non-qualified stock option plan, under which certain officers and key employees may receive options to acquire shares of the Company’s common stock. Awards of stock options and the terms and conditions of such awards are subject to the discretion of the Compensation Committee of the Board of Directors, all of whom are independent directors. A total of 1,700,000 shares have been authorized for issuance under the plan. Options generally vest over four years and become exercisable over the vesting period, or at the end of the vesting period. Options generally expire in six to eight years.

In accordance with SFAS No. 123, “Accounting for Stock-Based Compensation”, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the assumptions listed in the following table. Assumptions for 2005 apply only to the option term that was extended in 2005 as all other outstanding options vested prior to the beginning of fiscal 2005 and no additional options were granted during 2005.

	2005			2004			2003
Dividend yield		3.6	%		2.9	%		3.4%-4.6	%
Stock volatility factor		31.0	%		24.0	%		35.1	%
Risk-free interest rate		3.0	%		3.0	%		3.0	%
Expected life of options		1 year			8 years			8 years

57

CPI CORP.

Notes to Consolidated Financial Statements

Changes in stock options are as follows:

	2005					2004					2003
				Weighted-					Weighted-					Weighted-
				Average					Average					Average
				Exercise					Exercise					Exercise
	Shares			Price		Shares			Price		Shares			Price
Balance at beginning of year		229,470		$	19.28		530,206		$	19.17		1,066,713		$	24.60
Granted		-			-		4,968			22.14		83,240			14.44
Cancelled or expired		(45,464	)		23.73		(239,259	)		20.76		(596,526	)		28.36
Exercised		(57,986	)		14.18		(66,445	)		13.29		(23,221	)		15.57
End of year balance		126,020		$	20.02		229,470		$	19.28		530,206		$	19.17
Reserved for future grant at year-end		966,706
Exercisable		126,020		$	20.02		229,470		$	19.28		267,770		$	22.74
Fair value of options granted during the year									$	4.29				$	3.66

The following table summarizes information about stock options outstanding at February 4, 2006:

	Options Outstanding and Exercisable
			Weighted-Average
			Remaining Contractual		Weighted-Average
Range of Exercise Prices	Shares		Life (Years)		Exercise Price
$12.96 - $13.99		32,212		4.76	$	13.01
$16.50 - $20.45		38,498		3.61		17.47
$24.87 - $25.94		55,310		0.39		25.88
Total		126,020		2.49	$	20.02

Restricted Stock Plan

The Company has an amended and restated restricted stock plan that has 250,000 shares of common stock reserved for issuance to key employees and members of the Board of Directors. During 2005 and 2004, the stockholders approved additional shares to be reserved for issuance under the plan of 200,000 and 100,000, respectively. Restricted stock is valued based on the fair market value of the Company's common stock on the grant date and the value is amortized over the vesting period.

On April 14, 2005, the Board of Directors approved a grant of 17,281 shares of unrestricted stock and 17,281 shares of restricted stock to its Chairman of the Board who had been acting in an executive officer capacity since October 6, 2004, when the Company formed its Office of the Chief Executive. The fair value of these awards on the date of grant was $519,122, $176,452 of which represented compensation for fiscal 2004 and the remainder was recorded as compensation expense in 2005. As of May 5, 2005, members of the Board of Directors were awarded 13,122 shares of restricted stock with a grant-date value of $224,649, which became fully vested on February 4, 2006.

58

CPI CORP.

Notes to Consolidated Financial Statements

	2005					2004					2003
	Shares			Grant-date Value		Shares			Grant-date Value		Shares			Grant-date Value
Nonvested stock, beginning of year		5,205		$	13.45		577		$	14.37		1,410		$	14.37
Granted		64,730			16.67		5,205			13.45		-			-
Vested		(37,396	)		16.02		(577	)		14.37		(833	)		14.37
Forfeited		(2,812	)		13.66		-			-		-			-
Nonvested stock, end of year		29,727		$	17.20		5,205		$	13.45		577		$	14.37
Reserved for future grant at year-end		267,853
Stock-based compensation expense related to restricted stock				$	727,532				$	13,803				$	11,975
The weighted average remaining vesting period of nonvested stock as of February 4, 2006 is 1.78 years.

NOTE 10 - EMPLOYEE BENEFIT PLANS

Expenses for retirement and savings-related benefit plans were as follows:
thousands	2005		2004		2003
Profit sharing	$	506	$	405	$	659
Pension plan expense		1,412		1,211		1,764
Pension plan curtailment loss		-		-		2,385
Supplemental retirement plan expense		280		841		1,545
Supplemental retirement plan expense -
accelerated vesting from change of control		-		3,338		-
Supplemental retirement plan curtailment loss		-		-		58
Total	$	2,198	$	5,795	$	6,411

Profit Sharing

Under the Company’s profit-sharing plan, as amended and restated, eligible employees may elect to invest from 1% to 25% of their base compensation in a trust fund, the assets of which are invested in securities other than Company stock. The Company matches at 50% of the employees’ investment contributions, up to a maximum of 5% of the employees’ compensation. The Company's matching contributions are made in shares of its common stock which vest incrementally at 20% per year of service or 100% once an employee has five years of service with the Company. Expenses related to the profit-sharing plan are accrued in the year to which the awards relate, based on the fair market value of the Company's common stock to be issued, determined as of the date earned. The Company provided 32,693, 27,047 and 47,699 shares to satisfy its obligations under the plan for 2005, 2004 and 2003, respectively, and recognized $506,000, $405,000 and $659,000 in expenses relating to the awards during those same time periods.

Defined Benefit Plans

The Company maintains a qualified, noncontributory pension plan that covers all full-time United States employees meeting certain age and service requirements. The plan provides pension benefits based on an employee's length of service and the average compensation earned from the later of the hire date or January 1, 1998 to the retirement date.

The Company's funding policy is to contribute annually at least the minimum amount required by government funding standards, but not more than is tax deductible. Plan assets consist primarily of marketable equity securities funds, guaranteed interest contracts, cash equivalents, immediate participation guarantee contracts and government bonds.

59

CPI CORP.

Notes to Consolidated Financial Statements

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

The Company seeks to maximize returns and minimize risk of the plan’s investment portfolio by diversifying the risks of the portfolio over many different industries and sectors. The targeted allocations are indicated below. The Company’s pension plan weighted average asset allocations at December 31, 2005 and December 31, 2004, by asset category, are as follows:

				Plan Assets at December 31
	Target
Asset Category	Allocation			2005			2004
Equity securities		60	%		63	%		61	%
Debt securities		40	%		37	%		39	%
Total		100	%		100	%		100	%

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

The Company also maintains a noncontributory defined benefit plan providing supplemental retirement benefits for certain current and former key executives. The cost of providing these benefits is accrued over the remaining expected service lives of the active plan participants. Net supplemental retirement benefit costs for 2005, 2004 and 2003 were $280,000, $524,000 and $1.6 million, respectively. The supplemental retirement plan is unfunded and as such does not have a specific investment policy or long-term rate of return assumptions. However, certain assets will be used to finance these future obligations and consist of investments in a Rabbi Trust amounting to $3.7 million and $6.1 million at February 4, 2006 and February 5, 2005, respectively. In 2006, the Company expects to pay approximately $290,000 of scheduled supplemental retirement plan benefit payments from the assets of the Rabbi Trust.

The measurement dates for the pension and supplemental executive retirement plans are December 31, 2005 and December 31, 2004, which correlate to the Company’s fiscal years ended February 4, 2006 and February 5, 2005, respectively.

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

	Pension		Supplemental
thousands	Benefits		Benefits
2006	$	2,000	$	290
2007		2,100		290
2008		2,200		180
2009		2,400		150
2010		2,600		250
2011-2015		13,500		750

60

CPI CORP.

Notes to Consolidated Financial Statements

The Company contributed $2.1 million to its pension plan in 2005, but does not expect to contribute to the pension plan in 2006.

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

	Defined Benefit Plans
thousands	Pension Plan						Supplemental Retirement Plan
	2005			2004			2005			2004
Projected benefit obligation
Benefit obligation at beginning of year	$	49,898		$	45,307		$	4,491		$	4,428
Service cost		468			745			112			190
Interest cost		2,796			2,702			249			358
Actuarial losses (gains)		1,858			2,785			(86	)		(988	)
Benefit payments		(2,072	)		(1,641	)		(989	)		(2,833	)
Plan amendments		-			-			-			247
Change of control - accelerated vesting		-			-			-			3,089
Benefit obligation at end of year (1) (2)	$	52,948		$	49,898		$	3,777		$	4,491
Fair value of plan assets
Fair value at beginning of year	$	32,412		$	31,546		$	-		$	-
Actual return on plan assets		1,403			2,507			-			-
Employer contributions (3)		2,050			-			989			2,833
Benefit payments		(2,072	)		(1,641	)		(989	)		(2,833	)
Fair value at end of year	$	33,793		$	32,412		$	-		$	-
Funded status
Funded status at end of year	$	(19,155	)	$	(17,486	)	$	(3,777	)	$	(4,491	)
Unrecognized prior service cost		177			221			184			215
Unrecognized net loss (gain)		18,305			15,954			(530	)		(556	)
Net amount recognized	$	(673	)	$	(1,311	)	$	(4,123	)	$	(4,832	)
Components of consolidated balance sheet
Accrued benefit liability	$	(17,810	)	$	(15,890	)	$	(4,123	)	$	(4,832	)
Intangible asset		177			221			-
Accumulated other comprehensive loss		16,960			14,358			-			-
Net amount recognized	$	(673	)	$	(1,311	)	$	(4,123	)	$	(4,832	)

(1)   At February 4, 2006 and February 5, 2005, the accumulated benefit obligation for the pension plan was $51.6 million and $48.3 million, respectively.

(2)   At February 4, 2006 and February 5, 2005, the accumulated benefit obligation for the supplemental retirement plan was $3.7 million and $4.4 million, respectively.

(3)   For the supplemental retirement plan for the fiscal years ended February 4, 2006 and February 5, 2005, the employer contributions were financed through the liquidation of investments in the Company’s Rabbi Trust.

61

CPI CORP.

Notes to Consolidated Financial Statements

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

	Pension Plan									Supplemental Retirement Plan
thousands	2005			2004			2003			2005			2004		2003
Components of net periodic benefit cost
Service cost	$	468		$	745		$	1,520		$	112		$	190	$	462
Interest cost		2,796			2,702			2,626			249			358		410
Expected return on plan assets		(2,831	)		(2,934	)		(3,078	)		-			-		-
Amortization of transition obligation		-			-			-			-			-		71
Amortization of prior service cost		44			44			441			31			31		-
Amortization of net (gain) loss		935			654			255			(18	)		-		17
Change of control - accelerated vesting		-			-			-			-			3,089		-
Net (gain) loss due to settlements		-			-			-			(94	)		31		372
Curtailment reduction in transition obligation		-			-			-			-			480		213
Net periodic benefit cost		1,412			1,211			1,764			280			4,179		1,545
Curtailment loss		-			-			2,385			-			-		58
Net periodic benefit cost after curtailment loss	$	1,412		$	1,211		$	4,149		$	280		$	4,179	$	1,603

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

	Pension Plan									Supplemental Retirement Plan
	2005			2004			2003			2005			2004			2003
Weighted-average assumptions used to determine
benefit obligations at fiscal year end
Discount rate		5.50	%		5.75	%		6.00	%		5.50	%		5.75	%		6.00	%
Rate of increase in future compensation		3.75	%		3.75	%		3.75	%		2.00	%		2.00	%		4.00	%
Weighted-average assumptions used to determine
net periodic benefit cost
Discount rate		5.75	%		5.75	%		6.50	%		5.75	%		6.00	%		6.50	%
Expected long-term return on plan assets		8.50	%		8.75	%		8.75	%		N/A			N/A			N/A
Rate of increase in future compensation		3.75	%		3.75	%		4.00	%		2.00	%		4.00	%		4.00	%

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

thousands	Pension Plan				Supplemental Retirement Plan
	2005		2004		2005		2004
Projected benefit obligation	$	52,948	$	49,898	$	3,777	$	4,491
Accumulated benefit obligation		51,603		48,303		3,681		4,351
Fair value of plan assets		33,793		32,412		-		-

62

CPI CORP.

Notes to Consolidated Financial Statements

The Company also maintains a noncontributory pension plan that covers all Canadian employees meeting certain service requirements. The plan provides pension benefits based on an employee’s length of service and annual compensation earned. As of February 28, 2005, the Company amended its plan to implement a freeze of future benefit accruals, except for certain employees who were both over 50 years of age and had ten or more years of service with the Company on that date. The Company contributed approximately $248,000 and $385,000 to this retirement plan in calendar 2005 and 2004, respectively. Plan assets were $2.1 million as of December 31, 2005 and $1.7 million as of December 31, 2004, and consisted of several Canadian equity and fixed income funds and a global equity fund. No liability is reflected in the Company’s consolidated financial statements as the plan is fully funded.

NOTE 11- INCOME TAXES

The total income tax provision (benefit) is summarized in the following table:

thousands
	2005		2004			2003
Total income tax provision (benefit)
Continuing operations	$	4,388	$	(2,189	)	$	3,183
Discontinued operations		-		(2,201	)		(2,518	)
Total income tax provision (benefit)	$	4,388	$	(4,390	)	$	665

The components of income tax provision (benefit) from continuing operations were:

thousands
	2005		2004			2003
Federal
Current	$	1,631	$	2,801		$	2,841
Deferred		1,793		(5,121	)		104
Federal income tax		3,424		(2,320	)		2,945
State
Current		51		276			100
Deferred		375		(648	)		423
State income tax		426		(372	)		523
Foreign
Current		353		387			-
Deferred		185		116			(285	)
Foreign income tax		538		503			(285	)
Total income tax provision (benefit)	$	4,388	$	(2,189	)	$	3,183

63

CPI CORP.

Notes to Consolidated Financial Statements

A reconciliation of expected income tax expense at the federal statutory rate of 34% to the Company’s applicable income tax expense (benefit) follows:

thousands	2005			2004			2003
Tax at statutory rate	$	3,664		$	(5,763	)	$	3,068
State income tax, at statutory rate, net of federal tax expense (benefit)		281			(246	)		434
Tax effect of:
Nondeductible expenses		158			270			123
Tax credits and exclusions		(381	)		(562	)		(384	)
Officers life insurance		-			784			(110	)
Valuation allowance		(289	)		3,296			-
Foreign taxes		372			308
Tax settlements		376			(228	)		-
Tax on earnings repatriation		242			-			-
Tax benefit of foreign tax deduction		(35	)		(48	)		-
Other items		-			-			52
Applicable income taxes (benefit)	$	4,388		$	(2,189	)	$	3,183

In preparing its tax return, the Company is required to interpret complex tax laws and regulations and utilize income and cost allocation methods to determine its taxable income. On an ongoing basis, the Company is subject to examination by federal, state and foreign taxing authorities that may give rise to differing interpretations of the complex laws, regulations and methods. During fiscal 2005, the Company finalized the federal tax examination for fiscal years ending February 2001 through February 2003. Other than an interest accrual adjustment attributable to a change in timing, the federal tax examination settlement approximated amounts accrued in 2004. Ongoing examinations by various state taxing authorities date back to February 7, 1998. At February 4, 2006, the Company believes that the aggregate amount of any additional tax liabilities that may arise from examinations by taxing authorities, if any, will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company.

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

64

CPI CORP.

