OMB APPROVAL OMB Number: 3235-0063 Expires: ~~January~~April 3130, ~~2008~~2009 Estimated average burden hours per response: 2,196.00

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended March 31, ~~2005~~2006

Commission File No. 000-09600

CPAC, INC.
(Exact name of registrant as specified in its charter)

New York

(State or other jurisdiction of incorporation or organization)

16-0961040

(IRS Employer Identification Number)

2364 Leicester ~~Rd.~~ Road, P O Box 175, Leicester, New York 14481

(Address of principal executive offices and Zip Code)

Registrant's telephone number, including area code:

(585) 382-3223

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

None

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

$.01 Par Value Common Stock (Title of class)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]

Indicate by check mark if the Registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act.		Yes [ ] No [ X ]

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 [ ] No [ X ]

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
	Yes [ X ] No [ ]

Indicate by check mark 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 [ ] Non-accelerated filer [ X ]

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).		Yes [ ] No [ X ]

The aggregate market value of the 2,619,372 shares of voting stock held by non-affiliates (persons other than officers, directors, and 5% shareholders) of the Registrant as of September 30, 2005, the last business day of the Registrant's most recently completed second fiscal quarter, was $13,044,472, based on the closing price of $4.98 on the Nasdaq National Market as of such date. As of March 31, 2006 there were 4,946,774 shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Part III of this Form 10-K are incorporated herein by reference to portions of the Registrant's Proxy Statement for the Annual Meeting of Shareholders dated June 22, 2006.

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 Act). Yes [ ] No [ X ]
The aggregate market value of the 2,512,816 shares of voting stock held by non-affiliates (persons other than officers, directors, and 5% shareholders) of the Registrant as of September 30, 2004, the last business day of the Registrant's most recently completed second fiscal quarter, was $12,815,362, based on the closing price of $5.10 on the Nasdaq National Market as of such date. As of March 31, 2005 there were 4,946,774 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Part III of this Form 10-K are incorporated herein by reference to portions of the Registrant's Proxy Statement for the Annual Meeting of Shareholders dated June 17, 2005, as amended on June 29, 2005 and further amended on July 8, 2005.
CPAC, INC. TABLE OF CONTENTS

	Page No.
PART I
Item 1.	Business.	3
Item 2.	Properties.	11
Item 1A.	Risk Factors.	10
Item 3.	Legal Proceedings.	11
Item 1B.	Unresolved Staff Comments.	12
Item 4.	Submission of Matters to a Vote of Security Holders.	12
Item 2.	Properties.	12
Item 3.	Legal Proceedings.	13
Item 4.	Submission of Matters to a Vote of Security Holders.	13
PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	1213
Item 6.	Selected Financial Data.	1314
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operation.	1314
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk.	2526
Item 8.	Financial Statements and Supplementary Data.	2627
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.	48
Item 9A.	Controls and Procedures.	48
Item 9B.	Other Information.	4948
PART III
Item 10.	Directors and Executive Officers of the Registrant.	4948
Item 11.	Executive Compensation.	5049
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	5049
Item 13.	Certain Relationships and Related Transactions.	50
Item 14.	Principal Accountants Fees and Services.	50
PART IV
Item 15.	Exhibits, Financial Statement Schedules.	5150
SIGNATURES		53
EXHIBIT INDEX		54

INDEX TO ITEMS INCORPORATED BY REFERENCE

PART III		Caption in Proxy Statement
Item 10.	Directors and Executive Officers of the Registrant.	Election of Directors; and Security Ownership of Certain Beneficial Owners and Management
Item 11.	Executive Compensation.	Executive Compensation
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	Security Ownership of Certain Beneficial Owners and Management
Item 13.	Certain Relationships and Related Transactions.	Election of Directors; and Committee Reports
Item 14.	Principal Accountants Fees and Services.	Independent Registered Public Accounting Firm's Fees and Services

PART I

Item 1. BUSINESS.

OVERVIEW

CPAC, Inc. (pronounced C-pack) and its consolidated subsidiaries (herein referred to collectively as "CPAC" or "the Company," unless indicated otherwise) has two principal business Segments: Fuller Brands and CPAC Imaging. The Company's Fuller Brands Segment develops, manufactures, distributes, and markets branded and private-label consumer and commercial cleaning and personal care products in North America and internationally. CPAC Imaging Segment includes the Company's color photographic, health care, and graphic arts imaging operations in the United States, Belgium, China, Italy, South Africa, and Thailand, which collectively sell into more than 100 other countries.

CPAC was formed in 1969 as a New York Corporation under the name of Computerized Pollution Abatement Corporation. Its name was shortened to CPAC, Inc. in 1976. The principal executive offices of the Company are located at 2364 Leicester Road, Leicester, New York, 14481, telephone number 585-382-3223, with a mailing address of P O Box 175, Leicester, New York 14481-0175. The Company maintains a web site at www.cpac.com and makes its annual, quarterly, and periodic Securities and Exchange Commission ("SEC") filings available through the News and Financial Information section of that web site. The Company's SEC filings are available through this web site free of charge, via a direct link to the SEC web site at www.sec.gov. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The Company's filings with the SEC are also available to the public at the SEC Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 or by calling the SEC at 1-800-SEC-0330.

Fuller Brands Segment

The Company's Fuller Brands Segment is comprised of three operations that develop, manufacture, distribute, and market approximately 2,700 branded and private-label products for consumer and commercial cleaning and personal care applications. These operations are The Fuller Brush Company, Inc. (Fuller Brush or Fuller), Great Bend, KS (acquired in 1994); Stanley Home Products (Stanley), Agawam, MA (operated since 1995); and Cleaning Technologies Group (CTG), Great Bend, KS (acquired in 1997).

The Segment's products include home and commercial cleaning products (all-purpose cleaners, degreasers, deodorizers, stain removers, laundry products); stick goods (brooms, brushes, mops); commercial floor care chemicals (finishes and waxes, strippers, sealers, maintainers); custom brush components for OEM applications; and personal care products (brushes, hair and skin care, fragrances, ~~vitamins,~~ nutritional supplements). The vast majority of Segment products are manufactured at its 600,000 sq. ft. facility in Great Bend, Kansas.

FULLER BRANDS -- CONSUMER

The Consumer component of the Fuller Brands Segment consists of products sold through The Fuller Brush Company and Stanley Home Products operations, which utilize the following channels: direct selling, catalogs, the Internet, factory outlet stores, direct ~~marketing~~mail ~~partners~~catalogs, national catalog marketers, television home shopping, ~~sweepstakes,~~ and high-end retailers, including grocery and drug.

The Consumer component includes (i) Home Care products for kitchen, laundry, bath, and general household cleaning, as well as brushes, brooms, and mops and (ii) Personal Care products such as brushes, hair and skin care products, fragrances, ~~vitamins and nutritional supplements. The Fuller Brush Company and Stanley Home Products each hold more than 100 registered trademarks in the U.S. and elsewhere for their products.~~

and nutritional supplements. The Fuller Brush Company and Stanley Home Products hold nearly 100 currently registered trademarks in the U.S. and elsewhere for their products.

While most of the Consumer cleaning products for Fuller and Stanley are developed and manufactured in the Great Bend facility, nutritional supplements and a number of skin care products are imported or outsourced.

Direct Selling

Stanley Home Products and The Fuller Brush Company both have direct selling organizations comprised of independent representatives. Direct selling consists of the sale of a consumer product or service, person-to-person, away from a fixed retail location. The Company also utilizes the "party plan" sales method in which its sales representatives demonstrate products to groups rather than individuals.

Most of the independent representatives sell part-time, purchasing products from Fuller and Stanley in order to resell them to their customers. Representatives are encouraged to recruit others into the business, thus widening the sales network.

Direct Mail Catalog/Internet

Both Fuller and Stanley publish full-color catalogs and fliers as a means of marketing their product lines, as well as to promote the direct selling business opportunity. Customers who are not assisted by a direct selling representative can order directly from the company by mailing, telephoning, e-mailing, or faxing an order directly to Customer Service. Additionally, both companies have e-commerce enabled web sites through which consumers can order products directly (www.fullerbrush.com and www.shponline.com).

Factory Outlet Stores

Fuller Brush operates ~~eight~~seven Factory Outlet Stores which are located in shopping centers in Kittery, Maine; Branson and Hazelwood, Missouri; Myrtle Beach, South Carolina; Pigeon Forge, Tennessee; St Augustine, Florida; and ~~Westbrook, Connecticut; and~~ at the Fuller Brush plant in Great Bend, Kansas. In addition, there are four Vanity Fair outlets wherein Fuller Brush products are sold (two in Ohio; two in Pennsylvania). All products bear the Fuller Brush brand and are sold at a discount. First-quality, consumer products comprise approximately 80% of stocked merchandise, with the balance consisting of consumer and commercial overstocks, closeouts, and ''seconds." The Factory Outlet component of Fuller Brands' Consumer business provides a useful platform for delivering world-famous Fuller quality goods to those consumers not covered by a local representative.

~~Direct~~National ~~Marketing~~Catalog ~~Partners~~Marketers and Home Television Shopping

Fuller-branded consumer products are marketed through national direct marketing partners such as catalog companies, sweepstakes marketers, direct mail firms, Internet marketers, and direct response television. They partner with Fuller Brush to directly promote the Fuller brand to their large audiences, and fulfill orders from their respective distribution centers.

This growing channel complements the direct selling efforts of Fuller representatives, and offers consumers an opportunity to purchase Fuller merchandise in a variety of ways.

Retail Initiative

As a new market growth initiative, Fuller Brush has ~~aggressively~~ pursued entry into grocery, hardware, and specialty retail with its redesigned and updated consumer product line. Fuller Brush utilizes manufacturers' representatives to access and service these accounts, with products being sold directly to these merchants.

FULLER BRANDS -- COMMERCIAL

The Commercial component of the Fuller Brands Segment consists of products sold through The Fuller Brush Company and Cleaning Technologies Group. Commercial sales are broken out into the following three categories: Commercial Cleaning, Custom Products, and Export. The three Commercial categories address the needs of a wide array of customers, from retail food store sanitation products to customer designed industrial brushes.

Commercial Cleaning

Cleaning Technologies Group, the Segment's commercial cleaning operation, manufactures, distributes, and sells sanitary maintenance supplies, professional cleaning products, and stick goods (brooms, brushes, mops). Products are sold through a national network of janitorial and paper distributors, manufacturers' representatives, wholesale distributors, and large buying groups that purchase and resell products to end-users such as grocery stores, offices, hotels, retail stores, hospitals, schools, and manufacturing plants. CTG also employs four regional representatives to service these accounts. In addition, CTG exhibits its products at national trade shows.

CTG products are marketed under the Franklin Cleaning Technology®, Masury-Columbia®, Fuller Brush® Commercial, TRUMIX™, and Brillo® brand names. In all, CTG has over 60 trademarks for general and specific commercial cleaning needs. All of CTG's support functions are located at the Company's Great Bend facility.4

CTG products are marketed under the Franklin^®, Masury-Columbia^®, Fuller Brush^®Commercial, TRUMIX^™, and Brillo^® customer brand names. In all, CTG has over 50 current trademarks for general and specific commercial cleaning needs. All of CTG's customer support functions are located at the Company's Great Bend facility.

Custom Products

The Custom Products sales channel of The Fuller Brush Company designs, manufactures, and sells private-label chemicals and stick goods made to customers' specifications. It principally manufactures OEM brush components; however, it also produces a variety of chemicals, metal handles, and plastic parts. The Custom Products sales channel principally serves the automotive, aviation, durable goods, and agriculture industries.

The Company's plant in Kansas features state-of-the-art high-speed lines as well as unique equipment which is used to manufacture brushes and brush components designed for specialty applications.

Export

The Fuller Brush Company services a number of commercial customer accounts in Canada, Mexico, and other countries. It distributes via intermodal transport to Puerto Rico. Primary products exported are home and floor care chemicals and products.

COMPETITION

Fuller Brands
CONSUMER

Fuller Brands' Consumer component entails the development, manufacture, and marketing of home cleaning and personal care products that are sold to consumers principally through the following four channels:

Direct Selling

Both Fuller Brush and Stanley Home Products' direct selling organizations are comprised of thousands of independent representatives in all 50 states who promote home cleaning and personal care products one-on-one, via the Internet, and at home parties. The product lines of these two operations are quite similar. In fact, before becoming part of CPAC, Inc., Fuller Brush and Stanley Home Products competed directly with one another in the marketplace. Now, Fuller representatives can sell both Fuller and Stanley products and vice versa, should they choose.

Direct selling companies compete both in terms of products, and in terms of attracting representatives and customers. Relative to their home cleaning and personal care product lines, Fuller and Stanley compete with direct selling companies such as Alticor^®, Watkins^®, Shaklee^®, and Tupperware^®. All U.S. direct selling companies compete with Fuller and Stanley for representatives and customers. Product demonstrations are key to the success of both the Fuller and Stanley direct selling activities, particularly with the home care lines.

Although the Fuller Brush brand has historically been marketed door-to-door, the Company continues to expand its presence in other channels to reach consumers that are not as readily available to direct sellers. In April 2002 Fuller began selling home care product sets via direct response television [also known as home shopping]. These live televised product demonstrations raise awareness of the Fuller brand, which supports the efforts of the direct selling organization.

Fuller has been in the direct sales business since 1906 and Stanley since 1931. For both organizations, a reputation for quality and service has created significant loyalty to the products and to the business opportunity for an independent representative. The Company believes there is still significant brand equity in both names. In addition, the personalized demonstrations and service offered by Fuller and Stanley representatives, the rich history of those brands, and the Company's satisfaction guarantee are significant factors in maintaining a competitive position in direct selling.

Direct Mail Catalog/Internet

Both Fuller and Stanley maintain e-commerce enabled web sites, which allow consumers to place orders directly with the Company or request a catalog by mail. This practice encourages new and repeat sales, creates a "lead" for a field sales representative to pursue, and allows the Company to market the business opportunity to potential representatives.

The majority of direct selling companies publish catalogs and/or fliers for representatives to leave behind after a sales call or home party; several allow consumers to order directly. Most well known direct selling companies also have an Internet presence.

Management believes that the Internet channel has enhanced sales, marketing, recruiting, and information-sharing opportunities for its customers and representatives. A significant cost reduction is achieved by communicating electronically with the field sales force. The Internet also allows current and prospective customers and representatives to self-educate about products.

Factory Outlet Stores

Fuller Brush markets its products in ~~eight~~seven retail outlet stores in the U.S., primarily located in well-traveled outlet malls. This channel allows Fuller Brush to efficiently sell first-quality inventory, as well as slow-moving or discontinued items, while enhancing brand awareness. In addition, there are four Vanity Fair outlets wherein Fuller Brush products are sold.

The Fuller Brush Company uses merchandising and attractive product displays in its retail stores to compete with other mall tenants, such as Oneida^®, Maidenform^®, Buster Brown^®, and Jockey^®. The number of direct competitors that Fuller faces in the retail outlet channel is limited.

Fuller's brand equity is strong with certain groups of consumers who shop in outlet malls. The stores represent an opportunity for former customers to re-discover Fuller in a retail setting.

Management believes that its retail outlet stores in certain areas of the country are a viable channel for incremental sales and brand awareness.

~~Direct~~National ~~Marketing~~Catalog Partners and Home Television Shopping

Fuller-branded consumer products are purchased by national direct marketing partners such as catalog companies, direct mail firms, Internet marketers, and direct response television. These partners purchase Fuller products in quantity, then market and distribute them to their audiences and customer lists.

Fuller Brush competes for sales with similar products featured in catalogs, web sites, direct mailings, etc., such as Orange Glo^® and Oxiclean^®.

The Fuller brand has recently been reintroduced to consumers through appearances on direct response television. As previously stated, demonstrability, brand equity, and high quality are the Company's competitive advantages. These hallmark traits make the Fuller brand attractive to direct marketing partners and allow Fuller to effectively compete with the vast number of home care competitors.

Management views these direct marketing partner relationships as an effective means of broadening exposure for the Fuller Brush brand. This exposure adds value across every channel.

Retail Initiative

Fuller Brush utilizes its brand recognition and high-quality reputation to establish its products as a premium offering to select retailers. The Company's breadth of products allows it to offer retailers a "cleaning center concept" versus individual item sales. Chemical cleaning products and applicators are offered for cleaning all areas of the home. This initial strategy has been to focus distribution within the retail channel and provide the retailer higher profitability than national brands sold through discount mass merchants.

