UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

OR

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

Commission file number 1-10204

CPI Corp.
(Exact name of registrant as specified in its charter)

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

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

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

Indicate by check mark whether the Registrant [1] has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and [2] has been subject to such filing requirements for the past 90 days.

|X| Yes |_| No

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

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

|X| Yes |_| No

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

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

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Proxy Statement relating to the Annual Meeting Of Shareholders to be held July 22, 2004 are incorporated by reference into Part III of this Report.

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TABLE OF CONTENTS

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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, AND CAPITAL EXPENDITURES, ARE ONLY PREDICTIONS OR EXPECTATIONS; ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY AS A RESULT OF RISKS FACING THE COMPANY. SUCH RISKS INCLUDE, BUT ARE NOT LIMITED TO: CUSTOMER DEMAND FOR THE COMPANY’S PRODUCTS AND SERVICES, THE OVERALL LEVEL OF ECONOMIC ACTIVITY IN THE COMPANY’S MAJOR MARKETS, COMPETITORS’ ACTIONS, MANUFACTURING INTERRUPTIONS, DEPENDENCE ON CERTAIN SUPPLIERS, CHANGES IN THE COMPANY’S RELATIONSHIP WITH SEARS AND THE CONDITION AND STRATEGIC PLANNING OF SEARS, FLUCTUATIONS IN OPERATING RESULTS, THE ATTRACTION AND RETENTION OF QUALIFIED PERSONNEL AND OTHER RISKS AS MAY BE DESCRIBED IN THE COMPANY’S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THIS FORM 10-K FOR THE YEAR ENDED FEBRUARY 7, 2004.

PART I

Item 1. Business

An Overview of the Company

CPI Corp. (“CPI”, the “Company” or “we”), a Delaware corporation formed in 1982, is a long-standing leader in the professional portrait photography of young children and families. From the single studio opened by its predecessor company in 1942, we have grown to 1,018 studios throughout the United States, Canada and Puerto Rico under license agreements with Sears, Roebuck and Co. (“Sears”). Our position in the top tier of the estimated $1.2 billion pre-school photography market is based on our revenues, which exceeded $301 million in fiscal year 2003, when our photographers captured approximately 4.6 million sittings. Management has determined that the Company operates in one segment offering similar products and services in all locations.

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

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

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

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

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

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

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

The Company’s Products and Services

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

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

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

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

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to their order at an additional cost per sheet. Everyday Expressions™customers’ images are also uploaded to our website, everydayexpressions.com, where friends and family can also view and order portraits. Personalized keepsakes and gifts, such as photo t-shirts, mugs, mouse pads, magnets, etc. are also available to purchase on-line. As of February 7, 2004, in approximately 630 studios, we can upload images captured in a Sears Portrait Studio session to our searsphotos.com website. With a code and individualized passwords, our customers can view the images from home and share them via email with friends and family. Any recipient of the on-line images may place orders for additional portraits from home, as well as other portrait related gifts such as personalized t-shirts, mugs, mouse pads and more.

The Company’s Relationship with Sears

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

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

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

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

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

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

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

Industry Background and Competition

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

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

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

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

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

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Seasonality and Inflation

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

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

Suppliers

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

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

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

Intellectual Property

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

The Company’s Employees

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

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The Company Website and Periodic Reports

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

Environmental Regulation

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

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Item 2. Properties

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

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

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

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

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Item 3. Legal Proceedings

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

Item 4. Results of Votes of Security Holders

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

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

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

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

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

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

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

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

This proposal was approved by the stockholders.

This proposal was approved by the stockholders.

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This proposal was approved by the stockholders.

This proposal was approved by the stockholders.

This proposal was approved by the stockholders.

This proposal was approved by the stockholders.

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PART II

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

Price Range of Common Stock and Dividends

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

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

Shareholders of Record

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

Dividends

The Company intends, from time to time, to pay cash dividends on its common stock, as its Board of Directors deems appropriate, after consideration of the Company’s operating results, financial condition, cash requirements, general business conditions and such other factors as the Board of Directors deems relevant. On June 3, 2003, the Company announced that its Board of Directors approved a 14% increase in the annual dividend rate paid on the Company’s common stock from $.56 per share to $.64 per share effective with the third quarter 2003 dividend payment.

Sales of Securities Other Than Sales of Equity Securities

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

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

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

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

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Item 6. Selected Consolidated Financial Data

thousands except per share data (1) (2)

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

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Item 6. Selected Consolidated Financial Data (continued)

thousands (1) (2)

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Item 6. Selected Consolidated Financial Data (continued)

thousands (1) (2)

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Item 6. Selected Consolidated Financial Data (continued)

thousands (1) (2)

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

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

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

EXECUTIVE OVERVIEW

The Company’s Operations

CPI Corp. is a long-standing leader, based on sittings and related revenues, in the professional portrait photography of young children and families. From the single studio opened by its predecessor company in 1942, we have grown to 1,018 studios throughout the United States, Canada and Puerto Rico under license agreements with Sears. We have provided professional portrait photography for Sears customers since 1959 and have been the exclusive Sears portrait studio operator since 1986.

As of the end of the last three fiscal years, the Company’s Sears Portrait Studio counts were:

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

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Competitive Factors/Trends/Challenges

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

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

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

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

Overall, the Company’s operating results for 2003 reflect:

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

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RESULTS OF OPERATIONS

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

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

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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:

Net Cash Provided By Operating Activities

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

Net Cash Used In Investing Activities

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

Net Cash Used In Financing Activities

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

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

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

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

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

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

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

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

Off-Balance Sheet Arrangements

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

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Future Cash Flows

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

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Liquidity

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

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

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

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ACCOUNTING PRONOUNCEMENTS AND POLICIES

Adoption of New Accounting Standards

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

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

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

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

Application of Critical Accounting Policies

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

Self-insurance reserves

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

Defined benefit retirement plans

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

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

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

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

The statements contained in this report, and in particular in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and involve risks and uncertainties. Management wishes to caution the reader that these forward-looking statements, such as the Company’s outlook for portrait studios, future cash requirements, compliance with debt covenants, valuation allowances, and capital expenditures, are only predictions or expectations; actual events or results may differ materially as a result of risks facing the Company. Such risks include, but are not limited to: customer demand for the Company’s products and services, the overall level of economic activity in the Company’s major markets, competitors’ actions, manufacturing interruptions, dependence on certain suppliers, changes in the Company’s relationship with Sears and the condition and strategic planning of Sears, fluctuations in operating results, the condition of Prints Plus Inc., the attraction and retention of qualified personnel and other risks as may be described in the Company’s filings with the Securities and Exchange Commission, including its Form 10-K for the year ended February 7, 2004.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market risks relating to the Company’s operations result primarily from changes in interest rates and changes in foreign exchange rates. The Company’s debt obligations have primarily fixed interest rates; therefore, the Company’s exposure to changes in interest rates is minimal. The Company’s exposure to changes in foreign exchange rates relative to the Canadian and Mexican operations is minimal. Canadian operations constitute only 10.3% of the Company’s total assets and 7.3% of the Company’s total sales. Mexican operations constitute 1.3% of the Company’s total assets and significantly less than 1% of the Company’s total net sales.

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Item 8. Financial Statements and Supplemental Data

(a)     INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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Management’s Report

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

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

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

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

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INDEPENDENT AUDITORS’ REPORT

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS CPI CORP.:

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

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

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

KPMG LLP

St. Louis, Missouri

April 8, 2004

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CPI CORP.
Consolidated Balance Sheets – Assets