Notes to Consolidated Financial Statements

The components of the Company’s net deferred tax assets as of February 4, 2006 and February 5, 2005 were:

thousands	2005			2004
Deferred tax assets
Federal, state and foreign operating and capital loss carryforwards	$	11,718		$	15,659
Pension and supplemental retirement benefits		8,008			7,568
Reserves, principally due to accrual for financial reporting purposes		4,128			5,527
Revenue recognition, principally due to SAB 101		759			773
Federal and foreign tax credit carry forwards		3,229			3,475
Gross deferred tax assets		27,842			33,002
Deferred tax liabilities
Property and equipment, principally due to differences in depreciation		(5,470	)		(8,697	)
Other		(87	)		(87	)
Gross deferred tax liabilities		(5,557	)		(8,784	)
Valuation allowance		(2,660	)		(3,689	)
Net deferred tax asset	$	19,625		$	20,529

As of February 4, 2006, the Company had available approximately $21.9 million in U.S. federal net operating loss carryforwards, which expire beginning in 2023 and $7.0 million in capital loss carryforwards, which expire in 2009. The Company had net operating loss carryforwards for state tax purposes and Canadian purposes of approximately $29.0 million and $2.8 million, respectively, which begin to expire in 2008 and 2010, respectively. The Company also has alternative minimum tax credit carryforwards of approximately $305,000. Also, during 2005 the Company elected to deduct previously recorded foreign tax credit carryforwards of approximately $1.0 million, removing the valuation allowance previously recorded. The Company has General Business Tax Credit carryforwards totaling $2.9 million which expire in tax years 2022 through 2025.

The Company regularly assesses the likelihood that deferred tax assets will be recovered through future taxable income. To the extent the Company believes that it is more likely than not that a deferred tax asset will not be realized, a valuation allowance is established. As of February 5, 2005, the Company had a valuation allowance of approximately $3.7 million. During 2005, the Company elected to deduct rather than credit foreign taxes, resulting in a net benefit of $289,000. The election also resulted in the reduction of the deferred tax asset related to foreign taxes and the related valuation allowance of $740,000. As of February 4, 2006, the Company had a valuation allowance of approximately $2.7 million to offset deferred tax assets related to capital loss carryforwards. It is management’s belief that the remaining deferred tax asset meets the criteria for realization, including the existence of a history of taxes paid sufficient to support the realization of deferred tax assets.

The American Jobs Creation Act (“AJCA”) which was enacted on October 22, 2004 created a temporary incentive for U.S. multinationals to repatriate accumulated earnings outside the United States by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations.  The Company elected to apply this provision to qualifying earnings repatriations in fiscal 2005 providing taxes of approximately $472,000. 

At February 4, 2006, approximately $3.3 million of foreign subsidiary net earnings was considered permanently invested in those businesses. This declined $5.3 million compared to February 5, 2004 due to the repatriation of foreign earnings under the AJCA described above. U.S. income taxes have not been provided for such unrepatriated earnings. It is not practicable to determine the amount of unrecognized deferred tax liabilities associated with such unrepatriated earnings.

65

CPI CORP.

Notes to Consolidated Financial Statements

NOTE 12 - COMMITMENTS AND CONTINGENCIES

Operating Lease Commitments

The Company leases various premises and equipment under noncancellable operating lease agreements with initial terms in excess of one year and expiring at various dates through fiscal year 2010. The leases generally provide for the lessee to pay maintenance, insurance, taxes and certain other operating costs of the leased property. In addition to the minimum rental commitments, certain of these operating leases provide for contingent rentals based on a percentage of revenues in excess of specified amounts.

Rental expense during 2005, 2004, and 2003 on all operating leases was $1.4 million, $1.8 million and $1.9 million, respectively.

Minimum rental payments under operating leases with initial terms in excess of one year at February 4, 2006, are as follows:

2006	$	1,178
2007		774
2008		343
2009		201
2010		74
Total minimum payments	$	2,570

Standby Letters of Credit

As of February 4, 2006, the Company had standby letters of credit outstanding in the principal amount of $6.3 million primarily used in conjunction with the Company’s self-insurance programs. On May 17, 2005, the Company replaced its then-outstanding letters of credit with new letters of credit issued under the Company’s new Credit Agreement. Accordingly, the restricted cash, which had been deposited as cash collateral as of February 5, 2005, has been returned to the Company to be used for general corporate purposes.

Purchase Commitments

As of February 4, 2006, the Company had outstanding purchase commitments for goods and services of $4.3 million.

Contingent Lease Obligations

In July 2001, the Company announced the completion of the sale of its Wall Décor segment, which included the ongoing guarantee of certain operating real estate leases of Prints Plus. As of February 4, 2006, the maximum future obligation to the Company under its guarantee of remaining leases is $2.6 million. To recognize the risk associated with these leases based upon the Company’s past experience with renegotiating lease obligations and the significant deterioration in the financial performance of Prints Plus, including its bankruptcy filing, all of which is more fully described in Note 13 to the Consolidated Financial Statements, the Company has recorded lease obligation reserves totaling $2.6 million at February 4, 2006. Based on the progress of the bankruptcy case to-date and the continued operations of selected locations of Prints Plus, the Company believes that the $2.6 million reserve is adequate to cover the potential losses to be realized under the Company’s operating lease guarantees.

66

CPI CORP.

Notes to Consolidated Financial Statements

Contingent Commission Payments

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

The Contingent Payments are triggered only if the Company operates more than 24 domestic non-Sears portrait studios and the rate of growth in total contractual commissions paid to Sears by the Company under the pre-existing agreement does not exceed Sears’ same-store revenue growth rate by specified percentages, up to a maximum of 2%. If both of the above mentioned conditions occur, the Contingent Payments are determined by a formula included in the amendment to the agreement, however, in no event shall such payments exceed $2.5 million annually or $7.5 million cumulatively through 2008, the remaining term of the current agreement. No domestic non-Sears portrait studios were opened in 2005, 2004 or 2003 and thus no Contingent Payments were made in any of the years.

Legal Proceedings

The Company is a defendant in various lawsuits arising in the ordinary course of business. Legal costs related to contingent liabilities are accrued as service is provided. It is the opinion of management that the ultimate liability, if any, resulting from such lawsuits will not materially affect the consolidated financial position or results of operations of the Company.

NOTE 13 - ASSETS OF BUSINESS TRANSFERRED UNDER CONTRACTUAL ARRANGEMENTS

Since the completion of the sale of its former Wall Décor segment (Prints Plus) in 2001 to Prints Plus’ former management, the Company has had a continuing financial interest in Prints Plus. This continuing financial interest was represented by a preferred security carrying a 9% annual interest rate, a secured revolving line of credit to Prints Plus and operating lease guarantees related to certain of Prints Plus’ retail store locations.

The Preferred Security was initially valued at $11.0 million at the date of the sale of Prints Plus and through voluntary redemptions had been paid down to $7.0 million prior to November 13, 2004. The amount advanced under its secured revolving line of credit was paid in full during the fourth quarter of 2004 and the underlying agreement was terminated. The operating performance of Prints Plus significantly deteriorated during its quarter ended November 13, 2004 and subsequent thereto. As a result, during 2004, the Company recorded an impairment reserve consisting of the remaining carrying value of the Preferred Security ($7.0 million), the related accrued interest ($689,000) and additional reserves for ongoing guarantees of certain of Prints Plus’ operating leases ($2.1 million). The Company continues to fully reserve all accrued interest due from Prints Plus on its Preferred Security. During 2005, certain lease guarantees were settled for $470,000. As of February 4, 2006, the maximum future obligations to the Company under it lease guarantees is $2.6 million, before any landlord negotiations or subleasing. Accordingly, as of February 4, 2006, the Company has recorded an impairment reserve of approximately $8.3 million related to the Preferred Security and related interest and $2.6 million in accrued lease liability obligations relating to its lease guarantees.

During the Company’s 2004 fourth quarter, Prints Plus filed a voluntary petition for relief in the United States Bankruptcy Court for the District of Massachusetts (the “Bankruptcy Court”) under Chapter 11 of the United States Bankruptcy Code. At February 4, 2006, based upon an analysis of the Company’s exposure under the operating lease guarantees, taking into account the progress of the bankruptcy case to date including those leases rejected in bankruptcy, the Company believes it has accrued sufficient liabilities for obligations under these operating leases.

In conjunction with the above-mentioned reorganization efforts, on February 28, 2006, Prints Plus (the “Debtor”) filed a disclosure statement and proposed plan of reorganization with the Bankruptcy Court. On April 7, 2006 they filed amendments to those documents (the “Plan Documents”). In the Plan Documents, the Debtor states that the Debtor and its bankruptcy estate may have potential claims against the Company under Chapter 5 of the United States Bankruptcy Code (the “Alleged Claims” or the “Unasserted Claims”). The Plan Documents do not specify the precise nature of the Alleged Claims, nor do they specify a particular amount of liability associated with the Alleged Claims. To date, the Debtor has not filed any complaint or other pleadings against the Company with respect to the Alleged Claims. The Bankruptcy Court has not ruled on the Plan Documents, nor has the Bankruptcy Court addressed the Alleged Claims. Based upon consultation with the Company’s bankruptcy counsel, management believes the potential Alleged Claims are without merit and intends to vigorously defend any claims, if ultimately asserted. It is the opinion of management that the ultimate liability, if any, resulting from the Unasserted Claims, if asserted, will not materially affect the consolidated financial position or results of operations of the Company. As a result of the uncertainty regarding the amount of any claim, if asserted, and the potential outcome of this matter, no additional provision has been made in the financial statements with respect to these Unasserted Claims.

67

NOTE 14- FAIR VALUE OF FINANCIAL INSTRUMENTS

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

Current Assets and Current Liabilities

Excluding deferred tax assets, the carrying amounts approximate fair value at February 4, 2006 and February 5, 2005 due to the short maturity of these financial instruments.

Deferred Tax Assets, Customer Deposit Liability and Other Long-Term Liabilities

For these financial instruments, fair market value is not practicable to estimate for the following reasons:

Deferred tax assets reverse over a variety of years and reversal periods are subject to future income levels. These assets are recorded at the ultimate anticipated cash inflow, without regard to the time value of money.

Other assets, customer deposit liability and other long-term liabilities are due in periods that exceed one year and are not traded instruments. These instruments are recorded at the ultimate anticipated cash value, without regard to the time value of money. Exceptions include the long-term pension asset, which is incorporated in the discussion in Note 10.

Property and Equipment

These assets have been purchased and held over varying timeframes, some are customized for our own use and resale values for such used items are not readily available. The recorded value of these instruments is discussed in Note 1.

Other Investments-Supplemental Retirement Plan

This investment is recorded based on valuation reports for the related Rabbi Trust, which approximate fair value.

Long-Term Debt

As of February 4, 2006, the Company’s long-term debt bears a rate of interest that varies with the market. Accordingly, the fair market value is estimated to approximate the recorded value of this instrument.

As of February 5, 2005, the fair value of the Company’s long-term debt (then a fixed rate instrument) was estimated based on quoted market prices for similar debt issues with similar remaining maturities. On February 5, 2005, the carrying value and estimated fair market value of the Company’s long-term debt was $25.7 million and $26.8 million, respectively.

68

CPI CORP.

Notes to Consolidated Financial Statements

NOTE 15 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

thousands, except per share data
				QUARTER ENDED:
FISCAL YEAR 2005	April 30, 2005			July 23, 2005			November 12, 2005			February 4, 2006
	(12 weeks)			(12 weeks)			(16 weeks)			(12 weeks)
Net sales	$	55,804		$	54,724		$	78,470		$	102,985
Gross margin		48,339			46,844			68,637			93,033
Net (loss) earnings		(2,058	)		(3,017	)		(3,098	)		14,561
Net (loss) earnings per share - diluted	$	(0.26	)	$	(0.38	)	$	(0.39	)	$	1.84
Net (loss) earnings per share - basic	$	(0.26	)	$	(0.38	)	$	(0.39	)	$	1.85
Weighted average number of common and equivalent shares - diluted		7,810			7,850			7,871			7,905
Weighted average number of common and equivalent shares - basic		7,810			7,850			7,871			7,880
		QUARTER ENDED:
FISCAL YEAR 2004		May 1, 2004			July 24, 2004			November 13, 2004			February 5, 2005
		(12 weeks)			(12 weeks)			(16 weeks)			(12 weeks)
Net sales	$	54,925		$	48,621		$	78,821		$	99,498
Gross margin		47,234			41,950			68,245			87,537
Net (loss) earnings from continuing operations		(7,649	)		(6,519	)		(13,438	)		12,844
Net loss from discontinued operations		(1,149	)		(2,588	)		(6	)		(3	)
Net (loss) earnings		(8,798	)		(9,107	)		(13,444	)		12,841
Net (loss) earnings per share from continuing operations - diluted	$	(0.95	)	$	(0.82	)	$	(1.73	)	$	1.65
Net loss per share from discontinued operations - diluted	$	(0.14	)	$	(0.32	)	$	-		$	-
Net (loss) earnings per share - diluted	$	(1.09	)	$	(1.14	)	$	(1.73	)	$	1.65
Net (loss) earnings per share from continuing operations - basic	$	(0.95	)	$	(0.82	)	$	(1.73	)	$	1.66
Net loss per share from discontinued operations - basic	$	(0.14	)	$	(0.32	)	$	-		$	-
Net (loss) earnings per share - basic	$	(1.09	)	$	(1.14	)	$	(1.73	)	$	1.66
Weighted average number of common and equivalent shares - diluted		8,101			7,988			7,752			7,797
Weighted average number of common and equivalent shares - basic		8,101			7,988			7,752			7,759

69

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

 None.

Item 9A.Controls and Procedures

Evaluation of disclosure controls and procedures

The Company’s Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934, as amended, Rules 13a-15(e) and 15d-15(e)) were effective to ensure that information required to be disclosed by the Company (including its consolidated subsidiaries) in the reports that the Company files or submits under the Securities Exchange Act of 1934 were recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our chief financial officer, as appropriate, to allow timely decisions regarding financial disclosures.

Changes in Internal Controls

There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management's Report on Internal Control Over Financial Reporting

CPI’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our internal control system was designed to provide reasonable assurance to CPI's management and board of directors regarding the preparation and fair presentation of published financial statements. CPI’s management has assessed the effectiveness of our internal control over financial reporting as of February 4, 2006. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on management’s assessment utilizing these criteria we believe that, as of February 4, 2006, our internal control over financial reporting was effective. Our independent auditors, KPMG LLP have audited management's assessment of our internal control over financial reporting as stated in their report on page 71.

70

Report of Independent Registered Public Accounting Firm

The Board of Directors

CPI Corp.:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that CPI Corp. (the Company) maintained effective internal control over financial reporting as of February 4, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of February 4, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by COSO. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 4, 2006, based on criteria established in Internal Control — Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of February 4, 2006 and February 5, 2005, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended February 4, 2006, and our report dated April 18, 2006 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

____________

KPMG LLP

St. Louis, Missouri

April 18, 2006

71

Item 9B. Other Information

     Not Applicable.

PART III

Item 10.Directors and Executive Officers of the Registrant

Information required under this Item will be contained in the Registrant's 2005 Proxy Statement to be filed with the SEC within 120 days of the end of the Registrant's fiscal year 2005 and is incorporated herein by reference and will be delivered to stockholders in connection with the Annual Shareholders meeting to be held on June 7, 2006.

The Company has adopted a Corporate Governance Code of Business Conduct and Ethics applicable to all employees, officers and directors. This code is applicable to senior executive officers including the principal executive officer, principal financial officer and principal accounting officer of the Company. The Company’s Corporate Governance Code of Business Conduct and Ethics is available on the Company’s website at www.cpicorp.com. The Company intends to post on its website any amendments to, or waivers from its Corporate Governance Code of Business Conduct and Ethics applicable to senior executive officers. The Company will provide stockholders with a copy of its Corporate Governance Code of Business Conduct and Ethics without charge upon written request directed to the Company’s Secretary at the Company’s address set forth on the cover page of this Annual Report on Form 10-K.