Fuller's competitors in this channel are national brands such as Proctor & Gamble, Acuity Brands™, Casabella®, Quickie®, Libman®, and SC Johnson all of whom have national advertising campaigns and established relationships with Fuller's target customers. In ~~this channel, Fuller also competes with niche products such as Swiffer® that have limited product lines.~~

COMMERCIAL

Fuller Brands' Commercial develops, manufactures, and markets commercial cleaning and maintenance chemicals, and stick goods. The Fuller Brands Segment competes with regional, national, and global companies in each of the three industrial channels in which it operates: Commercial Cleaning, Custom Products, and Export.

Commercial Cleaning

Cleaning Technologies Group, the Fuller Brands Segment's commercial cleaning sales channel, markets branded and private-label janitorial and maintenance products through a direct sales force as well as a national distributor network. CTG products are used primarily in offices, hotels, retail stores, hospitals, schools, universities, airports, and other public buildings.

Commercial cleaning products is a fragmented industry, and although two companies are significantly larger than others (SC Johnson Wax and Ecolab), no single firm or group of firms dominates the industry as a whole. Numerous small regional or local competitors focus on limited geographies, product lines and/or customer segments. CTG seeks to fill specific product niches where it feels it can compete favorably, such as providing one-stop sanitation shopping for retail food stores and environmentally friendly "green" products.

CTG has established long-standing relationships with its major commercial cleaning customers based on the ability to "bundle" high quality chemicals, pad applicators, and stick goods, and provide value-adds to customers such as lower cost structure, reduced labor, and assistance with training, safety, and environmental standards. Alliances with large national wholesalers, whose scope is national and whose extensive sales force is direct, augment CTG's own network.

Custom Products

This component of Fuller Brands' Commercial sales channel is involved in the manufacture and sale of private-label products made to customers' specifications. The primary products are brushes and brush components, although various chemicals, metal handles, and plastic parts are also produced on a contract basis.

Custom brush competitors tend to be specialized private companies such as Osborn International, Felton Brush and ~~America~~Industrial Brush ~~Company~~Corp. These competitors manufacture numerous types of industrial brush finished goods. Fuller Brands specializes in strip, tufted, and coil type brushes for commercial customers.

Management believes Fuller Brands is able to compete successfully in the custom products arena based on its reputation for high-quality products, exceptional technical support, on-time delivery and an emphasis on superior customer service.

Export

Fuller Brands' export sales channel currently is limited to the selling of branded commercial and household products through a small network of commercial distributors outside of the continental U.S. (primarily in Puerto Rico and Canada). As in the U.S., export customers demand the best value -- high quality at a competitive price. Fuller Brands' products meet these criteria.

The Company currently has an insignificant share of the global market for cleaning and personal care products, and so management believes a great opportunity exists.

CPAC Imaging Segment

The Company's CPAC Imaging (Imaging) Segment develops, manufactures, packages, distributes, and markets its extensive line of branded and private-label chemicals and equipment for Color Photographic, Health Care, and Graphic Arts applications.

The classes of products for CPAC Imaging include liquid chemicals for developing silver halide photographic film; photographic paper; radiographic and graphic arts film; chemical mixers for Health Care and Graphic Arts imaging; silver recovery and pollution control equipment and supplies; silver refining services; illuminators for viewing medical x-rays; dry-heat sterilizers used in dental practices; dental evacuation (suction) units; and portable air filtration units.

All of the Imaging Segment's ~~six~~seven business operations manufacture products. Equipment is manufactured at CPAC Equipment, Inc. in Leicester, New York, and chemicals are formulated and packaged at ~~five~~six other plant locations. The facility in Duluth, Georgia, a suburb of Atlanta, serves as the worldwide headquarters for CPAC Imaging. All products are marketed to businesses, such as photo processing labs, radiology and dental practices, and printing facilities in more than 100 countries worldwide. Through this Segment, CPAC has an extensive manufacturing and distribution base in key international markets. A superior level of customer and technical support is also a distinguishing characteristic of the Segment. Since its practice is to ship goods upon receipt of customer orders in all of its sales channels, the Segment does not generally have a material backlog of orders for its products.

The Imaging Segment manufactures most of its products to better control costs, quality, and inventory levels. This arrangement minimizes the expenses associated with outside vendor overhead and carrying raw goods versus finished goods inventory. The raw materials necessary for manufacture of the Segment's products are readily available from numerous sources, and the Imaging Segment is not dependent on any single supplier for any one item.

The refining of customers' recovered silver is conducted under an exclusive, ~~recently renewed, five-year~~ agreement with Academy Pioneer, LLC, the largest independent U.S. refiner of photographic silver.

Business operations in this Segment include CPAC Equipment, Inc. (CEI), Leicester NY (established in 2003 and formerly CED); Trebla Chemical Company (Trebla) acquired in 1984 was recently consolidated into Allied Diagnostic Imaging Resources, Inc. (Allied), Norcross, GA (acquired in 1988); CPAC Europe, N.V. (CPAC Europe), Herentals, Belgium (established in 1989); CPAC Italia, S.r.l. (CPAC Italia), Gorgonzola, Italy (acquired in 1992); CPAC Africa (Pty) LTD (CPAC Africa), Pretoria, South Africa (acquired in 1997); CPAC Asia Imaging Products Limited (CPAC Asia), Chachoengsao, Thailand (established in 1998). CPAC Imaging's PRS sales and marketing operation was merged into Allied in March 2005.7

Business operations in this Segment include CPAC Equipment, Inc. (CEI), Leicester, NY; Allied Diagnostic Imaging Resources, Inc. (Allied) d.b.a. CPAC Imaging, Americas, Norcross, GA (acquired in 1988); CPAC Europe, N.V. (CPAC Europe), Herentals, Belgium (established in 1989); CPAC Italia, S.r.l. (CPAC Italia), Gorgonzola, Italy (acquired in 1992); CPAC Africa (Pty) LTD (CPAC Africa), Pretoria, South Africa (acquired in 1997); CPAC Asia Imaging Products Limited (CPAC Asia), Chachoengsao, Thailand (established in 1998); and CPAC Taishan Chemical Products Ltd (CPAC Imaging China) Guangdong Province, P.R. China (established in 2005).

CPAC Imaging -- Color Photographic

There are three principal areas in which CPAC's Color Photographic sales channel operates: Chemicals, Equipment, and Refining Services.

The Color Photographic Chemicals sales channel includes the development, manufacture, packaging, distribution, marketing, and sales of branded and private-label processing chemicals used to develop photographic paper and film. These activities are carried out at the manufacturing plant in Norcross, Georgia, and the ~~four~~five international business operations.

Equipment is manufactured exclusively at CPAC Equipment, Inc., and involves the design, patent, fabrication, installation, and service of branded and private-label silver recovery and pollution control equipment. These products help photo processors achieve environmental compliance by collecting silver (a by-product of the traditional wet silver halide photographic process) for reclamation and subsequent refining.

Color Photographic products and services are marketed in more than 100 countries through a combination of wholesale distributors, manufacturers' sales representatives, and Company sales personnel.

Products are manufactured under the Trebla®, SilvPAC®, and CPAC® brands, as well as under private-label agreements, and are sold worldwide wherever photographs are wet processed (using liquid chemicals). End-users include independent and chain photo labs; one-hour processing locations, such as mass -market retailers; photo labs at universities and law enforcement agencies; and photo processing wholesalers.

Products are marketed domestically and in Mexico and South America to a network of photographic distributors and directly to end-users. For each of the International business operations, a sales force markets to distributors and end-users. The distributors buy CPAC's products and then market and sell them to photo processors, retaining the difference between the purchase and selling ~~prices~~price as profit. Each manufacturing business operation employs a team of technical support personnel to provide service to the distribution network and end-users. In addition, all CPAC's Imaging businesses advertise their products in trade publications and exhibit at national and international industry trade shows.

CPAC Imaging -- Health Care

CPAC's Health Care sales channel operates in three principal areas: Chemicals, Equipment, and Refining Services.

Health Care Chemicals are involved with the development, manufacture, packaging, distribution, marketing, and sales of branded and private-label wet processing chemicals used to develop medical and dental x-ray film. These activities are carried out at the manufacturing plant in Norcross, Georgia, as well as two international facilities. Dental x-ray film manufactured by other companies was introduced to the line in fiscal 2003, as was medical x-ray film in fiscal 2004.

Health Care Equipment, both branded and private label, involves the design, patent, fabrication, installation, and service of silver recovery equipment and chemical automixers for medical, dental, chiropractic, veterinary, and podiatry practices; illuminators (light boxes) for viewing x-ray film; and dry-heat sterilizers and portable and stationary vacuum equipment (evacuators) for dental practices. This equipment is manufactured exclusively at CPAC Equipment, Inc.

Health Care products, sold under the Autex®, RediChem®, ~~SilvPAC®,~~ and CPAC Imaging® brands as well as under private-label agreements, are marketed to radiology, dental, and niche health care markets, and are used wherever x-ray images are processed. This includes radiology practices including mammography clinics; dental practices and clinics; hospitals; and, to a lesser extent, veterinary, chiropractic, and podiatry practices.

CPAC Imaging employs a national sales manager to coordinate the sale of products to health care distributors, ~~group purchasing organizations (GPO's),~~ and directly to end-users. These distributors ~~and GPO's~~ buy CPAC's Health Care products and then market and sell these products to health care providers, retaining the difference between the purchase and selling ~~prices~~price. Each manufacturing business operation also employs a team of technical support personnel to provide service to the distribution network and end-users.

CPAC Imaging -- Graphic Arts

CPAC's Graphic Arts sales channel operates in two principal areas: Chemicals and Equipment.

Graphic Arts Chemicals involves the development, manufacture, packaging, distribution, marketing, and sales of branded and private-label wet processing chemicals used to develop prepress film and plates used in printing facilities. These activities are carried out at the manufacturing plant in Norcross, Georgia, as well as two international manufacturing facilities.

Graphic Arts Equipment, both branded and private label, involves the design, patent, construction, installation, and service of silver recovery and pollution control equipment and chemical mixers for commercial and in-plant printers, and service bureaus. This equipment is manufactured exclusively at CPAC Equipment, Inc. CEI is also a U.S. reseller of Island Clean Air portable air filtration units to the offset printing market ~~(CEI does not manufacture the Island Clean Air product line)~~.

Graphic Arts products, sold under the Allied^®, SilvPAC^® and CPAC^® brands as well as under private-label agreements, are marketed to commercial and in-plant printing markets and are used wherever film or plates are wet processed, primarily printers of newspapers, magazines, packaging, and labels, and service bureaus.

CPAC Imaging employs a national sales director to work with a nationwide sales force of manufacturer's representatives who market products to Graphic Arts products distributors; to group purchasing organizations (GPO's); and directly to end-users. The distributors and GPO's buy and resell CPAC's Graphic Arts products, retaining the difference between the purchase and selling ~~prices~~price as profit. Each manufacturing business operation employs a team of technical support personnel to provide service to the distribution network and end-users.

COMPETITION

CPAC Imaging
Color Photographic

CPAC's Imaging Color Photographic sales channel competes with regional, national, and international imaging companies. CPAC Imaging develops, manufactures, packages, markets and distributes liquid chemicals for developing silver halide photographic film and paper; silver recovery and pollution control equipment and supplies; and provides silver refining services.

~~Color~~The ~~Photographic~~domestic and international markets for the Company's branded products are ~~used~~highly ~~wherever~~competitive. ~~photographs~~Competitors ~~are~~range ~~wet~~in ~~processed~~size from large, ~~primarily~~diversified ~~independent~~companies ~~and~~to ~~chain~~small, ~~photo~~specialized ~~labs;~~producers. ~~one-hour~~Direct ~~processing~~competitors ~~locations~~for Color Photographic chemicals include companies such as ~~mass~~Eastman ~~market~~Kodak ~~retailers;~~Company, ~~photo~~Fuji ~~labs~~Hunt, atand ~~universities~~The ~~and~~Champion/Droqsacolor ~~law~~Group. ~~enforcement~~A ~~agencies;~~direct competitor for silver recovery and ~~photo~~silver ~~processing~~refining ~~wholesalers~~services is Academy Corp. and Hallmark Refining Corp.

The ~~domestic~~Color ~~and~~Photographic ~~international~~industry ~~markets~~continues ~~for~~to ~~the~~introduce ~~Company's~~new ~~branded~~ products ~~are~~and ~~highly~~services, ~~competitive~~especially in digital imaging. ~~Competitors~~ ~~range~~Significant conversion to digital has occurred in ~~size~~photo ~~from~~processing ~~large~~labs, ~~diversified~~but ~~companies~~primarily toin ~~small,~~developed ~~specialized~~countries. ~~producers~~This has impacted CPAC's sales in the U. ~~Direct~~S., ~~competitors~~but ~~for~~management ~~Color~~believes ~~Photographic~~that ~~chemicals~~CPAC's ~~include~~products ~~companies~~can ~~such~~be asutilized ~~Eastman~~in ~~Kodak~~"hybrid" ~~Company,~~processing ~~Fuji~~or ~~Hunt,~~the ~~and~~combining ~~The~~of ~~Champion/Droqsacolor~~digital ~~Group~~input with output to silver halide photographic paper. A ~~direct~~Moreover, ~~competitor~~management believes that customer demand for traditional silver ~~recovery~~halide remains in all domestic and ~~silver~~international ~~refining~~markets, ~~services~~where conversion to digital is ~~Hallmark~~too ~~Refining~~costly ~~Corp~~for existing facilities.

The Color Photographic industry continues to introduce new products and services, especially in digital imaging. Significant conversion to digital has occurred in photo processing labs, but primarily in developed countries. This has impacted CPAC's sales in the U.S.; and management believes there is great potential for traditional silver halide processes in emerging overseas markets, which are serviced by CPAC's international operations.

In Color Photographic, the Company seeks to improve product performance and ease of use, increase processing efficiency, and improve the ability of its customers to stay in compliance with local environmental regulations. Management believes that technological innovation, convenience, high product performance, and quality and timeliness of technical support and service are its competitive advantages in Color Photographic markets worldwide. CPAC Imaging also offers private-label products through its worldwide manufacturing network.

HEALTH CARE

~~CPAC~~The markets for the Company's ~~Imaging~~branded Health Care ~~sales~~products ~~channel~~are ~~develops~~highly competitive. Direct competitors for Health Care chemicals include companies such as Eastman Kodak Company, ~~manufactures~~White Mountain Imaging, ~~packages~~Agfa-Gevaert Group, ~~markets~~and H.R. Simon. White Mountain and ~~distributes~~Eastman ~~liquid~~Kodak ~~chemicals~~Company ~~for~~compete ~~developing~~with ~~silver~~CPAC ~~halide~~for ~~radiographic~~market ~~film,~~share of chemical automixers;. Direct competitors for silver recovery and pollution control equipment ~~and~~include ~~supplies;~~Academy Corp., Silver Enterprise, and ~~provides~~X-Rite, Inc. For silver refining services, CPAC Health Care imaging competes directly with Hallmark Refining Corp. ~~Additional~~ ~~products~~Competitors ~~include~~in x-ray illuminators ~~for~~are ~~viewing~~MAXANT ~~medical~~and xWolf X-~~rays~~Ray Corporation. CPAC competes directly with Wayne Metal Products, Inc. and indirectly with Dentronix, Inc. for dry- heat ~~instrument~~ sterilizers. ~~used~~DentalEZ, inInc. ~~dental~~is ~~practices;~~a ~~and~~competitor in dental evacuation units.

The Health Care ~~Imaging~~imaging ~~products~~industry ~~are~~continues ~~used~~to ~~wherever~~evolve, ~~x-ray~~driven ~~film~~primarily isby ~~wet~~increased ~~processed~~demand orfor ~~viewed,~~digital ~~such~~products asand services. Digital conversion is occurring in radiology ~~labs~~at ~~and~~a ~~hospitals,~~faster ~~and~~rate than in ~~dental~~Color ~~practices~~Photographic, ~~where~~but ~~instrument~~again, ~~sterilization~~primarily in the U.S. and ~~dental~~Western ~~evacuation~~Europe. Management believes there is ~~required~~still significant potential for traditional silver halide processes in select domestic Health Care markets as well as in emerging international markets.

The markets for the Company's branded products are highly competitive. Direct competitors for Health Care chemicals include companies such as Eastman Kodak Company, White Mountain Imaging, and H.R. Simon and Company. White Mountain and Eastman Kodak Company compete with CPAC for market share of chemical automixers. Direct competitors for silver recovery and pollution control equipment include USI International, Inc. and Metafix. For silver refining services, CPAC Health Care imaging competes directly with Hallmark Refining Corp. Competitors in x-ray illuminators are MAXANT and Wolf X-Ray Corporation. CPAC competes directly with Wayne Metal Products, Inc. and indirectly with Dentronix, Inc. for dry heat sterilizers. DentalEZ, Inc. is a competitor in dental evacuation units. 9

There is continued consolidation among Health Care imaging providers into IDN's (Integrated Delivery Networks) to leverage their buying power by working with or joining group-purchasing organizations (GPO's). In this environment, CPAC's businesses must aggressively compete for GPO contracts that provide the most favorable conditions to the Company.

The Health Care imaging industry continues to evolve, driven primarily by increased demand for digital products and services. Digital conversion is occurring in radiology at a faster rate than in Color Photographic, but again, primarily in the U.S. and Western Europe. This has impacted CPAC's sales in the U.S., and management believes there is still significant potential for traditional silver halide processes in emerging markets.

In Health Care imaging, the Company seeks to improve product performance, increase processing efficiency, broaden its product offering, and improve the ability of its customers to stay in compliance with local environmental regulations. Management believes that customer care, quality, ease-of-use, reliability, and technical support are its competitive advantages in Health Care imaging markets worldwide. CPAC Imaging also offers private-label products for Health Care customers.

GRAPHIC ARTS

~~CPAC~~The markets for the Company's ~~Imaging~~branded Graphic Arts ~~sales~~products ~~channel~~are ~~develops,~~highly ~~manufactures,~~competitive. ~~packages,~~Direct ~~markets~~competitors ~~and~~for ~~distributes~~Graphic ~~liquid~~Arts chemicals ~~for~~include ~~developing~~companies ~~graphic~~such ~~arts~~as ~~film~~Fuji-Hunt, Eastman Kodak Company, and ~~printing~~Agfa-Gevaert ~~plates;~~Group. Konica Graphic Imaging USA and Fuji compete with CPAC for market share of chemical automixers;. Direct competitors for silver recovery and pollution control equipment include X-Rite, Inc. and ~~supplies;~~Academy Corp. Graphic Arts processes that do not use silver halide film (computer-to-plate processes) require different chemical formulations and ~~provides~~a different treatment of effluent for environmental compliance. CPAC believes its private-label equipment serves the majority of customers in this niche market. For silver refining services., the Company competes directly with Hallmark Refining Corp in the Graphic Arts market space.

The Graphic Arts imaging industry continues to evolve, driven primarily by increased demand for digital products ~~are~~and ~~used~~services. inWhile ~~facilities~~many ~~such~~large asprinting ~~commercial~~customers ~~printers,~~are ~~service~~shifting ~~bureaus,~~to infilmless direct-~~plant~~to-plate ~~printers,~~processing ~~newspapers~~(DTP), ~~magazines,~~many ~~packaging~~smaller ~~printers,~~customers still use silver halide film as their primary pre-press method. Management believes it can provide enhanced products to serve this traditional market and ~~the~~sees ~~like~~graphic arts as a growth area.

The markets for the Company's branded products are highly competitive. Direct competitors for Graphic Arts chemicals include companies such as Kodak Polychrome Graphics and Agfa-Gevaert Group. Konica Graphic Imaging USA and Fuji compete with CPAC for market share of chemical automixers. Direct competitors for silver recovery and pollution control equipment include X-Rite, Inc. and USI International, Inc. Graphic Arts processes that do not use silver halide film (computer-to-plate processes) require different chemical formulations and a different treatment of effluent for environmental compliance. CPAC believes its private-label equipment serves the majority of customers in this niche market. For silver refining services, the Company competes directly with Hallmark Refining Corp in the Graphic Arts market space.

The Graphic Arts imaging industry continues to evolve, driven primarily by increased demand for digital products and services. Digital conversion is occurring in printing facilities at a slower rate than in Color Photographic, but again, primarily in the U.S. This has not significantly impacted CPAC's sales in the U.S. Management believes it can provide enhanced products to serve this market and sees graphic arts as a growth area.

In Graphic Arts imaging, the Company seeks to improve product performance, increase processing efficiency, broaden its product offering, and improve the ability of its customers to stay in compliance with local environmental regulations. Management believes that product innovation, high product quality, compatibility with all graphic arts films, competitive pricing, and superior technical support and service are its competitive advantages in Graphic Arts imaging markets worldwide. CPAC Imaging also offers private-label products for Graphic Arts customers.

Employees

At March 31, ~~2005~~2006, the Company employed ~~528~~473 people with ~~344~~299 working in the Fuller Brands Segment, ~~167~~157 in the CPAC Imaging Segment (8780 U.S. and 8077 International), and 17 assigned to the CPAC Corporate staff.

Effective May 1, 1986, the Company established a Profit Sharing and Retirement Plan under Section 401(k) of the Internal Revenue Code. This plan covers all eligible employees of CPAC, Inc. and its domestic subsidiaries. Subject to certain qualifications (employees must be over 21 years of age and have 30-days of employment, with participation beginning at the start of the next quarter), the plan has the following features:

(a) Contributions to the plan may be made for each plan year out of current or accumulated earnings to all eligible employees in such amounts as the Board of Directors may, in its discretion, determine. (To date, no discretionary payments have been made.)

(b) The Company will match each contribution made by a plan participant for the plan year in an amount equal to $0.50 for each $1.00 of participant contribution. While a participant may contribute up to 28% of compensation to the plan each year, the Company will limit matching contributions to the first 6% of compensation.

The Company has appointed Manning & Napier Advisors, Inc., Rochester, New York; as Investment Managers and ~~National~~First ~~Bank~~Niagara ~~of Geneva~~Bank, ~~Geneva~~Troy, New York; as Trustee of the plan.

Effective January 1, 2000 the Company adopted a non-qualified deferred compensation plan for certain key executives of the Company. Contributions to the plan consist of "excess" 401(k) deferrals and selected percentages of salaries and bonuses with a maximum individual deferral of $100,000 per year. No matching contribution by the Company is required. Compensation deferred will be invested by the Company in various investment grade "pooled accounts" on behalf of the participants.

Item 1A. RISK FACTORS.

The Company faces a variety of risks inherent in general business and in its consumer and commercial cleaning and personal care operations, as well as in its imaging chemical and equipment operations for color photographic, health care, and graphic arts arenas, including operational, regulatory and product risks. Management discusses below certain significant factors that could adversely affect the operations and results of the Company. Other factors may exist that the Company cannot anticipate or that the Company does not consider being significant based upon information which is available currently.

Additionally, because of the following risks and uncertainties, as well as other factors that could affect our operating results, the Company's past financial performance should not be considered as an indicator of future performance.

If digital imaging continues to accelerate declines in consumer demand for traditional silver halide imaging products, the Company's Imaging Segment's operations and revenues could be significantly impacted.

The increasing impact of digital imaging on traditional imaging processing may continue to depress the Imaging Segment's production volumes and sales, unless the Company is successful in obtaining outsource opportunities from other larger players, who may be looking to reduce their presence in this area. Or, if unable to obtain imaging outsource chemical business, the Segment's operations will have to diversify into the mixing of other chemicals or reduce potential excess capacity. Inability to grow, stabilize, or manage a diversification program away from traditional silver halide chemical manufacturing would impact revenues, gross margins, and profitability of the Company's Imaging operations.

If the Company is not able to expand sales of Fuller Brush consumer products into different distribution channels, revenues and profitability of the Fuller Brands Segment could be affected.

The Fuller Brands Segment will need to continue to expand and find new distribution channels for its consumer products. While the Fuller Brush brand name is still recognizable for its quality and reliability as evidenced by its success in selling through the home shopping network venue, the inability to promote and sell its products through traditional retail outlets or other channels may ultimately impact future revenues of the Fuller Brands Segment, if historical sales methods (door-to-door, party plan) become more challenging to operate profitably.

If the Company is unable to increase manufacturing volume in its Great Bend, Kansas, manufacturing facility, absorption of fixed costs will negatively impact Fuller Brands' gross profits and profits.

Since acquiring the Fuller Brush Company, the Company's strategy has been to grow or acquire additional business for products that can be manufactured in its Great Bend, Kansas, 495,000 square foot manufacturing facility, to help absorb its fixed manufacturing costs. While the Company believes the current business environment holds numerous opportunities to obtain additional business through organic growth or strategic acquisitions, the inability to do such, would have a negative impact on its manufacturing costs, causing lower gross margins and reduced profitability of the Segment.

If the Company is not able to pass on rising raw material costs to its customers, both Segments' operations and profitability could be negatively impacted.

Fiscal 2006 saw significant increases in raw material costs being experienced by both Segments of the Company's operations, as inflationary pressures in fuel and petroleum based products caused the Company's vendors to increase prices throughout the year. Since the Company's Segments operated in intensely competitive marketplaces, increasing prices to end-user customers was only able to be done for selected product groups. In fiscal 2007, if the Company is unable to pass on expected material costs increases to its end-user customers, the Company's gross profits and ultimate profitability will be negatively impacted.

The inability to improve cash flows through a reduction in domestic receivable and inventory levels could negatively impact the Company's ability to finance growth initiatives in both Segments.

The Company's domestic operations in 2006 struggled to match inventory levels with actual sales demands in many of its business lines, causing increased inventory levels and straining cash flows. In addition, changes in the traditional imaging marketplace have caused many of the Imaging Segment's distributor customers to struggle with cash flow issues of their own, slowing receivable collection efforts, and negatively impacting the generation of cash. If the Company is unable to improve its effectiveness of turning these assets into cash, the Company's ability to fund internal growth initiatives, or attract favorable borrowing arrangements, would be negatively impacted, causing further pressures on its balance sheet and future profitability.

Changes in international business, political, and economic conditions in the countries in which the Company's foreign subsidiaries operate in could negatively impact revenues and profitability.

The Company's international Imaging subsidiaries experienced revenue and profitability growth selling into Europe, Asia, and Africa in fiscal 2006. If political or economic conditions changed significantly, due to war, terrorist attacks, or unforeseen business downturns due to currency crises or other international events, the Company's revenues and profitability would be significantly impacted. In addition, if U.S. economic events in fiscal 2007, such as rising interest rates or the dollar

weakening against other foreign currencies occur, the Company's domestic export business could be affected, reducing expected revenues and profitability.

Failure of the Securities and Exchange Commission to adjust Sarbanes-Oxley Section 404 requirements for non-accelerated filers will significantly increase the Company's administrative costs of operating as a public company and negatively impact future profitability.

As Section 404 regulations of the Sarbanes-Oxley Act of 2002 (SOX 404) currently exist, the Company will have to devote significant resources (both financial and personnel) to comply with the requirements of this Section, as presently enacted into law. At this time, SOX 404 will be effective for the Company's fiscal year ended March 31, 2008. If Congress or the SEC does not significantly modify the regulations involving the testing and rendering of an opinion by the Company's external auditors involving the internal controls over the Company's financial reporting, it is expected that the Company's expenditures surrounding SOX 404 could exceed $500,000, which would significantly impact the ability to fund future growth initiatives and divert senior management's attention from strategic planning and operations.

Item 1B. UNRESOLVED STAFF COMMENTS.

None.

Item 2. PROPERTIES.

CPAC, Inc. owns the land and building in Leicester, New York, where the offices of the Corporate staff and manufacturing operations of CPAC Equipment, Inc. are housed. This plant is located on 4.2 acres and consists of a number of buildings, comprising a total of 3031,~~330~~ 262 sq. ft.

CPAC Imaging's headquarters are located in Duluth, Georgia, with leased office space of approximately 6,100 sq. ft. under a six-year lease expiring on July 31, 2009. CPAC Imaging's main domestic manufacturing plant (formerly Allied) is located in Norcross, Georgia, with an 84,212 sq. ft. facility and is leased until August 31, 2008. ~~CPAC~~ ~~Imaging has terminated its 35,000 sq. ft. warehouse and office space in St. Louis, Missouri, (formerly Trebla Chemical) in June 2005.~~

CPAC Europe owns 4.1 acres of land in Industriepark Herentals (near Antwerp), Belgium. The building, which is 4345,~~900~~449 sq. ft. (42,609 sq. ft. production facility and 2,804 sq. ft. offices), has a mortgage outstanding on the property until 2010.

CPAC Italia leases 29,350 sq. ft. of office, warehousing, and industrial space in Gorgonzola, Italy. The lease on the present facility has just ~~over~~under two years remaining (original lease term was six years ending September 30, 2007), with a six-year renewal option (to September 30, 2013).

The Fuller Brush Company, Inc.'s 495,000 sq. ft. facility is located in Great Bend, Kansas. The single story building contains manufacturing, distribution, office facilities, and retail outlet store, and has access to both truck and rail transportation for shipping purposes. The facility was financed through an Industrial Revenue Bond, which is outstanding until June 2009. Fuller Brush constructed a 105,000 sq. ft. North America Distribution Center (warehouse facility) on its property in Great Bend, Kansas, to accommodate Fuller's present inventory and to position Fuller Brush for future acquisitions and revenue growth. Fuller also leases seven third-party, retail outlet stores with two stores located in Missouri and one located in each of the following: Connecticut, Florida, Maine, South Carolina, and Tennessee. There is also an outlet store located at the Fuller Brush offices in Kansas.

Stanley Home Products operation leases 6,800 sq. ft. of office space in Agawam, Massachusetts, under a five-year lease commitment, expiring in December 2006.

In fiscal 2005, CPAC Africa expanded its manufacturing space by relocating to an 18,~~290~~299 sq. ft. facility located in Pretoria, South Africa, under terms of a three-year lease expiring in February 2007.

CPAC Asia owns its 3334,~~000~~444 sq. ft. facility located in Chachoengsao, Thailand. ~~Subsequent~~ ~~to the Company's fiscal year end, it entered into a three-year lease for a 33,900 sq. ft. facility located in Taishan City, Guangdong Province, P.R. China.~~

CPAC Imaging China leases a 33,907 sq. ft. manufacturing and warehouse facility located in Taishan City, Guangdong Province, P.R. China, under terms of a three-year lease expiring in June 2008.

In management's estimation, all facilities are adequate to allow the Company to continue operations.

Item 3.
LEGAL PROCEEDINGS.

No material litigation is pending to which the Company and/or its subsidiaries is a party or of which property of the Company and/or its subsidiaries is the subject.

Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

The Special Meeting of the Shareholders of the Company was held on March 9, 2005; and our shareholders voted on the following proposals:
	1. Approve the adoption by the Board of Directors of the 2004 Executive Long Term Stock Investment Plan and the reservation of 350,000 common shares thereunder, with votes cast as follows:
	For 2,254,192	Against 845,498	Abstain 14,662
	2. Approve the grant of an option to a new director, José J. Coronas, to purchase 15,000 shares of CPAC's $.01 par value common stock, with votes cast as follows:
	For 2,534,359	Against 566,581	Abstain 13,412
	3. Approve the amendments to the Non-Employee Directors Plan, with votes cast as follows:
	For 2,468,876	Against 622,687	Abstain 22,709

None.

PART II

Item 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

The principal market on which the Company's Common Stock is being traded is the NASDAQ National Market System.

	Fiscal 2005				Fiscal 2004
	Fiscal 2006				Fiscal 2005
	4th Q	3rd Q	2nd Q	1st Q	4th Q	3rd Q	2nd Q	1st Q
Price per share:
High	$54.~~430~~500	$5.~~590~~180	$5.~~900~~350	$65.~~150~~344	$65.~~490~~430	$65.~~780~~590	$65.~~990~~900	$6.~~460~~150
Low	43.~~450~~520	43.~~960~~330	54.~~060~~510	54.~~420~~830	54.~~510~~450	54.~~810~~960	5.~~620~~060	5.~~010~~420

The source of such quotations is from the Nasdaq-Amex Online^SM service. Such online quotations reflect inter-dealer prices, without retail markup, markdown, or commission and may not necessarily represent actual transactions.

The approximate number of holders of record of the Common Stock of the Company as of March 31, ~~2005~~2006 is 2,~~270~~230. This number includes only holders of record and beneficial holders who have disclosed that they are recordholders. Regular, quarterly dividends of $0.07 a share have been paid in both years ~~2005~~2006 and ~~2004~~2005.

The following table provides information as of March 31, ~~2005~~2006 concerning compensation plans previously approved by security holders and not previously approved by security holders.