Item 11.Executive Compensation

Information required under this Item will be contained in the Registrant's 2005 Proxy Statement to be filed with the SEC within 120 days of the end of the Registrant's fiscal year 2005 and is incorporated herein by reference and will be delivered to stockholders in connection with the Annual Shareholders meeting to be held on June 7, 2006.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table provides information as of February 4, 2006 regarding the number of shares of common stock that were issuable under the Company’s equity compensation plans.

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column)
Equity compensation plans approved by security holders		126,020	$	20.02		1,243,998 (1	)
Equity compensation plans not approved by security holders (2)		0		0		80,232 (3	)
Total		126,020	$	20.02		1,324,230

(1)   Includes 966,706 shares reserved for issuance under the Company’s stock option plan, 267,853 shares reserved for issuance under the Company’s restricted stock plan and 9,439 shares reserved for issuance under the Company’s employees’ profit sharing plan.

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

(3)   Represents 80,232 shares reserved for issuance under the Company’s inactive stock bonus plan.

72

Item 13.Certain Relationships and Related Transactions

Information required under this Item will be contained in the Registrant's 2005 Proxy Statement to be filed with the SEC within 120 days of the end of the Registrant's fiscal year 2005 and is incorporated herein by reference and will be delivered to stockholders in connection with the Annual Shareholders meeting to be held on June 7, 2006.

Item 14.Principal Accounting Fees and Services

Information required under this Item will be contained in the Registrant's 2005 Proxy Statement, to be filed with the SEC within 120 days of the end of the Registrant's fiscal year 2005 and is incorporated herein by reference and will be delivered to stockholders in connection with the Annual Shareholders meeting to be held on June 7, 2006.

PART IV

Item 15.Exhibits and Financial Statement Schedules

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

(1.)	FINANCIAL STATEMENTS		PAGES
	-	Report of Independent Registered Public Accounting Firm	33
	-	Consolidated Balance Sheets as of February 4, 2006 and February 5, 2005	34-35
	-	Consolidated Statements of Operations for the fiscal years ended February 4, 2006,  February 5, 2005 and February 7, 2004	36
	-	Consolidated Statements of Changes in Stockholders' Equity for the fiscal years  ended February 4, 2006, February 5, 2005 and February 7, 2004	37
	-	Consolidated Statements of Cash Flows for the fiscal years ended February 4, 2006,  February 5, 2005 and February 7, 2004	38-40
	-	Notes to Consolidated Financial Statements	41-69

(2.)FINANCIAL STATEMENT SCHEDULES

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

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

The exhibits to this Annual Report on Form 10-K are listed on the accompanying index and are incorporated herein by reference or are filed as part of this Annual Report on Form 10-K.

73

(a) EXHIBIT INDEX
		EXHIBIT INDEX
EXHIBIT
NUMBER		DESCRIPTION
(3.1)	Articles of Incorporation of the Company, incorporated by reference to CPI Corp.'s Annual Report
	for fiscal year 1989 on Form 10-K, Exhibit 3.1, filed 4/30/90.
(3.2)	Amended and Restated Bylaws of the Company.
(4.1)	Form of Rights Agreement, Dated as of March 13, 2000 between CPI Corp. and Harris Trust and
	Savings Bank, incorporated by reference to CPI Corp.'s Form 8-A, Exhibit 4.5, dated March 14, 2000
(10.1)	License Agreement Sears, Roebuck & Co.dated 1/1/99, incorporated by reference to CPI Corp.'s
	Annual Report for fiscal year 1998 on Form 10-K, Exhibit 10.28, filed 5/5/99.
(10.2)	Second Amendment dated 11/10/99 to License Agreement Sears, Roebuck & Co., incorporated
	by reference to CPI Corp.'s Form 10-Q, Exhibit 5.1, filed 12/23/99.
(10.3)	License Agreement Sears, Roebuck & Co. (Off Mall) dated 1/1/99, incorporated by reference to
	CPI Corp.'s Annual Report for fiscal year 1998 on Form 10-K, Exhibit 10.29, filed 5/5/99.
(10.4)	Second Amendment dated 11/10/99 to License Agreement Sears, Roebuck & Co. (Off Mall),
	incorporated by reference to CPI Corp.'s Form 10-Q, Exhibit 5.2, filed 12/23/99.
(10.5)	License Agreement Sears, Roebuck De Puerto Rico, Inc. dated 1/1/99, incorporated by reference
	to CPI Corp.'s Annual Report for fiscal year 1998 on Form 10-K, Exhibit 10.30, filed 5/5/99.
(10.6)	Development and License Agreement dated 1/31/01 between Sears, Roebuck and Co. and Consumer
	Consumer Programs, Incorporated, incorporated by reference to CPI Corp.'s Annual Report for
	fiscal year 2000 on Form 10-K, Exhibit 10.15, filed 5/3/01.
(10.7)*	Employment Contract Jane E. Nelson dated 2/6/00, incorporated by reference to CPI Corp.'s
	Annual Report for fiscal year 1999 on Form 10-K, Exhibit 10.36, filed 4/26/00.
(10.8)*	CPI Corp. Employees Profit Sharing Plan & Trust (As Amended and Restated Effective
	January 1, 1998), incorporated by reference to CPI Corp.'s Annual Report for fiscal year 1998
	on Form 10-K, Exhibit 10.32, filed 5/5/99.
(10.9)*	First Amendment to CPI Corp. Employee Profit Sharing Plan & Trust (As Amended and Restated
	Effective January 1, 1998) (Effective January 1, 1999), incorporated by reference to CPI Corp.'s
	Annual Report for fiscal year 1998 on Form 10-K, Exhibit 10.33, filed 5/5/99.
(10.10)*	CPI Corp. 1981 Stock Bonus Plan (As Amended and Restated Effective 2/3/91), incorporated by
	reference to CPI Corp.'s Annual Report for fiscal year 1992 on Form 10-K, Exhibit 10.29, filed 5/5/93.
(10.11)*	First Amendment to CPI Corp. 1981 Stock Bonus Plan (As Amended and Restated Effective
	February 3, 1991) Effective January 1, 1995, incorporated by reference to CPI Corp.'s Annual
	Report for fiscal year 2000 on Form 10-K, Exhibit 10.30, filed 5/3/01.
(10.12)*	CPI Corp. Deferred Compensation and Retirement Plan for Non-Management Directors
	(Amended and Restated as of January 28, 2000), incorporated by reference to CPI Corp.'s Annual
	Report for fiscal year 2000 on Form 10-K, Exhibit 10.31, filed 5/3/01.

74

		EXHIBIT INDEX (…continued)
EXHIBIT
NUMBER		DESCRIPTION
(10.13)*	Deferred Compensation and Stock Appreciation Rights Plan (Amended and Restated as of
	June 6, 1996), incorporated by reference to CPI Corp.'s Annual Report for fiscal year 2000
	on Form 10-K, Exhibit 10.32, filed 5/3/01.
(10.14)*	CPI Corp. Stock Option Plan (Amended and Restated Effective as of December 16, 1997),
	incorporated by reference to CPI Corp.'s Annual Report for fiscal year 2000 on Form 10-K,
	Exhibit 10.34, filed 5/3/01.
(10.15)*	CPI Corp. Key Executive Deferred Compensation Plan (As Amended and Restated June 6, 1996),
	incorporated by reference to CPI Corp.'s Annual Report for fiscal year 2000 on Form 10-K,
	Exhibit 10.36, filed 5/3/01.
(10.16)*	Employment Agreement dated 9/5/01 by and between Jack Krings and CPI Corp., incorporated by
	reference to CPI Corp.'s Form 10-Q, Exhibit 10.42, filed 12/21/01.
(10.17)*	Employment Agreement dated 4/8/02 by and between Gary W. Douglass and CPI Corp.,
	incorporated by reference to CPI Corp.'s Annual Report for fiscal year 2001 on Form 10-K,
	Exhibit 10.50, filed 5/1/02.
(10.18)	Third Amendment dated 6/5/02 to Sears License Agreement, incorporated by reference to
	CPI Corp.'s Form 10-Q, Exhibit 10.51, filed 6/7/02.
(10.19)*	First Amendment to CPI Corp. Deferred Compensation and Retirement Plan for Non-management
	Directors (As Amended and Restated as of January 28, 2002), incorporated by reference to
	CPI Corp.'s Form 10-Q, Exhibit 10.52, filed 6/7/02.
(10.20)	Sixth Amendment dated 11/20/02 to Sears License Agreement, incorporated by reference to
	CPI Corp.'s Form 10-Q, Exhibit 10.54, filed 12/11/02.
(10.21)	Third Amendment to Sears License Agreement (Off Mall) dated 11/20/02, incorporated by
	reference to CPI Corp.'s Form 10-Q, Exhibit 10.55, filed 12/11/02.
(10.22)	Fourth Amendment to Sears License Agreement (Off Mall) dated 11/20/02, incorporated by
	reference to CPI Corp.'s Form 10-Q, Exhibit 10.56, filed 12/11/02.
(10.23)	Fifth Amendment to Sears License Agreement (Off Mall) dated 11/20/02, incorporated by
	reference to CPI Corp.'s Form 10-Q, Exhibit 10.57, filed 12/11/02.
(10.24)*	Employment Agreement dated 10/21/02 by and between Peggy J. Deal and CPI Corp.,
	incorporated by reference to CPI Corp.'s Form 10-Q, Exhibit 10.58, filed 12/11/02.
(10.25)*	Employment Agreement dated 11/15/02 by and between Thomas Gallahue and CPI Corp.,
	incorporated by reference to CPI Corp.'s Form 10-Q, Exhibit 10.59, filed 12/11/02.
(10.30)	Sears License Agreement dated 1/1/03 by and between Sears, Canada, Inc., Sears Roebuck
	and Co. and CPI Corp.incorporated, by reference to CPI Corp.'s Annual Report for fiscal year
	2002 on Form 10-K, Exhibit 10.64, filed 5/16/03.

75

		EXHIBIT INDEX (…continued)
EXHIBIT
NUMBER		DESCRIPTION
(10.31)	First Amendment dated 9/30/02 to CPI Corp. Retirement Plan and Trust, incorporated by
	reference to CPI Corp.'sAnnual Report for fiscal year 2002 on Form 10-K, Exhibit 10.65,
	filed 5/16/03.
(10.32)	Second Amendment dated 11/29/02 to CPI Corp. Retirement Plan and Trust, incorporated by
	reference to CPI Corp.'s Annual Report for fiscal year 2002 on Form 10-K, Exhibit 10.66,
	filed 5/16/03.
(10.33)	Third Amendment dated 11/29/02 to CPI Corp. Employees Profit Sharing Plan and Trust,
	incorporated by reference to CPI Corp.'s Annual Report for fiscal year 2002 on Form 10-K,
	Exhibit 10.67, filed 5/16/03.
(10.34)	Seventh Amendment dated 8/11/03 to Sears License Agreement, incorporated by reference
	to CPI Corp.'s Form 10-Q, Exhibit 10.69, filed 8/27/03.
(10.35)	Eighth Amendment dated 9/1/03 to Sears License Agreement, incorporated by reference to
	CPI Corp.'s Form 10-Q, Exhibit 10.70, filed 12/18/03.
(10.36)	Third Amendment dated 2/6/04 to CPI Corp. Retirement Plan and Trust, incorporated by
	reference to CPI Corp.'s Annual Report for fiscal year 2003 on Form 10-K, Exhibit 10.73,
	filed 4/21/04.
(10.37)	Fourth Amendment dated 6/5/02 to License Agreement by and between Sears, Roebuck and Co.
	and CPI Corp., incorporated by reference to CPI Corp.'s Annual Report for fiscal year 2003
	on Form 10-K, Exhibit 10.74, filed 4/22/04.
(10.38)	Sixth Amendment dated 4/29/04 to License Agreement (Off Mall) by and between Sears,
	Roebuck and Co. and CPI Corp., incorporated by reference to CPI Corp.'s Form 10-Q,
	Exhibit 10.83, filed 6/10/04.
(10.39)*	CPI Corp. Restricted Stock Plan as Amended and Restated Effective as of April 14, 2005,
	incorporated by reference to CPI Corp.'s Annual Report for fiscal year 2004 on Form 10-K,
	Exhibit 10.86, filed 4/21/05.
(10.40)*	Stock Award and Restriction Agreement by and between CPI Corp. and David M. Meyer effective
	as of April 14, 2005, incorporated by reference to CPI Corp.'s Annual Report for fiscal year 2004
	on Form 10-K, Exhibit 10.88, filed 4/21/05.
(10.41)*	CPI Corp. Performance Plan Adopted Effective as of April 14, 2005, incorporated by reference
	to CPI Corp.'s Annual Report for fiscal year 2004 on Form 10-K, Exhibit 10.90, filed 4/21/05.
(10.42)*	CPI Corp. Non-Employee Directors Restricted Stock Policy Pursuant to the CPI Corp.
	Restricted Stock Plan Adopted Effective as of April 14, 2005, incorporated by reference
	to CPI Corp.'s Annual Report for fiscal year 2004 on Form 10-K, Exhibit 10.91, filed 4/21/05.
(10.43)*	CPI Corp. Non-Employee Directors Restricted Stock Policy (Restricted Stock Election)
	Adopted by the Company April 14, 2005, incorporated by reference to CPI Corp.'s Annual Report
	for fiscal year 2004 on Form 10-K, Exhibit 10.92, filed 4/21/05.
(10.44)*	Restricted Stock Award Agreement, incorporated by reference to CPI Corp.'s Annual Report for
	fiscal year 2004 on Form 10-K, Exhibit 10.93, filed 4/21/05.

76

		EXHIBIT INDEX (…continued)
EXHIBIT
NUMBER		DESCRIPTION
(10.45)*	First Amendment to Employment Agreement by and between Consumer Programs Incorprated
	and Thomas Gallahue, incorporated by reference to CPI Corp.'s Annual Report for fiscal year
	2004 on Form 10-K, Exhibit 10.95, filed 4/21/05.
(10.46)*	Retirement and Release Agreement by and between CPI Corp.and Stephen A. Glickman,
	incorporated by reference to CPI Corp.'s Form 10-Q, Exhibit 10.98, filed 9/1/05.
(10.47)*	Retirement and Release Agreement by and between CPI Corp. and Jack Krings, incorporated by
	by reference to CPI Corp.'s Form 10-Q, Exhibit 10.100, filed 9/1/05.
(10.48)*	Employment Agreement by and between CPI Corp. and Renato Cataldo, incorporated by reference
	to CPI Corp.'s Form 10-Q, Exhibit 10.102, filed 9/1/05. File No. 1-10204
(10.49)*	Stock Award and Restriction Agreement by and between CPI Corp. and Renato Cataldo,
	incorporated by reference to CPI Corp.'s Form 10-Q, Exhibit 10.103, filed 9/1/05.
(10.50)*	Confidentiality, Noncompetition and Nonsolicitation Agreement by and between CPI Corp. and
	Renato Cataldo, incorporated by reference to CPI Corp.'s Form 10-Q, Exhibit 10.104, filed 9/1/05.
(10.51)*	Stock Award and Restriction Agreement by and between CPI Corp. and Paul Rasmussen,
	incorporated by reference to CPI Corp.'s Form 10-Q, Exhibit 10.105, filed 9/1/05.
(10.52)*	Confidentiality, Noncompetition and Nonsolicitation Agreement by and between CPI Corp. and
	Paul Rasmussen, incorporated by reference to CPI Corp.'s Form 10-Q, Exhibit 10.106, filed 9/1/05.
(10.53)	Credit Agreement (As Amended and Restated Effective November 30, 2005) among the Company,
	the financial institutions that are or may from time to time become parties thereto and LaSalle
	National Bank Association, incorporated by reference to CPI Corp.'s Current Report on Form 8-K,
	Exhibit 10.84, filed 12/8/05.
(10.54)	Guaranty and Collateral Agreement among CPI Corp. and the other parties thereto, as guarantors, and
	LaSalle Bank National Association, an administrative agent, incorporated by reference to CPI Corp.'s
	Current Report on Form 8-K, Exhibit 10.85, filed 12/8/05.
(10.55)*	Retention agreement, dated as of January 12, 2006, by and between CPI Corp. and Thomas Gallahue,
	incorporated by reference to CPI Corp.'s Current Report on Form 8-K, Exhibit 10.107, filed 1/19/06.
(10.56)	First Amendment to Amended and Restated Credit Agreement dated as of January 25, 2006
	(the "Credit Agreement"), among the Company, the financial institutions that are or may from
	time to time become parties thereto and LaSalle Bank National Association, as administrative agent
	and arranger for the lenders, incorporated by reference to CPI Corp.'s Current Report on Form 8-K,
	Exhibit 10.108, filed 1/26/06.