EQUITY COMPENSATION PLAN INFORMATION

Plan Category		Number of Securities to be issued upon exercise of outstanding options, warrants, and rights (a)	Weighted average exercise price of outstanding options, warrants, and rights (b)	Number of securities remaining available for future issuance under equity compensation plans [excluding securities reflected in column (a)] (c)(2) (3)
Equity compensation plans approved by security holders(1)		960,911	$87.1938	~~350~~330,000
Equity compensation plans not approved by security holders		0	0	0
Totals		960,911	$87.1938	~~350~~330,000
(1)	Includes all options outstanding under the Executive Long-Term Stock Investment Plan, the 2004 Executive Long-Term Stock Investment Plan, and the CPAC, Inc. Non-Employee Directors Stock Option Plan.
(2)	The CPAC, Inc. Non-Employee Directors Stock Option Plan allows annual, automatic grants for the purchase of 3,000 shares, per director, of the Company's common stock, on the first Friday after the Annual Meeting of Shareholders, at a price equal to the fair market value at that date.
(3)	A total of ~~350~~330,000 option shares are available for future grant under the 2004 Executive Long-Term Stock Investment Plan. There are no shares available for future grant under the 1994 Plan.

Item 6.
SELECTED FINANCIAL DATA.

			For the Years Ended March 31,
			2005		2004		2003(1) (2)		2002		2001(3)
			2006		2005		2004		2003(1) (2)		2002
Net Sales			$ 87,~~213~~000,~~244~~393		$ 9087,~~010~~213,~~745~~244		$ 9590,~~290~~010,~~340~~745		$ 9795,~~779~~290,~~098~~340		$~~104~~ 97,~~544~~779,~~036~~098
Operating income (loss)(4)			56,302		(223,692	)	3,874,919		5,134,641		8,320,623
Operating income (loss)(3)			974,325		56,302		(223,692	)	3,874,919		5,134,641
Income before income tax expense			(1,259,886	)	(3,818,540	)	3,277,019		4,486,959		7,298,852
Income (loss) before income tax expense			500,801		(1,259,886	)	(3,818,540	)	3,277,019		4,486,959
Income (loss) before cumulative effect of change in accounting principle			(3500,~~846,886~~801	)	(3,~~349~~846,~~540~~886	)	2(3,~~041~~349,~~435~~540	)	2,~~929~~041,~~959~~435		42,~~584~~929,~~852~~959
Net income (loss)			(3464,~~846,886~~801	)	(3,~~349~~846,~~540~~886	)	(43,~~239~~349,~~816~~540	)	2(4,~~929~~239,~~959~~816	)	42,~~584~~929,~~852~~959
Net income (loss) per common share-basic:
Before cumulative effect of change in accounting principle			(0.7809	)	(0.6878	)	(0.4068	)	0.5640		0.8356
Cumulative effect of change in accounting principle, net(5)			--		--		(1.24	)	--		--
Cumulative effect of change in accounting principle, net(4)			--		--		--		(1.24	)	--
Basic net income (loss) per share			(0.7809	)	(0.6878	)	(0.8468	)	(0.5684	)	0.8356
Net income (loss) per common share-diluted:
Before cumulative effect of change in accounting principle			(0.7809	)	(0.6878	)	(0.4068	)	0.5640		0.8256
Cumulative effect of change in accounting principle, net(5)			--		--		(1.24	)	--		--
Cumulative effect of change in accounting principle, net(4)			--		--		--		(1.24	)	--
Diluted net income (loss) per share			(0.7809	)	(0.6878	)	(0.8468	)	(0.5684	)	0.8256
Total assets			5958,~~421~~045,~~292~~148		6459,~~732~~539,~~686~~788		6764,~~678~~732,~~871~~686		7567,~~768~~678,~~895~~871		7775,~~077~~768,~~170~~895
Total long-term debt(6)			7,092,421		6,981,645		7,978,401		8,465,896		8,995,490
Total long-term debt(5)			6,797,773		7,092,421		6,981,645		7,978,401		8,465,896
Cash dividends declared			1,385,528		1,385,~~201~~528		1,~~426~~385,~~080~~201		1,~~454~~426,~~697~~080		1,~~558~~454,~~331~~697
Cash dividends per share			0.28		0.28		0.28		0.28		0.28
	(1)	In April 2003, the Company increased its investment in affiliate to 40%, and in accordance with APB 18, adopted the equity method of accounting. 2003 financial statements have been restated to account for the Company's previous 19% ownership, as if it had been accounted for under the equity method.
	(2)	In 2003 the Company adopted the non-amortization provisions of SFAS No. 142. As a result of the adoption, results for 2003 do not include certain amounts of amortization of goodwill that are included in the prior years' financial results. ~~See Note 6 to the Company's Consolidated Financial Statements for additional information.~~
	(3)	InIncome ~~accordance~~before ~~with~~interest ~~EITF~~expense ~~00-10,~~(income) ~~shipping and handling costs billed to customers have been reclassified to~~ net ~~sales~~, ~~with~~non-operating noincome ~~impact~~(expense) onand ~~operating~~income ortax ~~net income~~expense.
	(4)	~~Income~~Upon ~~before~~adoption ~~interest~~of ~~expense~~SFAS ~~(income)~~No. ~~net~~142 in 2003, ~~non-operating~~the ~~income~~Company ~~(expense)~~recorded ~~and~~an ~~income~~impairment ~~tax~~adjustment ~~expense~~of $6,281,251, net of tax.
	(5)	~~Upon~~Includes ~~adoption~~current ~~of SFAS No~~maturities. ~~142 in 2003, the Company recorded an impairment adjustment of $6,281,251, net of tax. See Note 6 to the Company's Consolidated Financial Statements for additional information.~~
	(6)	Includes current maturities.

Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

RESULTS OF OPERATIONS

For purposes of financial reporting, the Company operates in two industry Segments: the Fuller Brands Segment, which is involved in developing, manufacturing, distributing, and marketing branded consumer and commercial cleaning and personal care products in North America and internationally, and the CPAC Imaging Segment, which includes the Company's color photographic, health care, and graphic arts imaging operations in the United States, Belgium, China, Italy, South Africa, and Thailand. The products of each Segment are manufactured and marketed both in the U.S. and in other parts of the world. Sales between Segments are not material.

The Company's financial results for the fiscal year ended March 31, ~~2005~~2006 include~~: an~~ ~~after~~income tax ~~charge~~benefits of approximately $0.1001 per diluted share ~~for~~as ana ~~impairment~~result ~~loss~~of ~~recognized~~completion onof anfederal ~~investment~~and itstate ~~owned;~~income antax ~~after~~audits, ~~tax~~which ~~charge~~resulted ofin ~~$0.05~~the ~~per~~reversal ~~diluted~~of ~~share~~certain ~~for~~tax ~~its~~reserves previously established.

~~equity~~The inCompany's ~~losses~~financial ofresults ~~TURA~~for ~~(See~~the ~~Note 2~~fiscal toyear ~~the~~ended ~~Consolidated~~March 31, ~~Financial~~2005 ~~Statements);~~include: ~~and~~ an after tax charge of $0.6510 per diluted share for ~~the~~an ~~recognition~~impairment loss recognized on an investment it owned; an after tax charge of a$0.05 ~~valuation~~per ~~reserve~~diluted onshare for its ~~consolidated~~equity ~~deferred~~in ~~tax~~losses ~~assets~~of TURA (See Note 102 to the Consolidated Financial Statements); and an after tax charge of $0.65 per diluted

The Company's financial results for the fiscal year ended March 31, 2004 include: an after-tax charge of $0.15 per diluted share for the Imaging Restructuring initiative (See Note 9 to the Consolidated Financial Statements); an after-tax charge of $0.12 per diluted share for its 40% equity in losses from TURA, AG of Duren, West Germany (now required to be recognized due to the change in accounting as a result of CPAC's increased ownership); and an after-tax charge of $0.47 per diluted share related to the recognition of an impairment loss on the Company's investment in TURA (See Note 2 to the Consolidated Financial Statements regarding TURA charges).14

share for the recognition of a valuation reserve on its consolidated deferred tax assets (See Note 10 to the Consolidated Financial Statements).

Net Sales

The Company's net sales decreased 30.12% in ~~2005~~2006 as compared to ~~2004~~2005 and 5decreased 3.51% in ~~2004~~2005 as compared to ~~2003~~2004 (decreased 40.43% and 74.54%, respectively, excluding the impact of foreign currency exchange).

For the Fuller Brands Segment [consisting of The Fuller Brush Company, Inc. (Fuller Brush); Stanley Home Products (Stanley); and Cleaning Technologies Group (CTG)], net sales for fiscal 2006 decreased 2.2% as compared to 2005.

Fuller Brush sales decreased 7% as compared to 2005, largely due to lower sales into the television home shopping network distribution channel, as well as decreases in Fuller's private label, custom brush, and retail businesses. Sales into the television home shopping network distribution channel, Fuller's largest sales distribution channel, were hurt by inconsistent television showings, which caused first and fourth quarter sales during 2006 to lag behind comparable 2005 periods, resulting in a decrease of approximately $531,000. The Company believes that sales in 2007, with the continued introduction of new product types, will remain consistent with 2006 levels over the next fiscal year. Decreases in private label sales of approximately $366,000 were primarily a result of a loss of a major customer to an offshore supplier. Sales into the retail channel were also down over $261,000 for 2006 as compared to 2005. While the Fuller Brush brand has value in the retail marketplace, entrance on a significant scale has been more difficult than first anticipated. Discussions and product placement with major national retailers in early fiscal 2007 has re-invigorated the Company's commitment to the retail channel, which it believes can ultimately provide growth opportunities. Helping to offset some of the sale declines, were sales through factory outlet stores, which increased over $244,000.

Stanley's net sales decreased 6% for 2006 as compared to 2005. While the current year's decline slowed as compared to prior historical revenue declines, the Company believes that further compensation plan changes (similar to those rolled out to selected areas of the United States earlier in the year), as well as other incentive-type promotional programs are required to increase recruitment and retention of sales representatives, if it hopes to stabilize and grow the business. The sales decline during 2006 was partially a result of specific sales declines from regions impacted by Hurricane Katrina, as well as overall representative headcount reduction, due to competition with other direct selling entities.

CTG's net sales for 2006 increased over $1,000,000 or 6% as compared to 2005. Increased national accounts business, as well as strong distributor business, contributed to the year-to-date sales increases. However, both of these distribution channels have historically been volatile, causing wide month-to-month fluctuations, with new business opportunities often offset by unexpected customer turnover. CTG believes that expected strong national accounts business may help to offset lower seasonal distribution business that traditionally slows in the third and fourth quarters. In addition, while revenues have increased, material costs continue to increase, which created income shortfalls, due to difficulties in passing price increases on in an extremely competitive marketplace in 2006. CTG increased selling prices in mid-to-late fiscal 2006 where feasible, while continuing to seek business partners to strengthen its position in the commercial cleaning marketplace.

For the Fuller Brands Segment, net sales for fiscal 2005 increased 1.4% as compared to 2004. The Fuller Brush operation continued its exceptional performance with sales increases of 18.4% compared to 2004. Continued growth in Fuller's home shopping business, coupled with sales from its newly launched retail initiatives, drove the strong increase.

Stanley Home Products net sales declined 13.9% in 2005 as compared to 2004. In fiscal 2005, Stanley continued the process of updating its product packaging, product offering, and independent representative compensation plan to attract new recruits. Recruiting numbers improved as a result, but not significantly enough to offset attrition of older field sales leaders. The new compensation plan was introduced in a high-growth Hispanic area of the country, and after a six to twelve month learning curve, has been successfully adopted. Stanley is focused on implementing the plan in another Hispanic region of the country in fiscal 2006 and on using it to open new green field territories. Given the rate of attrition and acceptance of change by the current field, the company expects improvement to be gradual.

Cleaning Technologies Group net sales also declined 8.2% in 2005 as compared to 2004, primarily from lower sales to distributors and continued reductions in its existing Kmart business. The operation remains focused on expanding nationwide coverage through manufacturing representative agencies that are currently being trained. National accounts business, with longer selling cycles, has been slower to realize, and year-to-date gains have not offset the decline in Kmart business. CTG has successfully introduced a line of environmental "green" cleaning products and continues to focus on new products to meet floor care needs for safety, convenience, and value. The commercial cleaning industry is considered to be fragmented; and the Company believes there are opportunities to acquire or partner with other firms to strengthen its competitive position in the marketplace.

For the Fuller Brands Segment, net sales for 2004 decreased 7.1% as compared to 2003. Fuller experienced a 7.9% net sales decline for 2004 as compared to 2003. The decline was largely attributable to a decrease in certain private label business, lessened by an increase in the home shopping network business. 15

~~Stanley~~In the Imaging Segment, net sales ~~declined~~increased 102.97% infor ~~2004~~2006 as compared to ~~2003. With~~2005 ~~its hiring of a new president, Stanley defined a new strategic direction, which emphasized new product development and improvement in recruitment of independent sales representatives, coupled with~~ (increased ~~average order size~~2. ~~These improvements~~72%, ~~once~~excluding ~~instituted,~~the ~~were~~impact ~~expected to slow rates~~ of ~~sales~~foreign ~~declines~~currency exchange).

~~CTG~~During ~~net~~2006, ~~sales~~combined ~~also~~domestic ~~declined~~sales ~~4.5%~~of inmedical ~~2004~~imaging aschemistry, ~~compared~~photographic tochemistry, ~~2003. CTG's~~and ~~business~~equipment indeclined ~~fiscal~~approximately ~~2004~~3.2% ~~was~~as ~~impacted~~compared ~~by lower distributor sales~~ to ~~school~~2005. ~~districts~~However, ~~due~~this towas ~~state and local budget constraints. To help~~ offset by the ~~decline,~~strong ~~CTG~~increases ~~developed~~in ~~a strategy to diversify its customer mix by focusing on~~ sales toin ~~national~~the ~~accounts,~~Company's ~~retail~~international ~~chains,~~operations ~~and~~(See ~~GSA~~Foreign ~~scheduled~~Operations ~~business~~discussions for ~~government~~international ~~procurement. These~~operations' ~~measures were also expected to mitigate and reverse sales declines in future periods~~results).

InThe ~~the~~Company ~~Imaging~~is ~~Segment,~~encouraged ~~net~~by ~~sales~~the ~~decreased~~comparative ~~9.4%~~sales pattern for ~~2005~~its Imaging chemical sales, as compared to ~~2004~~other ~~(decreased~~competitors ~~12.3%,~~in ~~excluding~~ the ~~impact~~industry, ofespecially ~~foreign~~in ~~currency~~its ~~exchange)~~international regions. ~~The~~ ~~shift~~Additional ~~from~~business ~~conventional~~has ~~film-based~~been toobtained, ~~digital~~both ~~imaging~~domestically ~~continues~~and tointernationally, ~~negatively~~as ~~impact~~other ~~sales~~larger ofimaging companies reduced or abandoned the traditional photochemical market. The Company's ~~medical~~continues ~~and~~to ~~photographic~~aggressively ~~chemistry~~pursue ~~and~~outsource ~~equipment. In~~manufacturing opportunities with domestic ~~markets,~~and ~~sales~~foreign ~~declines~~companies ~~were~~and inis ~~the~~positioned ~~range~~geographically ofand ~~12%~~strategically to ~~17%~~pick inup ~~fiscal~~volume, ~~2005~~as ~~versus~~larger ~~fiscal~~companies ~~2004. Although~~exit the ~~Company~~traditional ~~removed~~imaging ~~capacity~~marketplace, in ~~the~~favor Uof digital products.S. ~~last~~In ~~year~~the byinternational ~~consolidating~~marketplace, ~~manufacturing~~new ~~plants~~business opportunities continue to emerge, ~~the~~as ~~revenue~~a ~~shortfall~~result ~~has~~of ~~continued~~this industry consolidation, contributing to ~~depress~~strong ~~profitability~~fiscal 2006 sales increases. As While the ~~industry~~domestic ~~consolidates~~sales declines lessened during 2006, the Company iscontinues ~~currently~~to ~~pursuing~~strive ~~outsource~~for domestic manufacturing ~~opportunities~~efficiencies ~~within~~by ~~its~~reducing ~~markets~~fixed ~~and~~costs, ~~believes~~which itwould isallow init ~~good~~to ~~position~~further asreduce adomestic ~~competitive~~operating ~~supplier for North America~~losses.

2005 Imaging net sales as compared to 2004 decreased 9.4% (decreased 12.3%, excluding the impact of foreign currency exchange). The shift from conventional film-based to digital imaging negatively impacted sales of the Company's medical and photographic chemistry and equipment. In domestic markets, sales declines were in the range of 12% to 17% in fiscal 2005 versus fiscal 2004. Although the Company removed capacity in the U.S. by consolidating manufacturing plants in 2004, the revenue shortfall continued to depress profitability. In Europe, both the shift to digital, coupled with the strengthening of the Euro ~~versus the dollar~~, impacted the Company's operations in Belgium and Italy and the markets they serve~~. Both~~, ~~companies~~resulting ~~had~~in significant reductions in sales and profitability in 2005 as compared to 2004. The European difficulties in 2005 were offset, however, with continued strong results at CPAC Asia and CPAC Africa.

and profitability in 2005 as compared to 2004. The European difficulties in 2005 were offset, however, with continued strong results at CPAC Asia and CPAC Africa (See Foreign Operations discussions for international operations' results).
The Company's Imaging Segment believes that it is uniquely positioned to leverage its strategic, worldwide locations; product formulation capabilities; and market expertise to become a competitive, outsource private-label imaging chemical supplier to major industry players, as they invest resources in digital technology. This strategy, coupled with a plan for necessary reduction in future, fixed operating costs is anticipated to improve Segment performance.
In the Imaging Segment, net sales decreased 3.3% for 2004 as compared to 2003 (decreased 8.1%, excluding the impact of foreign currency exchange). Most Imaging operations, domestically and internationally, with the exception of CPAC Asia and CPAC Africa, had lower net sales in 2004 as compared to 2003 on a local currency basis. This reflected the worldwide slowdown in the traditional imaging marketplace, due partly to the advances of digital products, fierce competition from larger entities, and currency pressures overseas, due to the stronger Euro and Japanese yen versus the U.S. dollar. Domestically, the Company's medical imaging and photo imaging had decreases in 2004 as compared to 2003 ranging from 11.3% to 16.2%. The advances of digital technology will continue to impact both of these operations in future periods. Reduction in revenue was anticipated, spurring the Imaging Restructuring plan, which enabled the Company to manufacture all domestic imaging products at one location (See Foreign Operations discussion for international operation's annual results).
Gross Margins

Consolidated gross margins were 42.60% for ~~2005~~2006 versus 4342.06% and 4543.0% for the years ended March 31, ~~2004~~2005 and ~~2003~~2004, respectively.

Gross margins in the Fuller Brands Segment were 4847.57%, 48.5%, and 5048.35% for the years ended March 31, ~~2005~~2006, ~~2004~~2005, and ~~2003,~~2004 respectively. ~~Although~~ ~~the~~In ~~Segment~~2006, ~~experienced~~rapidly ~~raw~~increasing material costs offset later in the year by selected price increases ~~for~~in ~~its~~certain ~~chemical~~products ~~and~~helped ~~petroleum-based~~to ~~products~~lower ingross ~~2005~~margins. In addition, ~~these~~historically ~~increases~~high ~~were~~fuel ~~offset~~costs byhave ~~fluctuations~~continued into ~~product~~impact ~~mix. The~~the ~~decline~~Segment's invarious ~~gross~~distribution ~~margins~~channels, inputting ~~2004~~continued ~~versus~~strain ~~2003~~on ~~reflected~~product margins. Due to the ~~impact~~competitive nature of ~~lower~~many ~~production~~of ~~volume~~the ~~through~~channels the ~~Great~~Segment ~~Bend,~~operates ~~Kansas~~in, ~~manufacturing~~gross ~~facility,~~margins ~~due~~may continue to ~~lower~~be ~~sales~~pressured in ~~each~~2007, ~~operation. Pricing~~although ~~for~~recent ~~certain~~increases ~~products~~in ~~are~~CTG's ~~being~~national ~~reviewed~~account ~~for~~business ~~fiscal~~has ~~2006,~~helped increase volume throughput in ~~light~~the ofSegment's ~~higher~~Great ~~material~~Bend, ~~costs~~Kansas, inmanufacturing anfacility, ~~effort~~which should help to ~~improve~~stabilize ~~gross~~manufacturing ~~margins~~cost impacts. ~~However~~ In 2005, ~~increasing~~raw ~~manufacturing~~material ~~through-put~~increases in ~~the~~chemical ~~Great~~and ~~Bend~~petroleum-based ~~facility~~products iswere aoffset ~~key~~by ~~factor~~fluctuations in ~~maintaining~~product ~~and~~mix ~~improving~~sold, helping to keep Fuller Brands gross margins inconsistent ~~future~~with ~~periods~~2004.

Gross margins in the Imaging Segment were 33.68%, 3533.6%, and 3735.56% for the years ended March 31, ~~2005~~2006, ~~2004~~2005, and ~~2003~~2004, respectively. The slight increase in 2006 versus 2005, was caused by continued reduction in costs by most of the Segment's manufacturing operations, modest success in passing on material price increases in certain of the Segment's markets, and increases in production volume in the Segment's Asian and African operations. The decline in gross margins in 2005 versus 2004 reflected reductions in revenues occurring quicker than fixed cost reductions in the ~~Company~~Segment's domestic manufacturing operations. ~~Volume~~ ~~increases~~The atCompany ~~CPAC~~believes ~~Asia~~that ~~and~~margins ~~CPAC~~in ~~Africa~~2007 ~~helped~~will continue to ~~mitigate~~be ~~the~~under ~~margin~~pressure ~~decline,~~based ason ~~well~~higher asfuel ~~realization~~and ofmaterial ~~manufacturing~~costs, ~~efficiencies~~although init ~~the~~appears ~~Segment's~~that ~~Norcross,~~the ~~Georgia,~~market ~~manufacturing~~may ~~facility~~bear ~~late~~higher inprices ~~the~~being ~~fiscal~~passed ~~year~~on. ~~Despite~~ ~~this,~~The ~~the~~ Company believes ~~that~~in order to stabilize or increase gross margins ~~may~~its ~~continue~~traditional toimaging ~~erode~~chemical ~~slightly,~~production ~~due~~throughput has to ~~pricing~~be ~~pressures~~increased ~~and~~by ~~declining~~obtaining ~~domestic~~additional ~~volumes. The~~volume ~~decline~~through inoutsourcing ~~2004~~opportunities ~~versus~~or ~~2003~~other ~~reflected~~growth ~~the~~initiatives. ~~continued~~It ~~pressures~~is onalso ~~pricing,~~studying ~~due~~the topossibility ~~the~~of ~~declining~~increasing ~~worldwide~~production ~~photographic~~throughput, domestically and ~~medical~~internationally, ~~imaging~~with ~~markets,~~other ~~coupled~~imaging ~~with~~products ~~lower~~or ~~volumes~~other types of ~~production~~chemical products in the future.

Selling, Administrative and Engineering Expenses

Consolidated selling, administrative, and engineering costs in ~~2005~~2006 were 4140.50% of net sales, versus 41.15% and 4041.31% for the years ended March 31, ~~2004~~2005 and ~~2003~~2004, respectively.

For the Fuller Brands Segment, selling, administrative, and engineering expenses for ~~2005~~2006 were 4445.92% of net sales, as compared to 4544.39% and 4445.43% for the years ended March 31, ~~2004~~2005 and ~~2003~~2004, respectively. The ~~decrease~~increase in the percentage ~~in 2005 over 2004 is a function~~ of ~~certain non-recurring~~ selling ~~and marketing expenses incurred in 2004~~, ~~prior to the Company's entry into the retail marketplace. As the Company's business through the home shopping network and retail industry increases, the Segment's selling,~~ administrative, and engineering expenses ~~may~~to ~~increase as a percentage of~~ net sales, ~~as these distribution channels have higher selling costs. The increase~~ in ~~the~~2006 ~~percentage~~as incompared ~~2004~~to ~~versus~~2005, ~~2003~~was ~~reflects~~largely ~~additional~~a ~~expense~~function ~~related~~of tolower ~~increased~~ sales ~~and marketing management~~levels, ~~packaging~~with ~~revisions, and other initiatives related to Fuller's expansion into~~ the ~~retail~~same ~~marketplace. The~~level ~~increase~~of ~~also~~fixed ~~reflects~~expenses ~~the~~earlier ~~reduction~~ in ~~revenues~~fiscal ~~in all operations~~2006. ~~During~~ ~~2004's~~This ~~fourth~~was ~~quarter,~~addressed ~~the Segment undertook a comprehensive review of its fixed costs, which resulted~~ in ~~small~~the ~~reductions~~third ~~in personnel~~ and ~~other~~fourth ~~discretionary~~quarters ~~spending.~~

In the Imaging Segment, selling, administrative, and engineering costs for 2005, exclusive of the Imaging restructuring charges, were 35.9% of net sales, as compared to 35.2% and 34.2% for the years ended March 31, 2004 and 2003, respectively. The increase in 2005 versus 2004, as a percentage of net sales reflects revenue declines exceeding expense containment efforts in the Segment's domestic and European operations. This was offset somewhat by increased revenues with minimal increases in expenses at CPAC Asia and CPAC Africa. The increase in 2004 versus 2003 is largely a result of revenues declining at a greater rate than expenses, especially in the Segment's domestic operations. While the Imaging 16

~~Restructuring~~with ~~plan~~a ~~helped~~reduction ~~eliminate duplicate costs~~ in ~~the~~employee ~~domestic~~and ~~Imaging~~other ~~operations~~costs, ~~the~~resulting ~~Segment~~in ~~also~~a ~~continued~~lower ~~to reduce fixed~~ costs ingoing ~~light~~into offiscal ~~falling~~2007. ~~revenues,~~The ~~including~~decrease ~~headcount~~in ~~and~~percentage ~~other~~in ~~discretionary~~2005 ~~spending~~over ~~during~~2004 ~~the~~is ~~fourth~~a ~~quarter~~function of ~~2004. The~~certain ~~Company~~non-recurring ~~continued~~selling toand ~~seek~~marketing ~~fixed~~expenses ~~cost~~incurred ~~reductions~~ in ~~its European operations~~2004, ~~which~~prior ~~were~~to ~~impacted~~the byCompany's ~~increasing~~entry ~~digital~~into ~~imaging~~the ~~competition,~~retail ~~as well as adverse currency pressures~~marketplace.

In the Imaging Segment, selling, administrative, and engineering costs for 2006 were 30.9% of net sales, as compared to 35.9% and 35.2% for the years ended March 31, 2005 and 2004, respectively. The decrease in the expense, as a percentage of net sales in 2006 versus 2005, was largely a result of significant cost reductions in the Segment's domestic chemical Imaging operation. The increase in the percentage in 2005 versus 2004 reflected revenue declines exceeding expense containment efforts in the Segment's domestic and European operations, offset by increased revenues with minimal expense increases at CPAC Asia and CPAC Africa.

During 2006, Corporate expenses increased significantly, as compared to 2005 and 2004, reflecting certain strategic initiatives and consulting projects pursued by the Company. These expenses approximated $424,000 for the year ended March 31, 2006. Exclusive of those, the Company believes recurring, consolidated selling, administrative, and engineering costs, as a percentage of net sales, will continue to decline.

Research and Development Expenses

Research and development expenses, as a percentage of sales were approximately 1.0% of net sales for ~~2005~~2006, versus 01.80% and 0.78% of net sales for ~~2004~~2005 and ~~2003~~2004, respectively. The level of expense reflects the Company's emphasis of focusing on improving existing products or developing complementary products, based on customer needs.

For 2006, the Fuller Brands Segment will need to continue developing new products to accelerate its entry into the retail marketplace and sustain its growing television shopping business, stimulate recruitment efforts in its direct selling business, as well as continuing to enhance CTG's commercial cleaning product offerings to compete in the highly-competitive janitorial sanitation business.
In the Imaging Segment, continued effort will be placed on developing easy-to-use prepackaged, chemical formulations and innovative wrap-around-programs, involving chemistry, paper, and equipment for use in domestic and overseas imaging markets. These efforts are not expected to increase research and development expenses, as a percentage of sales, significantly from prior periods.
Net Interest Expense

Net interest expense (interest expense less interest income) increased 4.4% in 2006 versus 2005. Higher interest rates on borrowings, coupled with lower invested cash levels, contributed to the increase.

Net interest expense (interest expense less interest income) decreased 15.2% in 2005 versus 2004. Lower foreign debt levels in 2005 versus 2004 contributed to the decline.

Net interest expense (interest expense less interest income) increased 3.2% in 2004 versus 2003. While interest expense declined, due to lower debt levels, interest income declined even greater, due to lower levels of invested cash.
Income Taxes

The Company's recognized a consolidated ~~income~~net tax provision ~~and~~of ~~resulting~~$36,000 ~~effective tax rate~~ for ~~2005~~the ~~were~~year ~~impacted~~ended ~~significantly by the $3.2~~March ~~million~~31, ~~valuation~~2006, ~~reserve~~as ~~that~~compared ~~was~~to ~~recorded~~a inconsolidated ~~the fourth quarter against the Company's domestic~~ net ~~deferred~~ tax ~~assets. A~~provision ~~"soft"~~of ~~fourth quarter for the Fuller Brands Segment~~$2,587,000 ~~coupled~~and ~~with~~a ~~higher~~consolidated ~~than~~net ~~expected~~tax ~~fourth~~benefit ~~quarter~~of ~~operating losses in the domestic Imaging Segment~~($469,000) ~~increased~~for the ~~Company's~~years ~~year-to~~ended ~~date loss, where, under criteria specified in SFAS No.~~March ~~109~~31, ~~"Accounting~~2005 ~~for~~and ~~Income Taxes" (cumulative losses experienced over several years)~~2004, ~~the Company is no longer able to assert that realization of its future tax benefits was "more likely than not~~respectively."

~~The~~Due ~~income~~to ~~tax~~continuing ~~provision~~domestic ~~also reflects a~~ tax ~~benefit~~losses, ~~from~~ the ~~carry-back~~2006 ofU.S. ~~substantially~~provision ~~all~~included ofonly ~~the~~ domestic ~~net~~state ~~operating~~tax ~~losses~~provisions, ~~against~~which ~~previously~~reflect ~~remitted~~mostly ~~federal~~minimum ~~taxes. In~~state ~~fiscal~~tax ~~2006~~liabilities ~~and~~in ~~beyond,~~the ~~any~~states ~~future~~the ~~domestic~~Company ~~net~~files. ~~operating~~Included ~~losses~~in ~~would~~the ~~only~~consolidated beprovision ~~available~~are totaxes ~~offset~~on ~~future~~the taxable income~~. In~~ ~~addition,~~of the ~~2005~~Company's foreign subsidiaries. The provision ~~reflects~~continues to be impacted by the benefits of the CPAC Asia tax holiday in Thailand (~~computed to be approximately $371,000 or $0.08 per diluted share, under~~ a seven-year ~~tax~~benefit ~~holiday on manufacturing operation earnings,~~ expiring in August 2006), asand ~~well as~~ the utilization of CPAC Africa's net operating loss carryforward, which reduced its taxable income. It also included provisions related to ~~offset~~its Italian operation, whose increased profitability in 2006 resulted in taxable income and overall tax expense for the year. The Company's consolidated tax provision for 2006 also reflects the expense of valuation allowances against the Company's domestic, CPAC Europe, and certain CPAC ~~Italia~~Asia's net deferred tax ~~provisions~~assets. In addition, due to the settlement of certain federal and state income tax audits in ~~2005~~late fiscal 2006, certain tax reserves established in prior years were ~~not~~reversed, ~~material~~as part of the consolidated tax provision.