77

		EXHIBIT INDEX (continued)
EXHIBIT
NUMBER		DESCRIPTION
(10.57)	Stock Award and Restriction Agreement, dated April 6, 2006, by and between CPI Corp. and
	David Meyer, incorporated by reference to CPI Corp.'s Current Report on Form 8-K,
	Exhibit 10.57, filed 4/12/06.
(10.58)	Extension dated January 18, 2006 of Sears License Agreement between CPI Corp. and
	Sears Canada, Inc.
(10.59)	Form of Indemnification Agreement by and between CPI Corp. and each of the following:
	Edmond S. Abrain, James R. Clifford, Joanne Sawhill Griffin, Lee Liberman, Nicholas R. Reding,
	Ingrid Otero-Smart, Martin Sneider and Virginia V. Weldon.
(11.1)	Computation of Earnings (Loss) Per Share - Diluted
(11.2)	Computation of Earnings (Loss) Per Share - Basic
(14.0)	Code of Business Conduct and Ethics
(21.0)	Subsidiaries of the Registrant
(23.0)	Independent Auditor's Consent
(31.1)	Certification Pursuant to Rule 13a-14(a) Under the Securities and Exchange Act of 1934
	by the President and Chief Executive Officer
(31.2)	Certification Pursuant to Rule 13a-14(a) Under the Securities and Exchange Act of 1934
	by the Executive Vice President, Finance and Chief Financial Officer
(32.0)	Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the
	Sarbanes-Oxley Act of 2002 by the President and Chief Executive Officer and the
	Executive Vice President, Finance and Chief Financial Officer

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

- See Item 15(a)(2)

78

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 18^th day of April 2006.

CPI CORP.
	BY:	/s/ Paul Rasmussen
		Paul Rasmussen
		Chief Executive Officer

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

SIGNATURES OF DIRECTORS AND PRINCIPAL OFFICERS
		Signature	Title	Date
	/s/	Paul Rasmussen	Chief Executive Officer	April 18, 2006
		(Paul Rasmussen)
	/s/	David M. Meyer	Chairman of the Board of Directors	April 18, 2006
		(David M. Meyer)
	/s/	James J. Abel	Director	April 18, 2006
		(James J. Abel)
	/s/	Michael S. Koeneke	Director	April 18, 2006
		(Michael S. Koeneke)
	/s/	Mark R. Mitchell	Director	April 18, 2006
		(Mark R. Mitchell)
	/s/	John Turner White, IV	Director	April 18, 2006
		(John Turner White, IV)
	/s/	Gary W. Douglass	Executive Vice President, Finance	April 18, 2006
		(Gary W. Douglass)	and Chief Financial Officer
	/s/	Dale Heins	Vice President, Corporate Controller	April 18, 2006
		(Dale Heins)	and Principal Accounting Officer

79

EX-3.2

(PAGE NUMBERS REFER TO PAPER DOCUMENT ONLY)

EXHIBIT 3.2

BY-LAWS of  CPI CORP.

Restated as of April 17, 1989

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TABLE OF CONTENTS

         Page

ARTICLE I. OFFICE 1

Section 1.1	Registered Office	1
Section 1.2	Principal Office	1

ARTICLE II. MEETINGS OF STOCKHOLDERS 1-4

Section 2.1	Annual Meeting	1
Section 2.2	Special Meetings	1
Section 2.3	Place and Time of Meetings	1
Section 2.4	Notice of Meetings	1
Section 2.5	Adjournment	2
Section 2.6	Date for Determining Stockholders Entitled to Vote	2
Section 2.7	List of Shareholders Entitled to Vote	2
Section 2.8	Quorum and Required Vote	2
Section 2.9	Proxies	3
Section 2.10	Convening Stockholders Meetings	3
Section 2.11	Voting at Meetings	3
Section 2.12	Persons Who May Vote Certain Shares	4

ARTICLE III. BOARD OF DIRECTORS 4-7

Section 3.1	General Powers	4
Section 3.2	Number, Term and Election	5
Section 3.3	Removal of Directors	5
Section 3.4	Regular Meetings	5
Section 3.5	Special Meetings	5
Section 3.6	Place of Meeting	5
Section 3.7	Quorum and Required Vote	6
Section 3.8	Executive Committee	6
Section 3.9	Other Committees	6
Section 3.10	Compensation	7
Section 3.11	Actions Without Meetings	7

ARTICLE IV. OFFICERS 7-9

Section 4.1	General	7
Section 4.2	Chief Executive Officer	7
Section 4.3	Chairman of the Board	7
Section 4.4	President	8

2

         Page

Section 4.5	Vice-Presidents	8
Section 4.6	Secretary	8
Section 4.7	Treasurer	8
Section 4.8	Assistant Secretaries and Assistant Treasurers	8
Section 4.9	Vacancies	9

ARTICLE V. CAPITAL STOCK 9-10

Section 5.1	Certificates	9
Section 5.2	Lost, Stolen or Destroyed Certificates	9
Section 5.3	Stock Transfers	9
Section 5.4	Closing of Transfer Books	10
Section 5.5	Record Holders of Stock	10
Section 5.6	Dividends	10

ARTICLE VI. INDEMNIFICATION 11-13

Section 6.1	Nature of Indemnity	11
Section 6.2	Successful Defense	12
Section 6.3	Determination That Indemnification is Proper	12
Section 6.4	Advance Payment of Expenses	12
Section 6.5	Procedure for Indemnification of Directors and Officers	13
Section 6.6	Survival; Preservation of Other Rights
Section 6.7	Insurance
Section 6.8	Severability
Section 6.9	Consolidations and Mergers
Section 6.10	Definitions

ARTICLE VII. MISCELLANEOUS 13-14

Section 7.1	Negotiable Instruments and Contracts	13
Section 7.2	Resignations	13
Section 7.3	Fiscal Year	13
Section 7.4	Action with Respect to Securities of Other Corporations	13
Section 7.5	Computation of Time	14
Section 7.6	Waiver of Notice	14
Section 7.7	Amendments	14

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BY-LAWS

ARTICLE I. OFFICE

SECTION 1.1.REGISTERED OFFICE. The registered office of the Corporation, required by the General Corporation Law of the State of Delaware to be maintained in the State of Delaware, shall be in care of The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware 19801, in the County of New Castle, or such other address as the Board of Directors of the Corporation may from time to time determine.

SECTION 1.2.PRINCIPAL OFFICE. The principal office of the Corporation shall be located in the City of St. Louis, State of Missouri. The Corporation may have such other offices, either within or without the State of Missouri, as the Board of Directors may designate, or as the business of the Corporation may from time to time require.

ARTICLE II. MEETINGS OF STOCKHOLDERS

SECTION 2.1.ANNUAL MEETING. An annual meeting of the stockholders, for the purpose of electing directors and for the transaction of such other business as may come before the meeting, shall be held on the second Monday in the month of June in each year, or on such other day within such month or the following month as shall be fixed by the Board of Directors.

SECTION 2.2.SPECIAL MEETINGS. Special meetings of the stockholders, which may be held for any purpose or purposes, may be called by the Chairman of the Board, the Chief Executive Officer, the President, or the Board of Directors.

SECTION 2.3.PLACE AND TIME OF MEETINGS. Meetings of stockholders shall be held at the principal office of the Corporation or such other place as may be designated from time to time by the Board of Directors. Such meetings shall be convened at 10:00 a.m.; provided, however, that the Board of Directors or the person or persons calling such meeting may fix another reasonable hour for convening.

SECTION 2.4.NOTICE OF MEETING. Unless waived, written or printed notice of each meeting of stockholders shall be given which shall state the place, day and hour of the meeting, in the case of a special meeting, or where otherwise required by law, the purpose or purposes for which the meeting is called. The New York Stock Exchange ("NYSE") should be given prompt notice by telephone and in writing of the calling of any meeting of stockholders. This notice must be received by the Exchange not later than the tenth day prior to the record date (or closing of the transfer books) for determination of stockholders entitled to vote at the meeting, either personally or by mail, by or at the direction of the Chairman of the Board, the Chief Executive Officer, the President, the Secretary, or the persons calling the meeting, to each stockholder of record entitled to vote at such meeting. If such notice is given by mail, it shall be deemed delivered when

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deposited in the United States mail, postage prepaid, addressed to the stockholder at his address as it appears on the records of the Corporation. Attendance of a stockholder at any meeting shall constitute a waiver of notice of such meeting, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of such meeting, to the transaction of any business thereat because the meeting is not lawfully called or convened.

SECTION 2.5.ADJOURNMENT. Any meeting of stockholders may adjourn from time to time to reconvene at the same or some other place, and notice need not be given of any such adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the Corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.

SECTION 2.6.DATE FOR DETERMINING STOCKHOLDERS ENTITLED TO VOTE. The date for determining the stockholders entitled to vote at a meeting of stockholders shall be established pursuant to Section 5.4 if action thereunder shall have been taken to establish the record date; otherwise, only the stockholders who are stockholders of record at the close of business on the day next preceding the day upon which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held, shall be entitled to notice of, and to vote at, the meeting and any adjournment of the meeting.

SECTION 2.7.LIST OF SHAREHOLDERS ENTITLED TO VOTE. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present.

SECTION 2.8.QUORUM AND REQUIRED VOTE. Unless a larger number is provided by law, the Certificate of Incorporation, or these By-Laws, a majority of the outstanding shares of stock of the Corporation entitled to vote at such meeting represented in person or by proxy, shall constitute a quorum at a meeting of stockholders and the decision of a majority of those shares represented in person or by proxy and voting shall be valid as a corporate act. A majority of the shares so represented may adjourn the meeting to a specified date after such adjournment, from time to time, provided that if any adjournment is to a date more than thirty (30) days after the date of

5

the meeting or the adjournment thereof, a notice of the adjourned meeting shall be given to each stockholder of record who was entitled to vote at the meeting. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted that could have been transacted at the meeting as originally noticed. The stockholders present at a duly organized meeting may continue to transact business until the adjournment thereof notwithstanding the subsequent withdrawal of stockholders representing enough shares to leave less than a quorum.

SECTION 2.9.PROXIES. A Stockholder entitled to vote at meeting of stockholders, or to express consent or dissent to corporate action in writing without a meeting, may vote or consent either in person or by proxy executed in writing by the stockholder or by his duly authorized attorney in fact. No proxy shall be valid after one (1) year from the date of its execution, unless otherwise provided in the proxy. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only so long as, it is coupled with an interest sufficient in Law to support an irrevocable power. Proxies shall be filed with the Secretary of the Corporation before or at the time of such meeting. A Stockholder granting a revocable proxy may revoke the same by (i) attending in person and voting at the meeting, (ii) filing a written notice of revocation with the Secretary prior to the meeting, or (iii) executing a proxy bearing a date and time later than that of the proxy to be revoked.

SECTION 2.10.CONVENING STOCKHOLDERS MEETINGS. The Chairman of the Board, or in his absence, the Chief Executive Officer, or in his absence, the President, or in his absence, the Secretary, or in the absence of all of the foregoing, any other officer or any of the persons calling the meeting by a notice given as herein provided (in the order of seniority of age) shall call meetings of stockholders to order and act as chairman thereof and determine the order of business thereof. Notwithstanding the foregoing, the stockholders present may elect the chairman of such meeting from among their members. The Secretary shall act as secretary of all meetings of stockholders and shall record the proceedings thereof, but in the absence of the Secretary, or if he is serving as chairman, the chairman may appoint any other person to act as secretary.

SECTION 2.11.VOTING AT MEETINGS. Except as otherwise provided by law or the Certificate of Incorporation, every stockholder entitled to vote at a meeting of stockholders upon a particular question shall have one (1) vote for each share of voting stock standing in his name on the books of the Corporation on the record date (as determined under Section 2.6 of these By-Laws).

SECTION 2.12.PERSONS WHO MAY VOTE CERTAIN SHARES. Shares standing in the name of another corporation, domestic or foreign, may be voted by such officer, agent or proxy as the by-laws of such corporation may prescribe or, in the absence of a governing provision, as the board of directors of such corporation may determine. Shares standing in the name of a deceased person may be voted by his administrator or executor, either in person or by proxy. Shares standing in the name of a guardian, custodian, curator, or trustee may be voted by such fiduciary, either in person or by proxy. Shares standing in the name of a receiver may be voted by such receiver,

6

and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into his name if authority to do so is contained in an appropriate order of the court by which such receiver was appointed. A stockholder whose shares are pledged shall be entitled to vote such shares (i) unless he has expressly empowered the pledge to vote thereon and has furnished notice thereof to the Corporation, or (ii) until the shares have been transferred into the name of the pledgee, in either of which cases the pledgee or his proxy shall be entitled to represent and vote the shares so transferred. In all cases described in this section, the Corporation may require reasonable substantiation of the right of any person to vote the shares.

SECTION 2.13.ACTIONS WITHOUT MEETINGS. Unless otherwise provided by law or in the Corporation's Certificate of Incorporation, any action required or permitted to be taken at any annual or special meeting of stockholders of the Corporation may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action of the Board of Directors is necessary, shall be the day on which the first written consent is expressed. Prompt notice of the taking of any corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing.

ARTICLE III. BOARD OF DIRECTORS

SECTION 3.1.GENERAL POWERS. The property and business of the Corporation shall be controlled and managed by the Board of Directors. The Board of Directors may exercise all powers of the Corporation and do all lawful acts and things as are not by law, the Certificate of Incorporation, or these By-Laws directed or required to be exercised or done by the stockholders or some particular officer of the Corporation.

SECTION 3.2.NUMBER, TERM AND ELECTION. The number of directors constituting the full Board of Directors of the Corporation shall be five (5), or such other number not less than three (3) as may from time to time be established by amendment of these By-Laws. At the first annual meeting of stockholders and at each annual meeting thereafter the stockholders entitled to vote shall elect directors to hold office until the next succeeding annual meeting. Each director shall hold office for the term for which he is elected and until his successor shall have been elected and qualified, except as otherwise provided by law or these By-Laws.

SECTION 3.3.REMOVAL OF DIRECTORS. Any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares of the Corporation's stock issued and outstanding and entitled to vote at an election of directors, in the manner and subject to the limitations provided by law.

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SECTION 3.4.REGULAR MEETINGS. The Board of Directors by resolution fixing the time and place thereof, shall provide for the holding of a regular meeting or meetings, which may thereafter be held at the designated time and place without further notice thereof to the directors.

SECTION 3.5.SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by or at the request of the Chairman of the Board, the Chief Executive Officer, the President, or any two (2) directors. Unless waived, notice of any special meeting, stating the place, day and hour thereof, shall be given at least three (3) days prior thereto by the person or one of the persons calling the meeting, either orally, or if in writing, by hand delivery, mail or telegram, to each director either at the most recent address which he has furnished the Secretary or at his last known residence address. If notice is given by mail, such notice shall be deemed to be delivered when deposited in the United States mail, so addressed, postage prepaid. If notice is given by telegram, such notice shall be deemed to be delivered when the telegram is delivered to the telegraph company. Attendance of a director at any special meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting, at the beginning of such meeting, to the transaction of any business thereat because such meeting is not lawfully called or convened.

SECTION 3.6.PLACE OF MEETING. Meetings of the Board of Directors or any committee designated by the Board of Directors may be held at any place either within or without the State of Delaware. Members of the Board of Directors or of any committee designated by the Board of Directors may participate in a meeting of the Board of Directors or of such committee by means of conference telephone or similar communications equipment whereby all persons participating in the meeting can hear each other, and participation in a meeting in this manner shall constitute presence in person at the meeting.

SECTION 3.7.QUORUM AND REQUIRED VOTE. Unless a greater number is required by law, the Certificate of Incorporation, or these By-Laws, a majority of the full Board of Directors shall constitute a quorum for the transaction of business and the vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. In the absence of a quorum, a majority of the directors present at a meeting, or the director if only one (1) is present, or the Secretary if no director is present, may adjourn the meeting which may be held on a subsequent date without further notice, provided a quorum is present at such adjourned meeting.

SECTION 3.8.EXECUTIVE COMMITTEE. The Board of Directors, by resolution adopted by a majority of the whole board, may designate two (2) or more directors to constitute an Executive Committee, which committee, except as provided by law or by resolution of a majority of the full Board of Directors, shall have and exercise all authority of the Board of Directors, shall have and exercise all authority of the Board of Directors in the management of the Corporation. Any or all members of the Executive Committee may be removed at any time, with or without cause by vote of a majority of the full Board of Directors. Unless the Board of Directors provides for a greater number,

8

a majority of the members constituting the full Executive Committee shall be a quorum and the act of such majority shall be the act of the Executive Committee. In the absence or disqualification of a member of the Executive Committee, the other member or members thereof present at a meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of such absent or disqualified number.

SECTION 3.9.OTHER COMMITTEES. Other committees of two (2) or more members of the Board of Directors may be established from time to time by the Board of Directors, by resolution adopted by a majority of the whole board. Such other committees shall have such purposes and such powers and shall continue for such terms as the Board of Directors may determine by resolution. The Board of Directors shall have the power to appoint alternate members of any such committee, to remove any member thereof and to fill any vacancy therein, and to designate the chairman of such other committee, provided, however, that in the absence or disqualification of a member of such committee, the other member or members thereof present at a meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of such absent or disqualified members. Unless otherwise provided by the Board of Directors, a majority of the members of such committee shall be a quorum, and the act of a majority of the members present at a meeting at which a quorum is present shall be the act of such committee.

SECTION 3.10.COMPENSATION. The Corporation may reimburse each director for the expenses, if any, incurred by him in attending each meeting of the Board of Directors or of any committee of the Board of which he is a member, and may pay such compensation or retainer to the directors as the Board of Directors may from time to time determine.

SECTION 3.11.ACTIONS WITHOUT MEETINGS. Any action which is required or permitted to be taken at a meeting of the Board of Directors or of the Executive Committee or any other committee of the directors, may be taken without a meeting if consents in writing, setting forth the actions so taken, are signed by all of the members of the Board of Directors or of any such committee, as the case may be. The consents shall have the same force and effect as a unanimous vote at a meeting duly held. The Secretary shall file the consents with the minutes of the meetings of the Board of Directors or of such committee, as the case may be.

ARTICLE IV. OFFICERS

SECTION 4.1.GENERAL. The principal executive officers of the Corporation shall be a Chief Executive Officer, a Chairman of the Board, a President, one (1) or more Vice - Presidents (any of whom may be designated with descriptive titles), a Secretary, and a Treasurer. The Board of Directors may appoint such other officers and agents (including, but not limited to, a Chairman Emeritus of the Board and one (1) or more Assistant Vice-Presidents, Assistant Secretaries and Assistant Treasurers), as it shall

9

deem necessary, who shall have such authority and shall perform such duties as are set out in these By-Laws or as from time to time shall be prescribed by the Board of Directors. Any two (2) or more of the aforesaid offices may be filled by the same person. The Board of Directors, at its first annual meeting and thereafter from time to time, shall elect the principal executive officers and other officers of the Corporation, who shall serve at the pleasure of the Board of Directors. Any officer or agent may be removed by the Boad of Directors, with or without cause, whenever in its judgment the best interests of the Corporation will be served thereby. The Board of Directors shall determine the salary and other compensation of all officers and agents of the Corporation.

SECTION 4.2.CHIEF EXECUTIVE OFFICER. The Chief Executive Officer of the Corporation shall have general and active management of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried out.

SECTION 4.3.CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside at meetings of the Board of Directors. If expressly designated as such by the Board of Directors, the Chairman of the Board shall be Chief Executive Officer of the Corporation, with the powers and duties which attend to such position.

SECTION 4.4.PRESIDENT. If no Chairman of the Board is serving, or if the Chairman of the Board has not been expressly designated Chief Executive Officer, the President shall be the Chief Executive Officer of the Corporation, with the powers and duties which attend to such position. If the Chairman of the Board is Chief Executive Officer, the President shall be the Chief Operating Officer of the Corporation, being responsible at all times to the Chairman of the Board. If no Chairman of the Board is serving, or in the absence of the Chairman of the Board, the President shall preside at meetings of the Board of Directors.

SECTION 4.5.VICE-PRESIDENTS. Vice-Presidents shall perform such duties and exercise such powers as shall be delegated by the Chief Executive Officer or as shall be designated by the Board of Directors.

SECTION 4.6.SECRETARY. The Secretary shall attend all meetings of the Board of Directors and the stockholders, and except as otherwise provided in these By-Laws, shall act as clerk thereof and record all votes and the minutes of all proceedings in books kept for that purpose. He shall keep in safe custody the seal of the Corporation and, when authorized by the Board of Directors, affix the seal to any instrument requiring the same and, when so ordered, add his signature as an attestation thereof. He shall give, or cause to be given, a notice as required of all meetings of the stockholders and of the Board of Directors; he shall keep or cause to be kept a stock certificate and transfer book and a list of all the stockholders and their respective addresses and shall perform such other duties as may be prescribed by the Board of Directors or by the Chief Executive Officer, under whose supervision he shall be.

SECTION 4.7.TREASURES. The Treasurer shall have the custody of the Corporations funds and securities and shall keep or cause to be kept full and accurate

10

accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all monies and other valuable effects in the name and to the credit of the Corporation in such depositaries as may be designated by the Board of Directors. He shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements and shall render to the Chief Executive Officer and directors at the regular meetings of the Board of Directors and to the stockholders at the annual meeting of the stockholders or whenever the Board of Directors may require it, an account of all his transactions as the Treasurer and of the financial condition of the Corporation.

SECTION 4.8.ASSISTANT SECRETARIES AND ASSISTANT TREASURES. The Assistant Secretary or Secretaries, if any, shall perform such duties and exercise such powers as shall be delegated by the Secretary or as shall be designated by the chief executive officer or by the Board of Directors. An Assistant Secretary may, in the absence or disability of the Secretary, perform all the duties and exercise all the powers of the Secretary. The Assistant Treasurer or Treasurers, if any, shall perform such duties and exercise such powers as shall be delegated by the Treasurer or as shall be designated by the chief executive officer or by the Board of Directors. An Assistant Treasurer may, in the absence or disability of the Treasurer, perform all the duties and exercise all the powers of the Treasurer.

SECTION 4.9.VACANCIES. If the office of any officer of the Corporation becomes vacant because of death, resignation, removal or for any other reason or if any officer of the Corporation is unable to perform the duties of his office for any reason, the Board of Directors may choose a successor who shall replace such officer or the Board of Directors may delegate the duties of any such vacant office to any other officer or to any Director of the Corporation for the unexpired portion of the term.

ARTICLE V. CAPITAL STOCK

SECTION 5.1.CERTIFICATES. Every holder of stock in the Corporation shall be entitled to have a certificate signed by or in the name of the Corporation by the Chairman of the Board, if he is the Chief Executive Officer, or the President or a Vice-President, and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, certifying the number of shares owned by him. Any of or all of such signatures may be facsimiles. In case any such officer, transfer agent or register who has signed or whose facsimile signature has been placed on a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, such certificate may nevertheless be issued by the Corporation with the same effect as if such person where such officer, transfer agent or registrar at the date of issue.

SECTION 5.2.LOST, STOLEN OR DESTROYED CERTIFICATES. The Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed. The Corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made

11

against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate.

SECTION 5.3.STOCK TRANSFERS. The Corporation shall register transfer of a certificate of stock, together with the date of such transfer, if such certificate is (i) delivered and endorsed by the person appearing by the certificate to be the owner of the shares represented thereby, (ii) delivered together with a separate document containing a written assignment of the certificate or a power of attorney to sell, assign, or transfer the same, signed by the person appearing by the certificate to be the owner of the shares represented thereby, or (iii) delivered together with a separate document containing a written assignment of the certificate signed by the trustee in bankruptcy, receiver, guardian, executor, administrator, custodian, or other person duly authorized by law (and presenting evidence of such authority satisfactory to the Corporation) to transfer the certificate on behalf of the person appearing by the certificate to be the owner of the shares represented thereby.

SECTION 5.4.CLOSING OF TRANSFER BOOKS. So that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be later than the tenth day prior to the record date, (or closing of the transfer books) for determination of shareholders entitled to vote at the meeting. Only the stockholders who are stockholders of record on the date of closing the transfer books shall be entitled to notice of, and to vote at, the meeting, or to express consent in writing to corporate action without a meeting, and any adjournment thereof, or to receive payment of the dividend or other distribution or allotment of rights, or to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, as the case my be, notwithstanding any transfer of any shares on the books of the Corporation after the date of closing of the transfer books or the record date fixed as aforesaid.

SECTION 5.5.RECORD HOLDERS OF STOCK. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, save as expressly provided for by law.

SECTION 5.6.DIVIDENDS. The Board of Directors may declare, and the Corporation may pay, dividends on its outstanding shares of capital stock in accordance with law and the Certificate of Incorporation.

SECTION 5.7.TREASURY STOCK. All issued and outstanding stock of the Corporation that may be purchased or otherwise acquired by the Corporation and not retired shall be treasury stock, and shall be subject to disposal by action of the Board of

12

Directors. Such stock shall neither vote nor participate in dividends while held by the Corporation nor be counted for purposes of determining whether a quorum exists at any meeting of the stockholders.

ARTICLE VI. INDEMNIFICATION

SECTION 6.1.NATURE OF INDEMNITY. Subject to Section 6.3 hereof, the orporation

(i) shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suite or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was or has agreed to become a director or officer of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a director or officer, of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity, and

(ii) may indemnify any person who was or is a party or is threatened to be made a party to such an action, suit or proceeding by reason of the fact that such person is or was or has agreed to become an employee or agent of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise,

against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person or on such person's behalf in connection with such action, suit or proceeding and any appeal therefrom, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding had no reasonable cause to believe his conduct was unlawful; except that in the case of an action or suit by or in the right of the Corporation to procure a judgment in its favor (1) such indemnification shall be limited to expenses (including attorneys' fees) actually and reasonably incurred by such person in the defense or settlement of such action or suit, and (2) no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper.

The termination of any action, suit or proceeding by judgment, order settlement, conviction, or upon a plea of nolocontendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person

13

reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful.

SECTION 6.2.SUCCESSFUL DEFENSE. To the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 6.1. hereof or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith.

SECTION 6.3.DETERMINATION THAT INDEMNIFICATION IS PROPER. Any indemnification of a director or officer of the Corporation under Section 6.1. hereof (unless ordered by a court) shall be made by the Corporation unless a determination is made that indemnification of the director or officer is not proper in the circumstances because he has not met the applicable standard of conduct set forth in Section 6.1. hereof. Any indemnification of an employee or agent of the Corporation under Section 6.1. hereof (unless ordered by a court) may be made by the Corporation upon a determination that indemnification of the employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 6.1. hereof. Any such determination shall be made (1) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders.

SECTION 6.4.ADVANCE PAYMENT OF EXPENSES. Expenses incurred by a director or officer in defending a civil or criminal action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Article. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. The Board of Directors may authorize the Corporation's counsel to represent such director, officer, employee or agent in any action, suit or proceeding.

SECTION 6.5.PROCEDURE FOR INDEMNIFICATION OF DIRECTORS AND OFFICERS. Any indemnification of a director or officer of the Corporation under Sections 6.1. and 6.2. of this Article, or advance of costs, charges and expenses to a director or officer under Section 6.4. of this Article, shall be made promptly, and in any event within thirty (30) days, upon the written request of the director or officer. If a determination by the Corporation that the director or officer is entitled to indemnification pursuant to this Article is required, and the Corporation fails to respond within sixty (60) days to a written request for indemnity, the Corporation shall be deemed to have approved such request. If the Corporation denies a written request for indemnity or advancement of expenses, in whole or in part, or if payment in full pursuant to such request is not made within thirty (30) days, the right to indemnification or advances as

14

granted by this Article shall be enforceable by the director or officer in any court of competent jurisdiction. Such person's costs and expenses incurred in connection with successfully establishing his right to indemnification, in whole or in part, in any such action shall also be indemnified by the Corporation. It shall be a defense to any such action (other than an action brought to enforce a claim for the advance of costs, charges and expenses under Section 6.4. of this Article where the required undertaking, if any, has been received by the corporation) that the claimant has not met the standard of conduct set forth in Section 6.1. of this Article, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, its independent legal counsel, and its stockholders) to have make a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct set forth is Section 6.1 of the Article, nor the fact that there has been actual determination by the Corporation (including its Board of Directors, its independent legal counsel, and its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct.

SECTION 6.6.SURVIVAL; PRESERVATION OF OTHER RIGHTS. The indemnification provisions of this Article shall be deemed to be a contract between the Corporation and each director, officer, employee and agent who serves in any such capacity at any time while these provisions as well as the relevant provisions of the Delaware Corporation Law are in effect and any repeal or modification thereof shall not affect any right or obligation then existing with respect to any state of facts then or previously existing or any action, suit, or proceeding previously or thereafter brought or threatened based in whole or in part upon any such state of facts. Such a "contract right" may not be modified retroactively without the consent of such director, officer, employee or agent.

The indemnification and the procedures for obtaining such indemnification provided by this Article shall not be deemed exclusive of any other procedures and rights to which those indemnified may be entitled under any other by-law, statute, agreement, provision of the Corporation's Certificate of Incorporation, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.

SECTION 6.7.INSURANCE. The Corporation shall purchase and maintain insurance on behalf of any person who is or was or has agreed to become a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him or on his behalf in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this

15

Article, provided that such insurance is available on acceptable terms, which determination shall be made by a vote of a majority of the entire Board of Directors.

SECTION 6.8.SEVERABILITY. If this Article or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each director or officer and may indemnify each employee or agent of the Corporation as to costs, charges and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of the corporation, to the fullest extent permitted by any applicable portion of this Article that shall not have been invalidated and to the fullest extent permitted by applicable law or any agreement.