The ~~Company's~~valuation ~~provision~~allowance ~~also~~on ~~recognized~~the adomestic ~~tax~~net ~~liability~~deferred ~~based~~tax onassets ~~"the~~was ~~American~~initially ~~Jobs~~recorded ~~Creation~~in ~~Act~~the ofCompany's ~~2004"~~fourth ~~(the~~quarter ~~Act),~~of ~~which~~fiscal ~~became~~2005 ~~law~~and inhas ~~the~~been ~~United~~increased ~~States~~to onreflect ~~October 22,~~the ~~2004. Included~~changes in the ~~Act~~Company's ~~was~~net adeferred ~~provision~~tax ~~that~~assets, ~~allowed~~which ~~for~~included athe ~~one-time~~Company's ~~tax~~domestic ~~dividends~~taxable ~~received~~loss ~~deduction~~in offiscal ~~85%~~2006. ofThe ~~the~~domestic ~~foreign~~losses ~~earnings~~for ~~remitted~~federal bytax ~~foreign~~purposes ~~subsidiaries~~can toonly ~~U.S.~~be ~~parent~~carried ~~companies~~forward ~~through~~to ~~December 31,~~offset ~~2005. The~~future ~~earnings~~taxable ~~available~~income. ~~for~~The ~~remittance~~valuation ~~were~~allowance ~~those~~against ~~earnings~~CPAC ~~previously~~Europe's ~~designated~~net asdeferred ~~reinvested~~tax ~~indefinitely. The~~assets ~~Company~~was ~~evaluated~~recorded in the ~~legislation~~first ~~and~~quarter ~~determined~~of ~~that~~fiscal ~~certain~~2006 ~~previously~~and ~~unremitted~~has ~~earnings~~been ~~related~~adjusted ~~only~~ to ~~its~~reflect ~~wholly-owned~~Belgian ~~foreign~~taxable ~~subsidiary,~~losses ~~CPAC~~in ~~Asia~~fiscal ~~Imaging~~2006. ~~Products Limited~~Also, ~~would~~a bevaluation ~~repatriated. In~~allowance ~~March~~was ofrecorded ~~2005,~~in CPAC Asia ~~declared~~against a ~~special~~deferred ~~dividend~~tax ofasset ~~$2,297,000~~for ~~payable~~certain toreceivable ~~CPAC,~~balances ~~Inc.~~written (aoff ~~portion~~for offinancial ~~its~~statement ~~previously~~purposes, ~~unremitted~~but ~~earnings)~~not ~~and~~yet ~~remitted~~deducted ~~the~~for ~~amount~~tax ~~prior to March 31, 2005~~purposes. In ~~accordance~~Due ~~with~~to the ~~Act~~uncertainty ~~requirements,~~as to the ~~use~~ultimate ofsuccess ~~these funds was described~~ in aobtaining ~~domestic~~regulatory ~~reinvestment~~approval ~~plan~~to ~~approved~~deduct bythis ~~the~~previous ~~Company's~~bad ~~senior~~debt, ~~management~~a ~~and~~valuation ~~Board~~reserve ofwas ~~Directors. The Company has~~ recorded ~~the~~against ~~applicable~~this ~~$117,000~~deferred tax ~~liability,~~asset. ~~after~~In ~~the~~addition ~~one-time~~to ~~dividends~~the ~~received~~valuation ~~deduction,~~allowance inrecorded ~~its~~for ~~2005~~CPAC ~~tax~~Asia, ~~provision. At~~the ~~March 31,~~CPAC ~~2005,~~Europe ~~all~~and ~~other~~domestic ~~income~~valuation ofallowances ~~the~~established ~~Company's~~as ~~foreign~~a ~~subsidiaries~~result isof ~~considered~~losses toincurred beduring ~~permanently~~the ~~reinvested,~~current and asprior ~~such,~~fiscal ~~deferred~~years ~~income~~under ~~taxes~~the ~~have~~criteria ~~not~~established ~~been~~in ~~provided~~SFAS ~~on this income~~No. It 109, is"Accounting ~~not~~for ~~practicable~~Income toTaxes," ~~estimate~~were the ~~amount~~result of ~~additional~~the ~~tax~~Company ~~that~~no ~~might~~longer beable ~~payable~~to onassert ~~this~~that ~~foreign~~realization ~~income~~of ~~if distributed (See Note 10 to~~ the ~~Consolidated~~related ~~Financial~~future ~~Statements~~tax ~~for~~benefits ~~further~~was ~~discussion~~"more onlikely ~~the~~than ~~2005 consolidated tax provision)~~not."

~~For~~During the Company's fiscal year ended March 31, 2006, none of the Company's ~~expects~~foreign tosubsidiaries ~~maintain~~repatriated aany ~~valuation~~of ~~allowance~~their oncurrent ~~future~~or ~~tax~~cumulative ~~benefits~~foreign ~~related~~earnings to ~~its~~their ~~domestic~~U.S. ~~income,~~parent ~~until~~company. anAs ~~appropriate~~has ~~level~~been ofthe ~~profitability~~Company's ishistorical ~~sustained~~practice, orincome itof the foreign subsidiaries is ~~able~~considered to ~~develop~~be ~~additional~~permanently ~~tax~~reinvested, ~~planning~~and ~~strategies~~as ~~that~~such, ~~would~~deferred income taxes were not

generate taxable income. Until then, the Company's tax provision will include the net tax expense or benefit attributable to certain foreign operations and the expense or benefit from U.S. operations will be recorded as an adjustment to the valuation allowance. 17

Inprovided ~~2004~~on ~~the~~this ~~Company~~income. ~~recorded a net tax benefit of ($469~~Accordingly,~~000)~~ orno ~~(12.3)%~~deferred oftaxes ~~the~~have ~~pretax~~been ~~loss. The~~provided ~~benefit~~on ~~was~~this ~~primarily~~income, ~~attributable~~as tothe ~~domestic~~Company ~~losses~~does ~~that~~not ~~were~~plan ~~carried back~~ to ~~offset~~initiate ~~previous~~any ~~year's~~action ~~earnings,~~that ~~resulting~~would inrequire ~~various~~the ~~state~~payment ~~and~~of ~~U.S.~~income ~~refundable~~ taxes. ~~The~~ ~~net~~It ~~benefit~~is ~~was~~not ~~reduced~~practicable ~~somewhat~~to byestimate ~~foreign~~the ~~tax~~amount ~~expense,~~of ~~resulting~~additional ~~from~~tax ~~earnings~~that atmight ~~CPAC~~be ~~Europe,~~payable ~~CPAC~~on ~~Italia,~~this ~~and~~foreign ~~CPAC~~income ~~Africa. The~~if ~~Company's~~distributed ~~Asian~~(See ~~subsidiary~~Note 10 ~~continued~~ to ~~enjoy~~ the ~~tax~~Consolidated ~~savings~~Financial ~~from~~Statements ~~its~~for ~~seven-year~~further ~~tax~~discussion ~~holiday~~on ~~granted~~the in2006 ~~Thailand,~~consolidated ~~which~~tax ~~amounted to approximately $306,000 ($0.06 per diluted share~~provision).

The ~~effective~~Company's ~~tax~~consolidated ~~rate for~~ income ~~before~~tax ~~taxes~~provision and ~~cumulative~~resulting ~~effect~~effective oftax ~~change~~rate infor ~~accounting~~2005 ~~principle~~were ~~was~~impacted ~~34.1%~~significantly inby ~~2003,~~the as$3.2 million ~~compared~~valuation toallowance ~~34.7%~~that was recorded in ~~2002. The~~the ~~continued~~fourth ~~reduction~~quarter inagainst the Company's ~~effective~~domestic ~~tax~~net ~~rate~~deferred intax ~~2003~~assets. ~~resulted~~A ~~from~~"soft" afourth ~~lower~~quarter ~~provision~~for ~~from~~the ~~its~~Fuller ~~Italian~~Brands ~~operation~~Segment, ~~who~~coupled ~~received~~with ~~certain~~higher ~~tax~~than ~~credits~~expected ~~and~~fourth ~~benefits~~quarter ~~related~~operating tolosses ~~its~~in ~~facility relocation, as well as~~ the ~~utilization~~domestic ofImaging ~~net operating loss carryforwards at its African operation. Similar to 2002~~Segment, ~~the~~increased ~~effective rate shows~~ the ~~benefits of the seven-year tax holiday existing for the~~ Company's ~~Asian~~2005 ~~subsidiary~~loss, aswhere, ~~well~~under ascriteria ~~lower~~specified ~~state~~in ~~taxes due to reduced domestic earnings. In conjunction with the~~ SFAS No. ~~142~~109, ~~goodwill~~"Accounting ~~adjustment~~for ~~recognized~~Income byTaxes" ~~the~~(cumulative ~~Company~~losses inexperienced ~~the~~over ~~first~~several ~~quarter of 2003 amounting to $10~~years),~~469,251,~~ athe ~~tax~~Company ~~benefit of $4,188,000~~ was ~~recorded. This~~no ~~deferred~~longer ~~asset~~able ~~in 2004 was expected~~ to beassert ~~realized~~that ~~over~~realization ~~the~~of ~~next~~its ~~nine~~future ~~years,~~tax asbenefits ~~the goodwill~~ was ~~deducted~~"more ~~for~~likely ~~income~~than ~~tax purposes~~not. "

AtThe ~~March 31,~~2005 ~~2004~~income ~~the~~tax ~~Company~~provision ~~had~~also ~~recorded~~reflected ~~gross~~a ~~deferred~~ tax ~~assets~~benefit offrom ~~approximately~~the ~~$4,471,000~~carry-back ~~with~~of nosubstantially ~~valuation~~all ~~reserve. These deferred tax assets consisted primarily~~ of the domestic ~~(U.S.~~net ~~Federal~~operating ~~and~~losses ~~State)~~against ~~tax~~previously ~~benefits~~remitted ~~for~~federal ~~items~~taxes. ~~which~~In ~~have~~addition, ~~been~~the ~~recognized~~2005 ~~for~~provision ~~financial~~reflected ~~reporting~~the ~~purposes,~~benefits ~~but~~of ~~which~~the ~~will~~CPAC beAsia ~~reported on~~ tax ~~returns~~holiday ~~to be filed~~ in ~~the~~Thailand ~~future~~(computed ~~and~~to be approximately $~~368~~371,000 ~~representing~~or ~~tax-effected foreign net operating loss carryforwards~~$0. ~~Realization~~08 ofper ~~the~~diluted ~~domestic~~share, ~~portion~~under ofa ~~the~~seven-year ~~net deferred~~ tax ~~asset~~holiday ison ~~dependent~~manufacturing ~~upon~~operation ~~profitable~~earnings, ~~operations~~expiring in ~~the~~August ~~United States during future years. Despite domestic pretax losses for the year ended March 31~~2006), ~~2004,~~as ~~the~~well ~~Company~~as ~~believed they were primarily attributable to~~ the ~~asset~~utilization ~~impairment and equity in losses from its investment in TURA and the Imaging Restructuring plan and that the Company would return to profitability in fiscal 2005. Likewise, realization~~ of ~~the~~CPAC ~~deferred~~Africa's ~~tax asset related to the foreign~~ net operating loss carryforward ~~was~~to ~~also~~offset ~~dependent~~taxable ~~on future, foreign~~ income. ~~Although~~ ~~realization~~CPAC ~~for~~Europe ~~both~~and ~~was~~CPAC ~~not~~Italia's ~~assured,~~tax ~~the~~provisions ~~Company believed at March 31, 2004,~~ in ~~following~~2005 ~~the~~were ~~criteria specified in SFAS No. 109, "Accounting for Income Taxes," that it was more likely than~~ not ~~that such assets will be realized~~material.

~~Net~~ The ~~Loss~~Company's 2005 provision also recognized a tax liability based on "the American Jobs Creation Act of 2004" (the Act), which became law in the United States on October 22, 2004. Included in the Act was a provision that allowed for a one-time tax dividends received deduction of 85% of certain foreign earnings remitted by foreign subsidiaries to U.S. parent companies through December 31, 2005. The earnings available for remittance were those earnings previously designated as reinvested indefinitely. The Company evaluated the legislation and determined that certain previously unremitted earnings relating only to its wholly-owned foreign subsidiary, CPAC Asia Imaging Products Limited, would be repatriated. In March of 2005, CPAC Asia declared a special dividend of $2,297,000 payable to CPAC, Inc. (a portion of its previously unremitted earnings) and remitted the amount prior to March 31, 2005. In accordance with the Act requirements, the use of these funds was described in a domestic reinvestment plan approved by the Company's senior management and Board of Directors. The Company recorded the applicable $117,000 tax liability, after the one-time dividends received deduction, in its 2005 tax provision. At March 31, 2005, all other income of the Company's foreign subsidiaries was considered to be permanently reinvested, and as such, deferred income taxes were not provided on this income.

~~The~~In 2004 the Company's recorded a net ~~loss~~tax ~~for~~benefit of ($469,000) or (12.3)% of the ~~year~~pretax ~~ended~~loss. ~~March 31,~~The ~~2005~~benefit ~~increased~~was ~~$497,346,~~primarily asattributable ~~compared~~to domestic losses that were carried back to ~~the~~offset previous year's ~~ended March 31~~earnings, ~~2004. The~~resulting ~~recognition~~in ofvarious astate ~~valuation~~and ~~reserve~~U.S. ~~against~~refundable ~~consolidated~~taxes. The net ~~deferred~~benefit was reduced somewhat by foreign tax ~~assets~~expense, anresulting ~~impairment~~from ~~adjustment~~earnings ~~related~~at toCPAC aEurope, ~~third~~CPAC ~~party investment~~Italia, and ~~equity~~CPAC ~~losses~~Africa. ~~recognized~~CPAC onAsia ~~the~~continued ~~Company's~~to ~~investment~~enjoy inthe ~~TURA,~~tax ~~coupled~~savings ~~with~~from ~~revenue~~its ~~declines~~seven-year intax ~~2005~~holiday ~~versus~~granted ~~2004~~ in ~~the Imaging Segment~~Thailand, ~~all~~which ~~contributed~~amounted to ~~the~~approximately ~~increase~~$306,000 in($0.06 ~~the~~per ~~Company's~~diluted ~~net loss~~share).

~~The~~At March 31, 2004 the Company's ~~income~~had ~~before~~recorded gross deferred tax assets of approximately $4,471,000 with no valuation allowance. These deferred tax assets consisted primarily of domestic (U.S. Federal and State) tax benefits for items which have been recognized for financial reporting purposes, but which will be reported on tax returns to be filed in the ~~cumulative~~future ~~effect~~and approximately $368,000 representing tax-effected foreign net operating loss carryforwards. Realization of athe ~~change~~domestic portion of the net deferred tax asset is dependent upon profitable operations in ~~accounting~~the ~~principle~~United States during future years. Despite domestic pretax losses for the year ended March 31, 2004 ~~decreased $5~~,~~390,975~~ ~~from~~ the ~~prior~~Company ~~year. The~~believed ~~Imaging~~they ~~restructuring~~were ~~expenses,~~primarily attributable to the ~~increasing~~asset impairment and equity in losses offrom its investment in TURA ~~required~~and tothe beImaging ~~recognized~~Restructuring ~~under~~plan and that the ~~equity~~Company ~~method~~would ofreturn ~~accounting~~to profitability in fiscal 2005. Likewise, realization of the ~~impairment~~deferred ~~charge~~tax asset related to the foreign net operating loss carryforward was also dependent on future, foreign income. Although realization for both was not assured, the Company's ~~investment~~believed inat ~~TURA~~March 31, ~~and~~2004, in following the ~~reduced~~criteria ~~revenues~~specified in ~~both~~SFAS ~~Segments~~No. 109, ~~contributed~~"Accounting tofor ~~the~~Income ~~decline~~Taxes," that it was more likely than not that such assets would be realized.

~~The~~Net ~~net~~Income ~~loss after the cumulative effect adjustment was~~ (~~$4,239,816~~Loss) or ($0.84) a diluted share. The Company adopted SFAS No. 142 during the first quarter of 2003 and recorded a one-time, non-cash expense of $6,281,251, net of a tax benefit of $4,188,000, or $1.24 per diluted share. The adjustment related to the Fuller Brands Segment's Cleaning Technologies Group investment in fiscal 1998, whose goodwill was determined to be impaired, based on calculating the present value of future cash flows. CTG had been impacted by several factors, including continued, reduced operating performance (See Note 6 to the Consolidated Financial Statements).

The Company's net income for the year ended March 31, 2006 increased approximately $4.3 million, as compared to the year ended March 31, 2005. An increase in the Imaging Segment's international operations profits, coupled with a reduction in the operating loss in the Imaging Segment's domestic chemical operations, offset reduced profits at Fuller Brands and increased Corporate expenses. In addition, 2005's net loss was impacted by the $3.3 million valuation reserve recorded against the Company's domestic net deferred tax assets, due to continuing losses.

The Company's net loss for the year ended March 31, 2005 increased $497,346, as compared to the year ended March 31, 2004. The recognition of a valuation reserve against consolidated net deferred tax assets, an impairment

adjustment related to a third party investment, and equity losses recognized on the Company's investment in TURA, coupled with revenue declines in 2005 versus 2004 in the Imaging Segment, all contributed to the increase in the Company's net loss.

Foreign Operations

The results of operations for the Company's foreign subsidiaries, including the impact of currency exchange, are reported on a three-month lag. Intercompany sales between foreign operations have been eliminated in discussions of year-over-year fluctuations on a U.S. dollar basis, as well as disclosures concerning amounts and percentages, with foreign currency impacts excluded.

Combined net sales for the Company's operations in Thailand, China, South Africa, Belgium, and Italy for fiscal ~~2005~~2006 as compared to ~~2004~~2005 ~~decreased~~increased approximately $~~370~~1,387,000 or 29.5% (or ~~decreased~~increased approximately $1,~~489~~369,000 or 109.04%, excluding the impact of currency exchange). For fiscal ~~2005~~2006 CPAC Europe and CPAC Italia net sales combined ~~decreased~~increased 1514.95% (~~decreased~~increased 2314.14%, after removing currency impact). CPAC Asia's sales ~~decreased~~increased ~~less~~4.6% ~~than~~(increased 14.0%, ~~(decreased~~after removing currency impact), while CPAC Africa's net sales increased approximately 3.2% (4.0%, after removing currency impact).

Combined net sales for the Company's operations in Thailand, South Africa, Belgium, and Italy for fiscal 2005 as compared to 2004 decreased approximately $370,000 or 2.5% (or decreased approximately $1,489,000 or 10.0%, excluding the impact of currency exchange). For fiscal 2005 CPAC Europe and CPAC Italia net sales combined decreased 15.9% (decreased 23.1%, after removing currency impact). CPAC Asia's sales decreased less than 1.0% (decreased 3.0%, after removing currency impact). CPAC Africa continued to demonstrate growth, as net sales increased approximately $1,083,000 or 95.7% ($727,000 or 64.3%, after removing currency impact).

Combined ~~net~~pretax ~~sales~~profits for ~~the Company's operations in Thailand, South Africa, Belgium, and Italy for~~ fiscal ~~2004~~2006 asprior ~~compared~~ to ~~2003~~minority interests, increased approximately $1517,~~940,~~000 or 1439.97% (~~or increased~~ approximately $95526,000 ~~or 0.7%~~, excluding ~~the~~ impact of currency exchange)~~. For~~, as compared to fiscal ~~2004~~2005. CPAC Europe and CPAC Italia's ~~net~~pretax ~~sales~~profits combined increased ~~10.5%~~approximately $348,000 (~~decreased~~approximately ~~6.3%~~$349,000, ~~after~~excluding ~~removing~~impact of currency ~~impact~~exchange). CPAC ~~Asia~~Africa's ~~sales~~fiscal 2006 pretax income increased ~~17.2%~~approximately $61,000 (~~increased~~approximately ~~13.1%~~$58,000, after removing currency impact). , while CPAC ~~Africa~~Asia's ~~net~~profits ~~sales~~were ~~increased~~up approximately $~~380~~108,000 ~~or 51%~~ (approximately $62119,000 ~~or 8.2%~~, after removing currency impact) over fiscal 2005.

Combined pretax profits for fiscal 2005, prior to minority interests and equity in losses of TURA, decreased approximately $215,000 (approximately $318,000, excluding impact of currency exchange), as compared to fiscal 2004. CPAC Europe and CPAC Italia's pretax profits combined decreased approximately $664,000 (approximately $687,000, excluding impact of currency exchange). CPAC Africa's fiscal 2005 pretax income increased approximately $233,000 (approximately $182,000, after removing currency impact), while CPAC Asia's profits were up approximately $216,000 (approximately $187,000, after removing currency impact) over fiscal 2004.

Combined pretax profits for fiscal 2004, prior to minority interests and equity in losses of TURA, increased approximately $412,000 (approximately $286,000, excluding impact of currency exchange), as compared to fiscal 2003. CPAC Europe and CPAC Italia's pretax profits combined increased approximately 23% (approximately 3%, excluding impact of currency exchange). CPAC Africa's fiscal 2004 pretax income declined approximately $111,000 (approximately $134,000, after removing currency impact), while CPAC Asia's profits were up approximately $446,000 (approximately $410,000, after removing currency impact) over fiscal 2003. Over $333,000 of this increase resulted from the fiscal 2003 CPAC Asia bad debt provision increase, due to a troubled distributor account.

As disclosed in the Consolidated Financial Statements, the Company accounts for its 40% investment in TURA under the equity method. However, the Company's recognition of the 40% share of the losses of TURA during the first six months of fiscal 2005 effectively reduced the basis of its investment to zero. The Company was not obligated to fund any losses or record its 40% share of TURA equity earnings or losses in future periods, unless TURA became profitable. Over the last six months, TURA attempted to restructure its operations by reducing its workforce, replacing its former president, and terminating financial management in an effort to reduce operating losses and improve cash flows. However, TURA was unsuccessful and is currently undergoing liquidation under German government supervision.

During 2004, the Company increased the investment in TURA to 40% requiring the change in accounting for this investment to the equity method. Commencing in the second quarter of fiscal 2004, the Company recorded its 40% share of TURA's net loss, plus the amortization of the purchase price (in fiscal 2003 and the first quarter of fiscal 2004, the Company recorded its 19% of TURA's net loss, plus the amortization of the purchase price). TURA's results reflected the worldwide economic pressures on the traditional film markets, as well as the stronger Euro against the dollar.

In ~~May~~the ~~2004~~fourth ~~the~~quarter ~~Company~~of ~~met~~fiscal ~~with~~2004, the ~~investee's~~Company ~~primary~~had ~~lending~~determined, ~~institution~~due to ~~discuss~~recognition ~~the~~of ~~financial~~significant ~~condition~~equity oflosses, that TURA,'s ~~who~~financial decline was ~~experiencing~~other ~~significant~~than ~~cash~~temporary ~~flow~~and ~~difficulties,~~recorded ~~due~~an toimpairment ~~continuing~~loss ~~operating~~of ~~losses~~approximately $2,320,000 or $0. ~~While~~47 ~~TURA~~a ~~was~~diluted ~~granted~~share anfor ~~extension~~the ~~until~~year ~~September~~ended March 3031, 2004. onThis reduced the ~~maturity~~Company's ~~date~~investment ofat ~~its~~March 31, ~~working~~2004 ~~capital~~to ~~line~~the ofestimated ~~credit,~~fair ~~the~~market ~~ability~~value ~~for~~of ~~TURA~~$250,000. toThe ~~meet~~impairment ~~its~~adjustment ~~normal~~also ~~day-to-day~~reduced ~~operating~~the ~~expenses~~previously ~~was~~allocated ~~conditional~~excess onpurchase ~~obtaining future~~price, ~~capital~~leaving ~~infusions. Although~~a ~~the~~value ~~Company~~that ~~had~~ the ~~option~~Company ofbelieved ~~increasing~~was ~~its~~largely ~~ownership~~attributable ~~stake~~ to ~~51%~~the bysupply ~~October~~contracts ~~2004,~~between itthe ~~declined~~Company toand ~~do so~~TURA.

~~After~~The ~~recognition~~Company ofhas ~~approximately~~exposure ~~$595,000~~to ~~and~~currency ~~$180,000~~fluctuations ~~of equity losses, including $160,000~~ and ~~$145,000~~occasionally ofhas ~~excess~~utilized ~~purchase~~hedging ~~price~~programs ~~amortization~~(primarily ~~for~~forward ~~the~~foreign ~~years~~currency ~~ended~~exchange ~~March 31,~~contracts) ~~2004~~to ~~and~~help ~~2003,~~minimize ~~respectively,~~ the ~~Company~~impact ~~believed that the ability~~ of ~~TURA~~these tofluctuations ~~generate~~on ~~sufficient~~results future cash flows was uncertain. TURA's financial statements showed current liabilities exceeding current assets, certain debt obligations having covenant violations, and operating losses continuing through TURA's first quarter. The Company believed TURA's current financial decline was other than temporary and recognized an impairment loss of ~~approximately $2,320,000 or $~~operations.~~047~~ ~~cents~~At ~~per diluted share for the year ended~~ March 31, ~~2004,~~2006 ~~reducing~~no ~~the~~forward ~~estimated~~foreign ~~fair~~currency ~~market~~exchange ~~value~~contracts ofwere ~~the Company's investment at March 31, 2004 to $250,000~~outstanding. The ~~impairment adjustment reduced the previously allocated excess purchase price, leaving a value that the~~ Company ~~believed~~does ~~was~~not ~~largely~~hold ~~attributable~~or toissue ~~the supply contracts between the Company and TURA. During fiscal 2005, this value was written down to zero.~~

The Company has exposure to currency fluctuations and occasionally has utilized hedging programs (primarily forward foreign currency exchange contracts) to help minimize the impact of these fluctuations on results of operations. At March 31, 2005 no forward foreign currency exchange contracts were outstanding. The Company does not hold or issue derivatives for trading purposes and is not a party to leveraged derivative transactions. On a consolidated basis, foreign currency exchange losses are included in income or expense as incurred and are not material to the results of operations. 19

derivatives for trading purposes and is not a party to leveraged derivative transactions. On a consolidated basis, foreign currency exchange losses are included in income or expense as incurred and are not material to the results of operations.

Imaging Restructuring

During fiscal 2004, the Company completed the shift of its domestic manufacturing of photochemicals from its St. Louis, Missouri, facility to its CPAC Imaging America's manufacturing facility in Norcross, Georgia. The transfer of the manufacturing fixed assets, as well as the retrofitting of the Georgia facility to absorb this production, was completed during the fourth quarter of fiscal 2004.

Related to this endeavor, the Company adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" and accounted for the employee termination costs and other costs associated with the move under its guidelines. The total expenses incurred in this project were approximately $1,275,000. As of September 30, 2004, all termination benefit costs and other move-related costs accrued at March 31, 2004 were fully paid.

The table below summarizes the total costs accrued and paid under the criteria described in SFAS No. 146:

	Severance Pay and Benefits Reserve		Unaudited Other Associated Costs Reserve		Total
First Quarter Fiscal 2004 Charges	$ 168,000		$ 12,000		$ 180,000
First Quarter Fiscal 2004 Paid	0		0		0
June 30, 2003 Balance	168,000		12,000		180,000
Second Quarter Fiscal 2004 Charges	294,000		123,000		417,000
Second Quarter Fiscal 2004 Paid	(88,000	)	(107,000	)	(195,000	)
September 30, 2003 Balance	374,000		28,000		402,000
Third Quarter Fiscal 2004 Charges	104,000		430,000		534,000
Third Quarter Fiscal 2004 Paid	(226,000	)	(424,000	)	(650,000	)
December 31, 2003 Balance	252,000		34,000		286,000
Fourth Quarter Fiscal 2004 Charges	10,000		134,000		144,000
Fourth Quarter Fiscal 2004 Paid	(128,000	)	(161,000	)	(289,000	)
March 31, 2004 Balance	134,000		7,000		141,000
First Quarter Fiscal 2005 Charges	0		0		0
First Quarter Fiscal 2005 Paid	(100,000	)	(7,000	)	(107,000	)
June 30, 2004 Balance	34,000		0		34,000
Second Quarter Fiscal 2005 Charges	0		0		0
Second Quarter Fiscal 2005 Paid	(34,000	)	0		(34,000	)
September 30, 2004 Balance	$ 0		$ 0		$ 0

The Company completed the sale of the St. Louis facility on September 27, 2004 and recorded a gain on the sale of approximately $63,000.

In the fourth quarter of fiscal 2005, the Company concluded that it would not utilize, nor was able to sublease its 35,000 square feet of warehouse space in St. Louis, Missouri, which it was renting under a ten-year lease obligation (with an option to terminate as of January 31, 2007, with 12 month's notification). The Company then entered into negotiations with its landlord, resulting in a "termination of lease agreement" that ~~will~~allowed ~~allow~~ the Company to pay a settlement amount of $150,000 to terminate the lease as of June 30, 2005, resulting in a savings to the Company of $170,000. The lease termination fee ~~has~~was ~~been~~ accrued at March 31, 2005, with the expense recorded in cost of sales.

LIQUIDITY AND CAPITAL RESOURCES

The Company has historically financed its operations and acquisitions with internally generated cash flows, supplemented with outside borrowings. The following table summarizes CPAC, Inc.'s consolidated cash flow information (in thousands):

	For the Years Ended March 31,
	2005		2004		2003
	2006		2005		2004
Cash provided by (used in):
Operating activities	$ ~~2,049~~984		$ 42,~~088~~049		$ 64,~~153~~088
Investing activities	(~~628~~677	)	(~~4,005~~628	)	(14,~~662~~005	)
Financing activities	(1,~~468~~803	)	(21,~~239~~468	)	(2,~~635~~239	)
Currency impact on cash	10(26	)	3710		1937
Net increase (decrease) in cash and cash equivalents	$ (371,522	)	$ (~~2,119~~37	)	$ 1(2,~~875~~119	)

Net cash provided by (used in) operating activities

Consolidated net cash provided by operating activities decreased in 2006 as compared to 2005 by approximately $1,065,000, due largely to inventory buildup at Fuller Brands and certain of the Imaging Segment operations to meet new business obtained in the fourth quarter of fiscal 2006. Significant sales increases at CPAC Europe and CPAC Asia in the fourth quarter of fiscal 2006 versus 2005 also contributed to a significant increase in accounts receivable for 2006 as compared to 2005. Cash from operations in 2006 was aided by income tax refunds of over $1,000,000 received during fiscal 2006. (Prepaid and refundable income taxes are grouped with prepaid expenses and other current assets on the consolidated balance sheets.)

Consolidated net cash provided by operating activities decreased in 2005 as compared to 2004, largely due to planned inventory increases in the Fuller Brands Segment to support the home shopping and retail business, offset somewhat by increases and decreases in other operating assets and liabilities in the last quarter of the fiscal year.

Consolidated net cash provided by operating activities decreased in 2004 as compared to 2003, due to reduced operating profits in both Segments.
Net cash provided by (used in) investing activities

Consolidated net cash used in investing activities ~~decreased~~for in2006 as compared to 2005 ~~versus~~increased ~~2004~~approximately $49,000. ~~due~~While capital additions were lower by approximately $933,000 as compared to 2005, fiscal 2005 realized cash ~~received~~benefits inof ~~2005~~over $1,200,000 from the sale of the ~~Company's~~domestic ~~St.~~Imaging ~~Louis, Missouri,~~ manufacturing facility, ~~coupled~~in ~~with~~St. Louis. ~~lower~~Fiscal ~~capital~~2005 ~~additions~~also ~~and~~saw ~~lower~~the ~~business~~use ~~investments. The~~of ~~Company did invest~~ $300,000 inof ~~acquiring~~funds towards the ~~20%~~buyout ~~minority~~of ~~ownership share in~~ CPAC Asia's ~~Imaging~~former ~~Products~~minority ~~Limited~~interest ~~in September 2004~~partners.

Consolidated net cash used in investing activities ~~increased~~decreased in ~~2004~~2005 versus ~~2003~~2004, due to cash received in 2005 from the sale of the Company's ~~additional~~St. $1Louis,~~300~~ Missouri,~~000~~ ~~equity~~manufacturing ~~investment~~facility, incoupled ~~TURA~~with inlower ~~April~~capital ~~2003,~~additions asand ~~well~~lower asbusiness ~~capital~~investments. ~~expenditures~~As ~~related~~noted toabove, ~~CPAC~~fiscal ~~Imaging's~~2005 ~~expansion~~saw ofthe ~~their~~use ~~Norcross~~of ~~manufacturing~~$300,000 ~~facility~~of tofunds ~~absorb~~for the ~~relocated~~buyout ~~color~~of ~~photochemicals~~CPAC ~~production~~Asia's ~~from~~former ~~St.~~minority ~~Louis~~interest partners.

Net cash provided by (used in) financing activities

Consolidated net cash used in financing activities ~~decreased~~increased induring ~~2005~~2006 ~~versus~~as ~~2004~~compared to 2005, due to ~~lower~~increased debt ~~payments~~reduction ~~made. In~~at ~~2004~~ CPAC ~~Asia~~Europe ~~repaid its various term debt obligations early~~ and ~~remained~~CPAC ~~"debt~~Africa ~~free"~~during inthe ~~2005~~year.

Consolidated net cash used in financing activities decreased induring ~~2004~~2005 ~~over~~as ~~2003,~~compared ~~due~~ to ~~decreased repurchases of the Company's common stock~~2004, ~~offset~~due byto ~~increased~~lower debt ~~repayments. In fiscal 2004~~payments, after CPAC Asia's ~~strong~~repaid ~~cash~~its ~~flows~~various ~~allowed~~term itdebt toobligations ~~repay~~early ~~its~~and ~~outstanding~~did ~~term~~not ~~debt~~borrow ~~early~~in 2005.

Working Capital and Leverage Ratios

Working capital is the excess of current assets over current liabilities. The working capital ratio is calculated by dividing current assets by current liabilities. The ratio of long-term debt to shareholders' equity is calculated by dividing long-term borrowings (current and long-term portions) by shareholders' equity.

	For the Years Ended March 31,
	2005	2004	2003
	2006	2005	2004
Working capital (in thousands)	$30,~~377~~039	$30,~~068~~506	$3130,~~954~~068
Working capital ratio	43.1689 to 1	4.0618 to 1	4.2806 to 1
Long-term debt to shareholders' equity	0.1819 to 1	0.1618 to 1	0.1716 to 1

During 2006, working capital decreased, as described above, as working capital was used in the Company's international operations to reduce debt levels during fiscal 2006.