SECTION 6.9.CONSOLIDATIONS AND MERGERS. For the purpose of this Article of these By-Laws, references to "the Corporation" include all constituent corporations absorbed in a consolidation or merger as well as the resulting or surviving corporation so that any person who is or was a director, officer, employee or agent of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise shall stand in the same position under the provisions of this Article of these By-Laws with respect to the resulting or surviving corporation as he would if he had served the resulting or surviving corporation in the same capacity.

SECTION 6.10.DEFINITIONS. For purposes of this Article, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in the provisions of the General Corporation Law of the State of Delaware.

ARTICLE VII. MISCELLANEOUS

SECTION 7.1.NEGOTIABLE INSTRUMENTS AND CONTRACTS. All checks, drafts, notes, demands for money and all other commercial paper and contracts and other obligations of the Corporation shall be executed in such manner and by such officer or officers or persons as the Board of Directors may from time to time designate.

SECTION 7.2.RESIGNATIONS. Any director or officer of the Corporation may resign at any time by giving written notice to the Chief Executive Officer or the Secretary. Such resignation shall take effect on the date on which the notice thereof is received or at any later time specified therein, and, unless otherwise specified herein, the

16

acceptance of such resignation by the Corporation shall not be necessary to make it effective.

SECTION 7.3.FISCAL YEAR. The Board of Directors shall, by resolution, determine the fiscal year of the Corporation.

SECTION 7.4.ACTION WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS. Unless otherwise provided by the Board of Directors, the Chief Executive Officer, or, if none, the President shall have the power to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of the stockholders of or with respect to any action of the stockholders of any other corporation in which the Corporation may hold securities, and otherwise to exercise any and all rights powers which this Corporation may possess by reason of its ownership of securities in such other corporation.

SECTION 7.5.COMPUTATION OF TIME. In applying any provision of these By-Laws relating to the number of days prior or subsequent to an event that an act be done or notice be given, calendar days shall be the basis of the computation of the time period, excluding the day on which the act is to be done and including the day of the event to which the act or notice relates.

SECTION 7.6.WAIVER OF NOTICE. Whenever any notice whatever is required to be given under the provisions of the Delaware Corporation Law, the Certificate of Incorporation, or these By-Laws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Except as otherwise required by law or the Certificate of Incorporation, neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, the Board of Directors, or a committee of directors need be specified in any written waiver of notice.

SECTION 7.7.AMENDMENTS. The Board of Directors, to the extent permitted by the certificate of Incorporation and by law, may, by the affirmative vote of a majority of the full Board of Directors, alter, amend or repeal these By-Laws.

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ADOPTED 5/9/02

SECTION 2.4.NOTICE OF MEETINGS. Unless waived, written notice of each meeting of stockholders shall be given which shall state the place, day and hour of the meeting, and in the case of a special meeting, the purpose or purposes for which the meeting is called. By or at the direction of the Chairman of the Board, Chief Executive Officer, the President, the Secretary, or the persons calling the meeting, each stockholder of record entitled to vote at such meeting shall receive written notice of such meeting either personally or by mail and such notice shall be given to each stockholder of record entitled to vote at such meeting not later than the tenth day nor earlier than the sixtieth day preceding such meeting. If such notice is given by mail, it shall be deemed delivered and given when deposited in the United States mail, postage prepaid, addressed to the stockholder at his address as it appears on the records of the Corporation. The New York Stock Exchange ("NYSE") should be given prompt notice by telephone and in writing of the calling of any meeting of stockholders. The notice must be received by the NYSE not later than the tenth day prior to the record date (or closing of the transfer books) for determination of stockholders entitled to vote at the meeting. Attendance of a stockholder at any meeting shall constitute a waiver of notice of such meeting, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of such meeting, to the transaction of any business thereat because the meeting is not lawfully called or convened.

SECTION 2.13.ACTIONS WITHOUT MEETINGS. Unless otherwise provided by law or in the Corporation's Certificate of Incorporation, any action required or permitted to be taken at any annual or special meeting of stockholders of the Corporation may be taken without a meeting, without prior notice and without a vote, if an consent in writing, setting forth the action so taken shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the board of directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the secretary, request the board of directors to fix a record date. The board of directors shall promptly, but in all events within ten (10) days after the date on which such a request is received, adopt a resolution fixing the record date. If no resolution fixing a record date has been adopted by the board of directors within ten (10) days after the date on which such a request is received, when no prior action by the board of directors is required by applicable law for the taking of the corporate action proposed to be taken, the

18

record date in respect thereof shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in the state of Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of stockholders meetings are recorded, to the attention of the Secretary of the corporation. Delivery shall be by hand or by certified or registered mail, return receipt requested. If no resolution fixing a record date has been adopted by the board of directors and prior action by the board of directors is required by applicable law for the taking of the corporate action proposed to be taken, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the date on which the board of directors adopts the resolution taking such prior action. Prompt notice of the taking of any corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing.

SECTION 2.15.INFORMATION REGARDING ACTION BY WRITTEN CONSENT. In addition to the requirements of any applicable statute, so long as securities of the Corporation of any class are subject to the reporting requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, whenever action involving the election of directors is to be taken by the stockholders of the Corporation by written consent without a meeting, a proxy statement or information statement disclosing information regarding each nominee for director and other corporate action to be taken as would be required to be included in solicitations of proxies pursuant to Regulation 14A under the Securities Exchange Act of 1934 shall be delivered to the stockholders of the Corporation entitled to vote on or consent to such matter not less than twenty (20) business days prior to the effectiveness of such action and to the Secretary of the Corporation when requesting the determination of the record date for such action pursuant to Section 2.13 of these By-laws. The provisions set forth in this Section 2.15 may not be repealed or amended in any respect or in any manner, including by any merger or consolidation of the Corporation with any other corporation, unless the surviving corporation's Certificate of Incorporation or By-laws contains a provision to the same effect as this Section, except by the affirmative vote of the holders of not less than 90% of the outstanding shares of common stock of the Corporation, subject to the provisions of any series of preferred stock that may at the time be outstanding.

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ADOPTED 2/4/02

SECTION 4.4.PRESIDENT. The President shall perform such duties and exercise such powers as shall be delegated by the Chief Executive Officer or as shall be designated by the Board of Directors. If no Chairman of the Board is serving or in the absence of the Chairman of the Board, the President shall preside at meetings of the Board of Directors.

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ADOPTED

            ;      ADOPTED 4/3/97

            < font id="TAB2" style="LETTER-SPACING: 9pt">          SUPERCEDED 3/24/04,
                  5/27/04 AND 5/17/05

SECTION 3.2.NUMBER, TERM AND ELECTION. (first sentence only)

The number of directors constituting the full Board of Directors shall be no more than nine (9), or such other number, not less than three (3), as may from time to time be established by amendment of these By-Laws.

21

ADOPTED 8/3/95

SECTION 2.14.NOTICE OF STOCKHOLDER NOMINATIONS AND PROPOSED BUSINESS.

(1)At any meeting of the stockholders, (i) nominations for the election of directors and (ii) business to be brought before any such stockholders' meeting may only be made or proposed (a) pursuant to the Corporation's notice of meeting, (b) by or at the direction of the Board of Directors or (c) by any stockholder of the Corporation who is a stockholder of record at the time of giving of the notice provided for in this By-law, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this By-law.

(2)Any stockholder may nominate one or more persons for election as directors at a stockholders' meeting or propose business to brought before a stockholders' meeting, or both, pursuant to clause (c) of paragraph 1 of this By-law, only if the stockholder has given timely notice thereof in proper written form to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than 90 days nor more than 120 days prior to the stockholders' meeting; provided, however, that if less than 100 days' notice or other prior public disclosure of the date of the meeting is given or made to the stockholders, notice by the stockholder to be timely must be received no later than the close of business on the 10th day following the earlier of the day on which notice of the date of the meeting was mailed or other public disclosure was made. To be in proper written form a stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the meeting:

(a)a brief description of the business proposed and/or persons nominated, as applicable, and the reasons for proposing such business or making such nomination;

(b)the name and address, as they appear on the Corporation's books, of the stockholder proposing such business or making such nomination, and the name and address of the beneficial owner, if any, on whose behalf the proposal is made;

(c)the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder of record and by the beneficial owner, if any, on whose behalf the proposal is made;

(d)with respect to any nomination, (i) a description of all arrangements and understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made, (ii) the name, age, business address and residence address of such nominee, (iii) the class and number of shares of capital stock of the Corporation owned beneficially and of record by such nominee and (iv) the written consent of the

22

proposed nominee to being named in the solicitation material and to serving as a director if elected; and

(e) such other information regarding each nominee or matter of business to be proposed as would be required to be included in solicitation of proxies, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.

(3)Notwithstanding anything in these By-laws to the contrary, no business shall be conducted at any stockholders' meeting and no stockholder may nominate any person for election at any stockholders' meeting except in accordance with the procedures set forth in this By-law. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that any proposed business and/or any proposed nomination for election as director was not properly brought or made before the meeting or made in accordance with the procedures prescribed by these By-laws, and if he should so determine, he shall so declare to the meeting and any such proposed business or proposed nomination for election as director not properly brought before the meeting or made shall not be transacted or considered.

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                    ADOPTED 2/3/94

            SUPERCEDED 4/3/97,

            3/24/04, 5/27/04 AND 5/17/05

SECTION 3.2.NUMBER, TERM AND ELECTION. (first sentence only)

The number of directors constituting the full Board of Directors of the Corporation shall be no more than eight (8), or such other number, not less than three (3), as may from time to time be established by amendment of these By-Laws.

24

            ADOPTED 4/2/92

        SUPERCEDED 2/3/94,

        4/3/97, 3/24/04, 5/27/04 AND 5/17/05 

SECTION 3.2.NUMBER, TERM AND ELECTION. (first sentence only)

The number of directors constituting the full Board of Directors of the corporation shall be six (6), or such other number not less than three (3) as may from time to time be established by amendment of these By-Laws.

25

                ADOPTED 3/24/04

  SUPERCEDED 5/27/04

                AND 5/17/05

SECTION 3.2.NUMBER, TERM AND ELECTION. (first sentence only)

The number of directors constituting the full Board of Directors shall be eight.

26

     ADOPTED 3/24/04

SECTION 2.2.SPECIAL MEETINGS. Special meetings of the stockholders, which may be held for any purpose or purposes, may be called at any time by the Chairman of the Board, the Chief Executive Officer, the President or the Board of Directors, or by any stockholder or stockholders of record entitled to vote at such meeting, provided such stockholder or stockholders beneficially or of record own in the aggregate at least 25% of the outstanding shares of common stock of the Corporation. If a special meeting is called, the person calling the meeting shall submit the request, specifying the time of such meeting and the general nature of the business proposed to be transacted, such request to be delivered personally, or sent by registered mail or by telegraphic or other facsimile transmission to the Chairman of the Board, the President or the Secretary of the Corporation. No business may be transacted at such special meeting other than such business specified in the request. The officer receiving the request shall cause notice to be given to the stockholders entitled to vote at such meeting, in accordance with the provisions of Section 2.4 of this Article II, that a special meeting will be held at the time requested by such person(s) calling the meeting, provided that such meeting is not less than ten (10) or more than sixty (60) days after receipt of the request. This Section 2.2 may be amended only by action of the stockholders.

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     ADOPTED 3/24/04

SECTION 3.12.VACANCIES AND NEWLY CREATED DIRECTORSHIPS.

Vacancies on the Board of Directors, which have occurred as a result of stockholder action, may only be filled by action of the stockholders with or without a stockholder meeting, until at least 20 days after such occurrence of such vacancy, after which time such vacancies may be filled by action of the stockholders or by the directors then in office. If at any time, by reason of death or resignation or other cause, the Corporation should have no directors in office, then any officer, or any stockholder, or any executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder may call a special meeting of the stockholders in accordance with the provisions of these By-Laws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of Delaware General Corporation Law. This Section 3.12 may be amended only by action of the stockholders."

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       & #160; ADOPTED 5/27/04

      SUPERCEDED 5/17/05

SECTION 3.2.NUMBER, TERM AND ELECTION. (first sentence only)

The number of directors constituting the full Board of Directors shall be seven.

29

      ADOPTED 5/17/05

SECTION 3.2.NUMBER, TERM AND ELECTION. (first sentence only)

The number of directors constituting the full Board of Directors shall be five.

EX-10.58

EXHIBIT 10.58

January 18, 2006

Mr. Paul Schiffner

CPI Corp.

46 Hedgedale Road

Brampton, Ontario

L6T 5L2

Dear Paul,

This letter will confirm that the SEARS LICENSE AGREEMENT, dated January 1^st, 2003 with CPI Corp. is renewed for an additional six month term commencing January 1, 2006 and expiring June 31, 2006 on the same terms and conditions.

Yours truly,

SEARS CANADA INC.

Per: /s/ Mike MacDonald

_______________________

Mike MacDonald

National Manager

Specialty Services

The foregoing is hereby confirmed and accepted.

CPI CORP.

Per: /s/ Paul Schiffner

____________________________________

Paul Schiffner

Vice-President and General Manager Canada

SEARS CANADA INC., 222 JARVIS STREET, TORONTO, CANADA M5B 2B8

EX-10.59

EXHIBIT 10.59

INDEMNIFICATION AGREEMENT

THIS AGREEMENT, made and entered into this __th day of _________, ____ by and between CPI Corp., a Delaware corporation (the “ Company”) and ______________ (the “ Indemnitee”).

WHEREAS, it is essential to the Company to retain and attract as directors and officers the most capable persons available;

WHEREAS, Indemnitee is a director of the Company;

WHEREAS, both the Company and Indemnitee recognize the increased risk of litigation and other claims being asserted against directors and officers of public companies in today’s environment;

WHEREAS, in recognition of Indemnitee’s need for substantial protection against personal liability and to enhance Indemnitee’s continued service to the Company in an effective manner and in part to provide Indemnitee with specific contractual assurance that the indemnification protection will be available to Indemnitee (regardless of, among other things, any changes in the composition of the Company’s Board of Directors), and to induce Indemnitee to continue to provide services to the Company as a director, the Company wishes to provide in this Agreement for the indemnification of and the advancing of expenses to Indemnitee to the full extent (whether partial or complete) permitted by law and as set forth in this Agreement, and, to the extent insurance is maintained, for the continued coverage of Indemnitee under the Company’s directors’ and officers’ liability insurance policies;

NOW, THEREFORE, in consideration of the premises and of Indemnitee’s continuing to serve the Company directly or, at its request, another enterprise, and intending to be legally bound hereby, the parties hereto agree as follows:

1.   Certain Definitions. As used herein the following terms shall have the following meanings:

(a)Board of Directors: the Board of Directors of the Company.

(b)Change of Control: a change of control of a nature that would be required to be reported in response to Item 1(a) of the Current Report of Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”) or would have been required to be so reported but for the fact that such event had been “previously reported” as that term is defined in Rule 12b-2 of Regulation 12B of the Exchange Act unless the transactions that give rise to the change of control are approved or ratified by a majority of the individuals who constitute the Board of Directors on the date hereof (the “Incumbent Board”) who are not employees of the Corporation; provided that, without limitation, notwithstanding anything herein to the contrary, such a change of control shall be deemed to have occurred if, (i) any Person is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 40% or more of the combined Voting Securities, (ii) individuals who constitute the Incumbent Board cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) shall be, for purposes of this clause (ii), considered as though such person were a member of the Incumbent Board, or (iii) approval by the stockholders of the Company of a reorganization, merger or consolidation, in each case, with respect to which persons who were the stockholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own, directly or indirectly, more than 50% of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated company’s then outstanding voting securities, or a liquidation or dissolution of the Company or the sale of all or substantially all of the assets of the Company.

(c) Claim: any threatened, pending or completed action, suit, proceeding, arbitration or alternate dispute resolution proceeding, whether civil, criminal, administrative, investigative, or other, or any inquiry hearing or investigation (whether conducted by the Company or any other party or authority) that Indemnitee in good faith believes might lead to the institution of any such action, suit, proceeding, arbitration or alternate dispute resolution proceeding.

(d) Expenses: include attorneys’ fees, expenses and charges and all other costs, travel expenses, fees of experts, transcript costs, filing fees, witness fees, telephone charges, postage, delivery service fees, expenses and obligations of any nature whatsoever paid or incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, be a witness in or participate in any Claim relating to any Indemnifiable Event.

(e) Indemnifiable Event: any event or occurrence related to the fact that Indemnitee is or was a director, officer, employee, agent or fiduciary of the Company, or is or was serving at the request of the Company as a director, officer, employee, trustee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, or by reason of anything done or not done by Indemnitee in any such capacity.

(f) Independent Legal Counsel: Independent Legal Counsel shall refer to an attorney, selected by the Indemnitee and approved by the Board of Directors (which approval shall not be unreasonably withheld), who shall not have otherwise performed services for the Company or Indemnitee within the last five years. Independent Legal Counsel shall be a member of or of counsel to a firm having no fewer than fifty attorneys as of the date such Independent Legal Counsel is designated by the Indemnitee. Independent Legal Counsel shall not be counsel to the Indemnitee in any Claims arising in whole or in part from any Indemnifible Event and shall not be Indemnitee’s counsel in any proceeding to determine Indemnitee’s rights hereunder. Independent Legal Counsel shall also not be any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement, nor shall Independent Legal Counsel be any person who has been sanctioned or censured for ethical violations of applicable standards of professional conduct. In the event an Independent Legal Counsel resigns, becomes disabled, dies, or is otherwise unable in such counsel’s opinion to serve as Independent Legal Counsel, Indemnitee shall select, subject to the approval of the Board of Directors (which approval shall not be unreasonably withheld) a successor Independent Legal Counsel.

(g) Person: any individual, corporation, partnership, group, association or other “person,” as such term is used in Section 14(d) of the Exchange Act, other than the Company or any corporation (or other business entity) controlling, controlled by or under common control with the Company or any employee benefit plan(s) sponsored or maintained by the Company or any corporation (or other business entity) controlling, controlled by or under common control with the Company.

(h) Voting Securities: all outstanding shares of capital stock of all classes and series of the Company entitled to vote generally in the election of directors of the Company, in each case hereunder voting together as a single class.

2.Basic Indemnification Arrangement

(a)In the event Indemnitee was, is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, a Claim by reason of (or arising in whole or in part out of) an Indemnifiable Event, subject to Sections 2(b), 2(c), and 2(d) hereof the Company shall indemnify Indemnitee to the fullest extent permitted by law as soon as practicable but in any event no later than thirty days after the Indemnitee presents written demand to the Company, against any and all reasonable Expenses and all judgments, fines, penalties and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses, judgments, fines, penalties or amounts paid in settlement) of such Claim and any federal, state, local or foreign taxes imposed on the Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement. The Indemnitee’s written demand shall also specify the Independent Legal Counsel selected by Indemnitee pursuant to the terms of this Agreement.

        If so requested by Indemnitee in writing, the Company shall advance (within ten business days of such request) any and all reasonable Expenses to Indemnitee or to the Indemnitee’s counsel (an “Expense Advance”). Such written request shall also specify the Independent Legal Counsel selected by Indemnitee if the Indemnitee has not previously specified such Independent Legal Counsel.

         Notwithstanding anything in this Agreement to the contrary and except as provided in  Section 3, prior to a Change of control, Indemnitee shall not be entitled to indemnification pursuant to this Agreement in connection with any Claim initiated by Indemnitee against the Company or any director or officer of the Company unless the Company has joined in or consented to the initiation of such Claim.

 (b)Notwithstanding the foregoing, (i) the obligations of the Company under Section 2(a) hereof shall be subject to the condition that within sixty (60) days of the Indemnitee’s written demand for an indemnification payment Independent Legal Counsel shall not have determined in a written opinion that Indemnitee would not be permitted to be indemnified under applicable law, and the Indemnitee hereby agrees to repay to the Company all indemnification amounts paid to Indemnitee by the Company under Section 2(a) hereof when and to the extent that Independent Legal Counsel so determines that such payments were not to be permitted under applicable law, and (ii) the obligation of the Company to make an Expense Advance pursuant to Section 2(a) shall be subject to the condition that, within sixty days of the Indemnitee’s written request for an Expense Advance Independent Legal Counsel shall not have determined in a written opinion that Indemnitee would not be permitted to receive such Expense Advance under applicable law, and the Indemnitee hereby agrees to repay to the Company all Expense Advances paid to the Indemnitee by the Company under Section 2(a) hereof when and to the extent Independent Legal Counsel so determines that such Expense Advance was not permitted under applicable law; provided, however, that if in the case of any indemnification payment or Expense Advance under Section 2(a) hereof Indemnitee commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law (whether or not commenced prior to or following the determination of such Independent Legal Counsel) then (i) any determination made by Independent Legal Counsel that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding upon Indemnitee, (ii) the Company shall be obligated to make such indemnification payments and Expense Advances as would otherwise be required by Section 2(a) unless and until a final judicial determination is made establishing that Indemnitee is not entitled to indemnification or Expense Advances under applicable law, and (iii) Indemnitee shall not be required to reimburse the Company for any such payment or Expense Advance until a final judicial determination is made requiring the Indemnitee to make such repayment. (A final judicial determination, as used in this and other Sections of this Agreement, is a determination with respect to which all rights of appeal therefrom have been exhausted or lapsed.) The Indemnitee hereby further agrees to repay to the Company all indemnification payments and Expense Advances made to Indemnitee under Section 2(a) hereof when and to the extent any such final judicial determination determines that such payments or Expenses were not permitted under applicable law. The lndemnitee’s obligation to reimburse the Company for indemnification payments and Expense Advances shall be unsecured and no interest shall be charged or payable thereon. If Independent Legal Counsel determines that Indemnitee substantively would not be permitted to be indemnified in whole or in part or to receive an Expense Advance under applicable law, Indemnitee shall have the right to commence litigation in any court sitting in the City or County of St. Louis, Missouri, or the State of Delaware having subject matter jurisdiction thereof and in which venue is properly seeking an initial determination by the court or challenging any such determination by the Independent Legal Counsel or any aspect thereof, or the legal or factual bases therefore, and the Company hereby consents to service of process and to appear in any such proceeding. Any determination by Independent Legal Counsel otherwise and made within the sixty day period provided under this Section 2(b) shall be conclusive and binding on the Company and Indemnitee.

(c) The Company shall not make any payments to the Indemnitee pursuant to Section 2 hereof on account of any Claim for recovery of profits from the purchase or sale by the Indemnitee of securities of the Company that is based upon the provisions of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state, or local statutory law.

(d) The Indemnitee hereby agrees to repay to the Company on demand all indemnification payments and Expense Advances made to Indemnitee under Section 2 hereof that are determined in a final judicial determination (as hereinbefore defined) to have been made with respect to the Indemnitee’s act or conduct that was knowingly fraudulent or deliberately dishonest or to have constituted willful misconduct.

3. Indemnification for Additional Expenses. The Company shall indemnify Indemnitee against any and all expenses (including attorneys’ fees) and, if requested by Indetmnitee, shall (within ten business days of such request) advance such expenses to Indemnitee, which are incurred by Indemnitee in connection with any claim asserted against or in connection with any action brought by Indemnitee for (i) indemnification or advance payment of reasonable Expenses by the Company under this Agreement or any other agreement, the Company’s Certificate of Incorporation, or the Bylaws of the Company now or hereafter in effect relating to Claims for Indemnifiable Events, and/or (ii) recovery under any directors’ and officers’ liability insurance policies maintained by the Company, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advance expense payment or insurance recovery, as the case may be.

4. Partial Indemnity. If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the Expenses, judgments, fines, penalties and amounts paid in settlement of a Claim but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. Moreover, notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any or all Claims relating in whole or in part to an Indemnifiable Event or in defense of any issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith. In connection with any determination by Independent Legal Counsel or otherwise as to whether Indemnitee is entitled to be indemnified hereunder the burden of proof shall be on the Company to establish that Indemnitee is not so entitled.

5. Independent Legal Counsel Fees. The Company agrees to pay from time to time the reasonable fees of the Independent Legal Counsel and to indemnify fully such Independent Legal Counsel against any and all expenses (including attorneys’ fees), claims, causes of action, liabilities, damages, judgments, penalties and fines arising out of or relating to this Agreement or the engagement of such Independent Legal Counsel pursuant hereto.

6. No Presumption. For purposes of this Agreement, the termination of any claim, action, suit or proceeding, by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law.

7. Non-exclusivity. The rights of Indemnitee hereunder shall be in addition to any other rights Indemnitee may have under any other agreement, the Company’s Certificate of Incorporation, the Bylaws of the Company, the Delaware General Corporation Law, or otherwise. To the extent that a change in the Delaware General Corporation Law (whether by statute or judicial decision) permits greater indemnification by agreement than would by afforded currently under the Company’s Certificate of Incorporation, the Bylaws of the Company and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change.

8. No Construction as Employment Agreement. Nothing contained herein shall be construed as providing the Indemnitee any right to be retained in the employ of the Company or any of its subsidiaries or to continue to serve as a director of the Company or any of its subsidiaries.

9. Liability Insurance. To the extent the Company maintains an insurance policy or policies providing directors’ and officers’ liability insurance, Indemnitee shall be covered by such policy or policies (which shall, if available at reasonable cost to the Company, provide coverage to the Indemnitee for at least six (6) years after the Indemnitee has ceased to be a director of the Company), in accordance with its or their terms, to the maximum extent of the coverage reasonably available for any Company director or officer.

10. Period of Limitations. No legal action shall be brought and no cause of action shall be asserted by or in the right of the Company or any affiliate of the Company against Indemnitee, Indemnitee’s spouse, heirs, executors, administrators or personal or legal representatives after the expiration of three years from the date of accrual of such cause of action, and any claim or cause of action of the Company or its affiliate shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such three-year period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action such shorter period shall govern.

11. Amendments and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.

12. Subrogation. In the event of payment to the Indemnitee under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents, agreements, and instruments required and shall do everything that may be necessary to secure such rights including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights.

13. No Duplication of Payment. The Company shall not be liable under this Agreement to make any payment in connection with any claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any other agreement, any insurance policy, the Company’s Certificate of Incorporation, the Bylaws of the Company or otherwise) of the amounts otherwise indemnifiable hereunder.

14. Miscellaneous. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns, including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Company, spouses, heirs, beneficiaries, and personal and legal representatives. The Company shall require and cause any successor or assign (whether direct or indirect by purchase, merger, consolidation or otherwise) to all, substantially all, or a substantial part, of the business and/or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as a director of the Company or of any other enterprise at the Company’s request. Section headings are included herein solely for convenience of reference and shall not be used in the construction and application of this Agreement.

15. Severability. The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single Section or a paragraph or sentence thereof) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by applicable law. Furthermore, to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of this Agreement containing any provision held to be invalid, void or otherwise unenforceable, that is not itself invalid, void or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable.

16. Governing Law. This Agreement and all amendments, modifications and supplements hereof shall be governed by and construed and enforced in accordance with the laws of the State of Delaware applicable to contracts made and to be performed in such state without giving effect to the principles of conflicts of laws.

IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the date first above written.

 CPI CORP.

By:	/s/ J. David Pierson
	J. David Pierson
Title:	Chairman of the Board and Chief Executive Officer
	/s/
	Indemnitee

EX-11.1

EXHIBIT 11.1

CPI CORP. COMPUTATION OF EARNINGS (LOSS) PER SHARE - DILUTED

FISCAL YEARS ENDED FEBRUARY 4, 2006, FEBRUARY 5, 2005 AND FEBRUARY 7, 2004

thousands except share and per share data	2005			2004				2003
Common shares outstanding at beginning of fiscal period		18,432,779			18,360,238				18,288,006
Shares issued during the period - weighted average		60,956			49,536				54,113
Shares issuable under employee stock plans - weighted average		10,720			-		*		21,919
Dilutive effect of exercise of certain stock options		16,148			-		*		44,626
Less: Treasury stock weighted average		(10,639,543	)		(10,521,370	)			(10,260,500	)
Weighted average number of common and common equivalent shares		7,881,060			7,888,404				8,148,164
Net earnings (loss) applicable to common shares:
From continuing operations	$	6,389		$	(14,762	)		$	5,842
From discontinued operations		-			(3,746	)			(4,624	)
Net earnings (loss)	$	6,389		$	(18,508	)		$	1,218
Net earnings (loss) per common and common equivalent shares:
From continuing operations	$	0.81		$	(1.87	)		$	0.72
Form discontinued operations		-			(0.48	)			(0.57	)
Earnings (loss) per common share	$	0.81		$	(2.35	)		$	0.15

Options to purchase 64,144, 190,991 and 167,728 shares of common stock were outstanding during 2005, 2004 and 2003, respectively, but were not included in the computation of diluted EPS because the options’ exercise price was greater than the average market price of the common shares.

* The effect of stock options in the amount of 21,527 shares and 17,422 shares issuable under employee stock plans were not considered as the effect is antidilutive.

EX-11.2

EXHIBIT 11.2

CPI CORP. COMPUTATION OF EARNINGS (LOSS) PER SHARE - BASIC

FISCAL YEARS ENDED FEBRUARY 4, 2006, FEBRUARY 5, 2005 AND FEBRUARY 7, 2004

thousands except share and per share data	2005			2004			2003
Common shares outstanding at beginning of fiscal period		18,432,779			18,360,238			18,288,006
Shares issued during the period - weighted average		60,956			49,536			54,113
Less: Treasury stock - weighted average		(10,639,543	)		(10,521,370	)		(10,260,500	)
Weighted average number of common and common equivalent shares		7,854,192			7,888,404			8,081,619
Net earnings (loss) applicable to commons shares:
From continuing operations	$	6,389		$	(14,762	)	$	5,842
From discontinued operations		-			(3,746	)		(4,624	)
Net earnings (loss)	$	6,389		$	(18,508	)	$	1,218
Net earnings (loss) per common and common equivalent shares:
From continuing operations	$	0.81		$	(1.87	)	$	0.72
From discontinued operations		-			(0.48	)		(0.57	)
Earnings (loss) per common share	$	0.81		$	(2.35	)	$	0.15

EX-14.0

(PAGE NUMBERS REFER TO PAPER DOCUMENT ONLY)

EXHIBIT 14.0

CODE OF BUSINESS CONDUCT AND ETHICS

Introduction

For many years, CPI has enjoyed a reputation for high ethical standards in business and civic arenas. That reputation has been built--and must be maintained--on the basis of the conduct of all who represent our Company. This Code of Business Conduct and Ethics reflects the standards CPI employees, officers and directors are expected to observe to maintain and enhance our quality business practices. Underlying this Code are the fundamental requirements of honesty and good faith in all actions that reflect on the Company and our people. Employees, officers and Directors are expected to honor this spirit as well as the letter of the principles expressed in this document. Even the appearance of improper conduct must be avoided.

This Code covers a broad range of business practices and procedures, but it does not cover every issue that may arise. Always err on the side of caution and if you have any questions about any part of this Code or its application in a particular circumstance, please contact your supervisor, the President, the Chief Financial Officer, Executive Vice President of Human Resources or the General Counsel for guidance.

1.Compliance with Laws, Rules and Regulations

All employees, officers and directors must respect and obey the laws, rules and regulations applicable in the jurisdictions in which we operate. You are not expected to know the details of these laws, but you should attend training sessions sponsored by the Company that cover legal issues that apply to your area of responsibility and seek advice from supervisors or the Legal Department as necessary.

2.Conflicts of Interest

All employees, officers and directors must be scrupulous in avoiding a conflict with the Company’s interests. A “conflict of interest” exists when a person uses or appears to use their position in any way that may interfere with the interests of the Company. A conflict can arise when an employee, officer or director takes actions or has interests that may influence his or her ability to discharge his or her duties properly or make it difficult to perform his or her work on behalf of the Company. Conflicts of interest may also arise when an employee, officer or director, or members of his or her family, receives improper personal benefits as a result of his or her position in the Company. This Code does not attempt to describe all possible conflicts on interest which could develop. The following are some examples of situations that present a conflict of interest:

● Owning a financial interest in any outside company that provides or seeks to provide goods or services to CPI;

● Receiving any benefit from an outside company or person, directly or indirectly (other than as a normal customer or shareholder), as a result of having the authority to influence Company decisions;

● Receiving a loan or a guarantee of obligation from an outside company (other than as a normal customer);

● Purchasing, trading or dealing with real estate which CPI purchases, sells or leases;

● Holding a position, such as the owner, partner, manager, distributor or major shareholder, that may involve receipt of a benefit of any kind from a competitor or other outside company that could interfere with the best interests of CPI. (This does not preclude a family member of any employee, officer or director from holding such a position, but it does require vigilance to avoid any conflict of interest.)

The best policy is to avoid any direct or indirect business connection with our customers, suppliers or competitors, except on our behalf, for no remuneration except compensation from CPI for performing the functions of your position.

Conflicts of interest may not always be clear-cut. If you have a question, you should consult with your supervisor or the Legal Department. Any employee, officer or director who becomes aware of a conflict or potential conflict should promptly disclose it to his or her supervisor or the Legal Department.

3. Gift Giving and Receiving

The purpose of business entertainment and gifts is to create good will and sound working relationships, not to gain unfair advantage with customers. No gift or entertainment should ever be offered, given, provided or accepted by any Company employee, officer or director, or a family member, unless it: (1) is not a cash gift, (2) is consistent with customary business practices, (3) is not excessive in value, (4) cannot be construed as a bribe or payoff and (5) does not violate any laws or regulations. No employee, officer or director should offer, give or receive gifts from persons or entities who deal with the Company in situations where the gift is being made in order to influence such person’s or the Company’s actions or where the acceptance of the gift would create the appearance of a conflict of interest. Please discuss with your supervisor any gifts or proposed gifts that you are not certain are appropriate.

Under no circumstances should an employee give gifts, meals, or entertainment to any United States or foreign governmental personnel, to any persons employed by the United States or foreign political parties, to any candidates for political office, or to any intermediaries (for example, commission, agents, sales representatives, or consultants) who might pass on any gifts to these persons. Giving gratuities to such persons may violate United States and/or foreign statutes.

The Company complies with the U.S. Foreign Corrupt Practices Act and the laws of other countries which prohibit the payment of money or anything of value to any person who is a government official, member of a political party or candidate for political office, solely for the purpose of obtaining, retaining or directing business. These laws apply to the Company, the Company’s employees, consultants, business partners and other Company representatives. The Company observes strict accounting standards imposed by these laws on public corporations and their subsidiaries relating to the accuracy of books and records and internal controls.

4.Insider Trading

Employees, officers and directors who have access to or knowledge of material confidential or nonor non-public information are not permitted to buy, sell or otherwise trade CPI stock, whether or not they are relying on that information. In addition, employees, officers and directors may not buy, sell or otherwise trade CPI stock except in accordance with the Company’s insider trading policy and with prior approval from the General Counsel. They are also prohibited from sharing that information with others. Allnon-public information about the Company should be considered confidential information. To use non-public information for personal financial benefit or to disclose it to others who might make an investment decision on the basis of this information is not only a violation of this Code and unethical, it is also illegal. If you have any questions, please consult the Legal Department.

In addition, if an employee, director or officer has inside or unpublished knowledge about any of the Company’s suppliers, customers or any other company that we do business with, he/she may not purchase or sell securities of those companies or tip others to do so.

5.Corporate Opportunities

Employees, officers and directors are prohibited from (a) taking for themselves personally any opportunities that belong to the Company or that are discovered through the use of Company property, information or position; (b) using corporate property, information, or position for improper personal gain,

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and (c) competing with the Company directly or indirectly, except as expressly authorized by disinterested directors of the Company. Employees, officers and directors owe a duty to the Company to advance its interests when the opportunity arises.

6.Competition and Fair Dealing

CPI seeks competitive advantages through superior performance, never through unethical or illegal business practices. Each employee, officer and director should respect the rights of and deal fairly with the Company’s customers, suppliers, competitors and other employees. No employee, officer or director should take unfair advantage of anyone through manipulation, concealment, use of privileged information, misrepresentation or any other unfair practice.

7.Discrimination and Harassment

The diversity of the Company’s customers, employees and suppliers is a valuable asset. CPI is firmly committed to providing equal opportunity in all aspects of service and employment and will not tolerate any illegal discrimination or harassment of any kind. Examples include unwelcome sexual advances and derogatory comments based on racial or ethnic characteristics or religious beliefs.

8.Record-Keeping

The Company requires honest and accurate recording and reporting of information in order to make responsible business decisions and comply with all public reporting requirements.

For example, only the true and actual number of hours worked should be reported. Business expense accounts must be only for authorized business purposes and must be documented and recorded accurately. If you are not sure whether a certain expense is legitimate, ask your supervisor or seek advice from the Financeial Services/Administration Department.

All of the Company’s books, records, accounts and financial statements must be maintained in reasonable detail, must appropriately reflect the Company’s transactions and must conform both to applicable legal requirements and to the Company’s system of internal controls. Unrecorded or “off the books” funds or assets should not be maintained unless permitted by applicable law or regulation and approved by the Chief Financial Officer.

Business records and communications often become public or may be used in litigation. Avoid exaggeration, derogatory remarks, guesswork or inappropriate characterizations of people and other companies that can be misunderstood. This applies equally to e-mail, internal memos, and formal reports. Records should always be retained or destroyed according to the Company’s record retention policies. . Inappropriate access or modifications to, or unauthorized destruction of accounting or other business records is prohibited. These prohibitions apply to all business records and data, regardless of whether such data and records are in written form or electronically stored. If litigation or governmental investigation is anticipated or underway that may require documents under your control, contact the Legal Department.

9.Confidentiality

Employees, officers and directors must maintain the confidentiality of non-public information about the Company, its suppliers or its customers acquired in the course of service to the Company, except when disclosure is authorized by the Legal Department or required by law or regulation. Confidential information includes all non-public information regardless of whether it may be of use to competitors or harmful to the Company or its customers if disclosed. The obligation to preserve confidential information continues even after employment ends.

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10.Protection and Proper Use of Company Assets

All employees, officers and directors should protect the Company’s assets and ensure their efficient use for business purposes. Theft, carelessness, and waste have a direct impact on the Company’s profitability. Company equipment should not be used for non-Company business.

The obligation of employees to protect the Company’s assets includes its proprietary information, such as trade secrets, patents, trademarks, and copyrights, as well as business, marketing and service plans, ideas, designs, databases, records, salary information and any unpublished financial data and reports and customer information. Unauthorized use or distribution of this information would violate Company policy. It could also be illegal and result in civil or even criminal penalties.

11. Public Company Reporting

It is the policy of the Company to fully and fairly disclose the financial condition of the Company in compliance with applicable accounting principles, laws, rules and regulations. As a public company, it is of critical importance that the Company’s filings with the Securities and Exchange Commission be accurate and timely. All books and records of the Company shall be kept in such a way as to fully and fairly reflect all Company transactions. Any employee, officer or director may be called upon to provide necessary information to assure the Company’s public reports are complete, fair and understandable. Clear, open and frequent communication among all management levels and personnel on all significant financial and operating matters will substantially reduce the risk of problems in the accounting and financial reporting areas as well as help achieve operating goals. The Company expects employees, officers and directors to take this responsibility very seriously and to provide prompt, accurate answers to inquiries related to the Company’s public disclosure requirements.

12.Amendments and Waivers of the Code of Business Conduct and Ethics

Only the Board of Directors may make any amendment to this Code. A waiver may be granted by the Board or by the Nominating and Governance Committee of the Board, subject to disclosure and other applicable requirements of the Securities and Exchange Commission and the New York Stock Exchange.

13.Reporting any Illegal or Unethical Behavior

Employees are encouraged to talk to supervisors, managers or other appropriate personnel about observed or suspected illegal or unethical behavior or violations of this Code. If for any reason you are not comfortable approaching a supervisor, you may contact any member of management or the Legal Department or you may leave a message on the Company’s Fraud Hotline, 866-292-4935. If you request that any reports of suspected unethical or illegal behavior be held in confidence, the Company will, to the fullest extent possible, honor that request. The Company will not allow retaliation of any kind for reports of misconduct by others made in good faith by employees. Employees are expected to cooperate in internal investigations of misconduct. A violation of this Code and failure to cooperate in any investigation of a suspected violation may result in disciplinary action, up to and including termination of employment.

14.Accounting Complaints

It is a policy of CPI to comply with all applicable financial reporting and accounting regulations. Any employee, officer or director who has concerns or complaints about accounting or auditing matters is encouraged to report them to the Audit Committee of the Board of Directors. Any such report may be made to the Chairman of the Audit Committee at the offices of the Company and it will be forwarded promptly and confidentially. In addition, the Company has established a confidential, anonymous hotline operated by an independent vendor at http://www.openboard.info/cpy calls made to the Company’s Fraud Hotline, 866-292-4935, relating tofor reporting of concerns or complaints about accounting or auditing matters. Reports made via this Internet hotline will be delivered forwarded to the Chairman of the Audit Committee. Subject to its duties under law or legal proceedings, the Audit Committee will treat complaints and concerns it receives about suspected accounting or auditing issues confidentially. No

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employee, officer or director will be subject to disciplinary action or other retaliation for reports or complaints made in good faith.

15.Compliance Procedures

We must all work to ensure prompt and consistent action against violations of this Code. Since we cannot anticipate every situation that will arise, here are some guidelines to keep in mind:

● Make sure you have all the facts. In order to reach the right solutions, we must be as fully informed as possible.

● Ask yourself: What specifically am I being asked to do? Does it seem unethical or improper? This will enable you to focus on the specific question you are faced with, and the alternatives you have. Use your judgment and common sense; if something seems unethical or improper, it probably is.

● Clarify your responsibility and role. In most situations, there is shared responsibility. Are your colleagues informed? It may help to get others involved and discuss the problem.

● Discuss the problem with your supervisor. This is the basic guidance for all situations. In many cases, your supervisor will be more knowledgeable about the question, and will appreciate being included in the decision-making process. Remember that it is your supervisor’s responsibility to help solve problems.

● If you are unsure of what to do in any situation, seek guidance before you act.

It is each employee’s responsibility to resolve with the General Counsel or the Chief Financial Officer of the Company any potential conflicts with this Code. Violations of this Code, even in the first instance, may result in disciplinary action up to and including dismissal of employment from the Company. In addition, violations of laws applicable to the Company could result in substantial fines to the Company and individual violators and, in certain instances, imprisonment. No improper or illegal behavior will be justified by a claim that it was ordered by someone in higher authority. No one, regardless of his or her position, is authorized to direct an employee to commit a wrongful act. The Company encourages you to ask questions and seek guidance from your supervisor or anyone on your management team, the Company’s human resources department, legal department or others designated by this Code.

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ACKNOWLEDGEMENT

I have reviewed and understand the CPI Corp. Code of Business Conduct andEthics (the “Code”). Except as described below, to the best of my knowledge, I am incompliance with the Code. Further, I agree to comply with the Code.

(Signature)

(Print Name)

Social Security Number

(For internal filing only)

(Date)

I have the following questions about the Code or wish to disclose the following information in light of the Code:

EX-21.0

EXHIBIT 21.0

SUBSIDIARIES OF THE REGISTRANT AS OF FEBRUARY 4, 2006

					STATE/PROVINCE	COUNTRY
CPI Corp.					Delaware	United States
	Consumer Programs Incorporated				Missouri	United States
		d/b/a Sears Portrait Studios
			Centrics Technology, Inc.		Delaware	United States
				d/b/a searsphoto.com
			CPI Images, L.L.C.		Missouri	United States
				d/b/a Sears Portrait Studios
				d/b/a Mainstreet Portraits
			CPI Research and Development. Inc.		Delaware	United States
			myportraits.com, Inc.		Missouri	United States
				Consumer Programs Partner, Inc.	Delaware	United States
CPI Corp.					Nova Scotia	Canada
	d/b/a Sears Portrait Studios
CPI Technology Corp.					Missouri	United States
	LBP Partnership				Missouri	United States
	P & W/LBP Partnership				Missouri	United States
CPI Prints Plus, Inc.					Delaware	United States
	Ridgedale Prints Plus, Inc.				Minnesota	United States
CPI Portrait Studios de Mexico S. de R.L. de C.V.					Monterrey, Nuevo Leon	Mexico
CPI International Holdings, Inc.					Delaware	United States
CPI Canadian Holdings, Inc.					Delaware	United States
CPI Portrait Studios of Canada Corp.					Nova Scotia	Canada
Texas Portraits, L.P.					Delaware	United States

EX-23.0

EXHIBIT 23.0

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

CPI Corp.:

We consent to the incorporation by reference in registration statements No. 333-08634, No. 333-08636, No. 333-64296, No. 33-19981, No. 33-41405, No. 33-50082 and 002-86403 on Forms S-8 and No. 33-17582 on Form S-3 of CPI Corp. of our reports dated April 18, 2006, relating to the consolidated balance sheets of CPI Corp. and subsidiaries as of February 4, 2006 and February 5, 2005 and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended February 4, 2006, management’s assessment of the effectiveness of internal control over financial reporting as of February 4, 2006 and the effectiveness of internal control over financial reporting as of February 4, 2006, which reports appear in the February 4, 2006 annual report on Form 10-K of CPI Corp.

/s/ KPMG LLP

KPMG LLP

St. Louis, Missouri

April 18, 2006

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO

RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934

I, Paul Rasmussen, Chief Executive Officer of CPI Corp., a Delaware Corporation, certify that:

1.I have reviewed this report on Form 10-K of CPI Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant's disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosures controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an Annual Report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

/s/ Paul Rasmusssen

Paul Rasmussen

Chief Executive Officer

Date: April 18, 2006

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO

RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934

I, Gary W. Douglass, Executive Vice President, Finance and Chief Financial Officer of CPI Corp., a Delaware Corporation, certify that:

1.I have reviewed this report on Form 10-K of CPI Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant's disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosures controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an Annual Report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

/s/ Gary W. Douglass

Gary W. Douglass

Executive Vice President, Finance and

Chief Financial Officer

Date: April 18, 2006

EX-32.0

EXHIBIT 32.0

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Chief Executive Officer and Chief Financial Officer of CPI Corp., a Delaware corporation (the “Company”), do hereby certify that:

(1)   The Annual Report on Form 10-K for the year ended February 4, 2006 (the “Form 10-K”) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and

(2)   The information contained in the Form 10-K fairly presents, in all material respects, the financial condition and the results of operations of the Company.

/s/ Paul Rasmusssen	/s/ Gary W. Douglass
Paul Rasmussen	Gary W. Douglass
Chief Executive Officer	Executive Vice President, Finance
	and Chief Financial Officer

Dated: April 18, 2006