During 2005 working capital increased, as described above, largely due to the sale of the St. Louis manufacturing facility, decreased capital expenditures, and decreased expenditures on business investments. The long-term debt to shareholders' equity ratio increased slightly, due to an increased net loss experienced in 2005, coupled with slightly higher borrowings.

During 2004 the Company's working capital declined, as described above, due to increased investment in TURA, increased capital expenditures related to the Imaging Restructuring project, and reduction in CPAC Asia's long-term, term note obligations. The long-term debt to shareholders' equity ratio improved slightly, due to larger than normal reductions in foreign subsidiary debt.

InOn ~~2003~~June 10, 2005, the Company's ~~continued~~line toof ~~build~~credit ~~working~~agreement ~~capital,~~(Agreement) ~~despite~~with ~~lower~~Bank ~~sales~~of ~~and~~America, ~~profits~~N.A. (BOA) was amended, ~~due~~reducing toits ~~tight~~maximum ~~cash~~borrowing ~~controls,~~capacity ~~aggressive~~under ~~receivable~~the ~~collections~~facility to $3,000,000 ~~implementation~~and ofextending ~~inventory~~its ~~reduction~~maturity ~~goals~~date ~~within~~until October 31, 2007. The Agreement requires the ~~Fuller~~Company ~~Brands~~to ~~Segment~~meet various debt covenants, ~~and~~including ~~reduction~~minimum indeposit ~~working~~liquidity, ~~capital~~minimum ~~borrowings~~net atworth, ~~CPAC~~debt ~~Asia~~service coverage, funded debt to EBITDA, as awell ~~result~~as oflimitations ~~continued~~on ~~strong~~capital ~~cash~~expenditures, ~~flow.~~

On June 10, 2005, the Company amended its line of credit agreement (Agreement) with Bank of America, N.A. (BOA), extending its maturity date to October 31, 2007. The Agreement includes a maximum borrowing capability of $3,000,000 with interest at the 30-day LIBOR rate plus 1.25% to 2.00% based on funded debt to EBITDA parameters. The Company also renewed its $6.2 million letter of credit facility, which collateralizes the Fuller Brands' Industrial Revenue Bonds to October 31, 2007. At March 31, 2005, the Company had not accessed its line of credit. 21

~~The~~and ~~amended~~amounts ~~Agreement~~spent ~~requires~~on ~~the~~acquisitions. The Company toalso ~~meet~~renewed ~~various~~its ~~quarterly~~$6.2 million ~~and~~letter ~~annual~~of ~~debt~~credit ~~covenants~~facility, ~~including~~which ~~minimum~~collateralizes ~~deposit~~the ~~liquidity,~~Fuller ~~minimum~~Brands' ~~net~~Industrial ~~worth,~~Revenue ~~debt service coverage~~Bonds, ~~funded~~until ~~debt to EBITDA, as well as limitations on capital expenditures, and amounts spent on acquisitions. At March~~October 31, ~~2005, the Company was in compliance with its various loan covenants or received appropriate waivers~~2007.

~~The~~At ~~Company's~~September 30, ~~wholly-owned~~2005 ~~subsidiary~~and ~~CPAC~~December 31, ~~Asia~~2005, ~~Imaging~~the ~~Products~~Company ~~Limited~~was ~~has~~in aviolation ~~line~~ of ~~credit~~the ~~with~~minimum annet ~~international~~worth, ~~bank~~debt ofservice ~~20 million~~coverage, ~~baht~~and ~~(approximately~~funded ~~$514,000~~debt ~~based~~to onEBITDA ~~the~~covenants. ~~year-end~~Although ~~conversion~~the ~~rate~~Company inhad ~~Thailand). Interest~~not isborrowed ~~payable~~under atits ~~the~~revolving ~~bank's~~credit ~~announced~~agreement ~~prime~~with ~~rate~~BOA in ~~Thailand~~several years, ~~which~~the ~~was~~Company's ~~7.75%~~Agreement atcontains ~~March 31,~~a ~~2005. CPAC~~provision ~~Asia~~related ~~had~~to ~~borrowings against~~ the ~~line~~letter of credit ofthat $0BOA ~~and~~provided ~~$1,402~~(maturing aton ~~March~~October 31, ~~2005~~2007), ~~and~~which ~~2004~~collateralizes the $6,000,000 ~~respectively~~Industrial Revenue Bonds, which are scheduled to mature in June 2009.

~~Management~~On ~~believes~~November 9, 2005, Bank of America issued a letter formally acknowledging that ~~its~~Events ~~existing~~of ~~available~~Default ~~lines~~had occurred related to the Agreement. The Bank did not agree to any waiver of ~~credit~~the covenant violations or Events of Default, and ~~cash~~required ~~flows~~and ~~from~~demanded, ~~operations~~strict ~~should~~compliance bewith ~~adequate~~the toterms ~~meet~~of ~~normal~~the ~~working~~Agreement. ~~capital~~In ~~needs~~addition, ~~based~~although onthey ~~operations~~reiterated asthat the line of ~~March 31~~credit was still in place, ~~2005. Additional~~they ~~financing~~discontinued ~~may~~the beautomatic ~~necessary~~borrowing and repayment procedures applicable to ~~allow~~the line of credit and required future request for advances under the ~~Company~~line to ~~pursue~~be ~~further~~evaluated ~~acquisitions~~on a case-by-case basis and made at the Bank's sole and absolute discretion.

Although the Bank did not cancel the letter of credit they previously provided, which was scheduled to mature as of October 31, 2007, and as indicated above, served as collateral for the Industrial Revenue Bonds, due to the covenant violations (Events of Default), the Company re-classified the debt obligation to a current liability as of September 30 and December 31, 2005.

On June 21, 2006, Bank of America entered into an agreement with the Company and issued the "Fourth Amendment to Restated Loan and Security Agreement and Waiver." This current Agreement amended the June 10, 2005 Agreement, resetting the required net worth covenant at March 31, 2006 and future periods and waived the Events of Default covenant violations that occurred at December 31, 2005 and September 30, 2005. With the amendment, the Company is in compliance with all applicable covenants at March 31, 2006, and as such, has classified the Industrial Revenue Bond obligation as a long-term liability at March 31, 2006. In addition, the automatic borrowing and repayment procedures applicable to the $3,000,000 line of credit have been restored.

The Company's wholly-owned subsidiary CPAC Asia Imaging Products Limited has a line of credit with an international bank of 20 million Baht (approximately $488,000 based on the year-end conversion rate in Thailand). Interest is payable at the bank's announced prime rate in Thailand, which was 8.25% at March 31, 2006. CPAC Asia had not accessed its line of credit at March 31, 2006 and 2005, respectively.

Management believes that its existing available lines of credit and cash flows from operations should be adequate to meet normal working capital needs, based on operations as of March 31, 2006. Additional financing may be necessary to allow the Company to pursue further acquisitions or market expansion.

Asset Turnover Ratios

	For the Years Ended March 31,
	2005	2004	2003
	2006	2005	2004
(1) Receivables-days outstanding	4546.65 days	4745.36 days	47.83 days
(2) Annual inventory turns	2.86 times	2.98 times	32.09 times

Receivable days outstanding at March 31, 2006 increased over 2005 levels, due to a higher amount of fourth quarter sales at Fuller Brands than experienced in fiscal 2005. Improving this ratio across the Company will be a key priority in 2007, in an effort to generate additional cash flows. Receivable days outstanding at March 31, 2005 as compared to March 31, 2004 ~~and 2003~~, continued to show slight improvement, largely as a result of reduced days outstanding in the Fuller Brands Segment's accounts receivable. Improved credit and collection efforts with current and historically past-due customers contributed to the improvement.

Inventory turns continued ~~their~~to ~~slight~~slow ~~decrease~~in fiscal 2006, continuing the trend experienced in 2005 ~~versus~~as compared to 2004. ~~and~~In ~~2003~~2006, ~~partly~~inventory buildup at Fuller Brands to meet the demands of CTG national accounts business obtained late in the fiscal year contributed to the slowdown. In 2005, the slowdown compared to the previous year was due to planned increases at Fuller Brands to support their home shopping network and retail customer business, as well as decreased turns in the domestic Imaging Segment, due to a more rapid decline in sales than planned. ~~While~~ ~~Fuller~~Although ~~Brands'~~managing inventory levels ~~will~~at beFuller ~~conditional~~Brands onin ~~the~~2007 ~~levels~~continues ofto ~~business~~be ~~with~~challenging, ~~the~~due ~~aforementioned~~to fluctuating businesses in their various distribution channels, ~~efforts~~the Company will beseek ~~made~~ways to reduce ~~Imaging's~~on-hand levels of stock, to ~~more~~better ~~closely~~manage ~~react~~their day-to-day ~~rapidly~~cash ~~changing~~flows. ~~markets~~In the Imaging Segment, ~~which~~the ~~continued~~Company will continue to be"right-size" ~~impacted~~levels byof ~~digital~~inventory, ~~imaging~~to meet expected levels of demand.

Contractual Cash Obligations (amounts in thousands
)

The following table summarizes information about the Company's consolidated contractual cash obligations and other commercial commitments (in thousands), as of March 31, ~~2005~~2006, and the effect such obligations are expected to have on its consolidated liquidity and cash flow in future periods:

~~Payments Due by Period~~

Payments Due by Period

Contractual Obligations

~~Total~~

~~Less than 1 year~~

~~1 to 3 years~~

~~4 to 5 years~~Total

~~After 5 years~~

Less than 1 year

1 to 3 years

4 to 5 years

After 5 years

Long-term debt

~~$ 7,093~~

~~$ 264~~

~~$ 394~~

$ 6,~~237~~758

~~$ 198~~

$ 239

$ 6,240

$ 163

$ 116

Operating leases

~~4,114~~

~~1,291~~

~~2,050~~

~~773~~2,992

1,171

1,706

115

Other long-term obligations

~~1,625~~

~~325~~

~~650~~

~~650~~1,300

325

650

325

Total contractual cash obligations

~~$ 12,832~~

~~$ 1,880~~

~~$ 3,094~~

$ 711,~~660~~050

~~$ 198~~

$ 1,735

$ 8,596

$ 603

$ 116

~~Amount of Commitment Expiration Per Period~~

Amount of Commitment Expiration Per Period

~~Total~~

~~Less than 1 year~~

~~1 to 3 years~~

~~4 to 5 years~~Total

~~After 5 years~~

Less than 1 year

1 to 3 years

4 to 5 years

After 5 years

Unused credit facilities(1) (2)

~~$ 3,514~~

~~$ 0~~

~~$ 3,514~~

$ 03,488

~~$ 0~~

$ 0

$ 3,488

$ 0

Standby letters of credit

~~160~~

Total commercial commitments

~~$ 3,674~~

~~$ 0~~

~~$ 3,674~~

$ 03,488

~~$ 0~~

$ 0

$ 3,488

$ 0

(1)

As of March 31, ~~2005~~2006, the Company had no borrowings against its $3 million line of credit with its primary domestic lending institution.

(2)

As of March 31, ~~2005~~2006, the Company's wholly-owned subsidiary CPAC Asia Imaging Products Limited had no borrowings against its $~~514~~488,000 line of credit, with its primary lending institution.

~~The~~As ~~Company~~of ~~believes~~the ~~that~~date ~~these~~of ~~obligations~~the ~~have~~report, noCPAC, ~~material~~Inc. ~~impact~~had onno ~~CPAC~~other commercial commitments, ~~Inc.'s~~which ~~liquidity~~may ~~and~~impact its capital resources and liquidity. As ofIn the ~~date~~absence of ~~the~~unforeseen ~~report~~developments, CPAC, Inc. ~~had~~believes nothat ~~other~~it ~~commercial~~has ~~commitments,~~sufficient ~~which~~liquidity ~~may~~to ~~impact~~fund its ~~capital~~operating ~~resources~~expenses and ~~liquidity~~other operational requirements at least for the 12 months following the date of this report.

In the absence of unforeseen developments, CPAC, Inc. believes that it has sufficient liquidity to fund its operating expenses and other operational requirements at least for the 12 months following the date of this report.
Critical Accounting Policies and Estimates

The accompanying consolidated financial statements and notes to financial statements contain information that is pertinent to management's discussion and analysis of financial condition and results of operations. The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Actual results may differ from these estimates and assumptions.

CPAC, Inc. believes that the critical accounting policies and estimates discussed below involve additional management judgement due to the sensitivity of the methods and assumptions necessary in determining the related asset, liability, revenue, and expense amounts.

Revenue Recognition

The Company's revenues result primarily from sales of chemical based products or complementary hard goods in each of its Segments. For revenue recognition purposes, the Company reviews all sales transactions to ensure the following attributes are present: persuasive evidence of an arrangement; title and risk of ownership transfer; sales price fixed and determinable; and collectibility reasonably assured.

In the Fuller Brands Segment, the product offerings consist of sales of cleaning and personal care chemical based products (both consumer and industrial) as well as related stick good products (i.e., brushes, brooms, mops). Although sales are generated through various distribution channels, such as independent distributors, Company employed sales associates, direct selling independent representatives, retail outlet stores, catalog, Internet, direct marketing partners, and direct to end users, the revenue recognition policies remain virtually the same in each operation or channel. Shipping of these products is primarily by land using independent freight carriers. At the time revenue is recognized, the Company provides for the estimated costs of product returns and reduces revenue for estimated returns. In the Consolidated Statement of Operations, the Company presents sales at "net," adjusting for sales discounts, returns, allowances, and volume rebates, which are not deemed significant.

In the Imaging Segment, revenue results primarily from sales of chemicals used in the photofinishing, medical imaging, or graphic arts arenas. Imaging's distribution channels, both domestic and international, are primarily through independent distributors, or direct to end users, with limited Company employed sales associates. Revenue recognition practices are similar in all venues. Domestically, most products are shipped via land carriers. In situations where legal contracts have stipulated the time at which title transfer has occurred ("fob destination" versus traditional "fob shipping"), revenue is recognized according to contract terms. Internationally, chemical products are shipped via truck and sea. Again, special emphasis is placed on reviewing contractual terms to ensure the point at which title and risk of ownership has transferred and that the other revenue recognition attributes criteria are present. Appropriate accruals for discounts and volume rebates, which exist for sales into the medical imaging market, are recorded at time of sale.

stipulated the time at which title transfer has occurred ("fob destination" versus traditional "fob shipping"), revenue is recognized according to contract terms. Internationally, chemical products are shipped via truck and sea. Again, special emphasis is placed on reviewing contractual terms to ensure the point at which title and risk of ownership has transferred and that the other revenue recognition attributes criteria are present. Appropriate accruals for discounts and volume rebates, which exist for sales into the medical imaging market, are recorded at time of sale.

Allowance for Doubtful Accounts

The Company regularly reviews its customer accounts and records specific provisions for doubtful accounts to reduce the related receivable to the amount that is estimated to be collectible. The Company also records provisions for doubtful accounts based on a variety of factors including the Company's historical experience, current economic conditions, and other adverse industry or market trends. If circumstances related to specific customers were to change, the Company's estimates with respect to the collectibility of the related receivables could be further adjusted. The Company considers all available information in its quarterly assessments of the adequacy of the ~~reserves~~allowance for uncollectible accounts. ~~The~~ Company recorded an expense provision of $351,000, $351,000, and $778,000 to the consolidated statements of operations for the years ended March 31, 2005, 2004, and 2003, respectively. The provision added in 2005 versus 2004 was primarily related to the Imaging Segment, whose customers and markets reflect the "softness" of the traditional photographic market, due to the impact of digital imaging. While the Segment continues to seek out new opportunities, there are inherent risks in many of these markets (Latin America, South America, Eastern Europe), as well as increasing pressures on many of the Segment's existing U.S. distributors, which may continue to impact the collectibility of certain receivables in future periods. The increase in 2003's expense provision, as previously disclosed, was primarily due to CPAC Asia and CPAC Europe's troubled distributor receivables in Japan and Russia.

The Company recorded a provision for doubtful accounts of $184,000, $351,000, and $351,000 to the consolidated statements of operations for the years ended March 31, 2006, 2005, and 2004, respectively. The provision added in 2006 was less than that added in 2005, primarily due to a decrease in the Imaging Segment's net provision, after uncollectible accounts, previously reserved for in 2005 and 2004, were written off. The Imaging Segment's customer base (numerous small distributors and end-user customers) and its domestic operations' continued expansion into Latin America and South America make balancing sales opportunities with accompanying credit risks an issue that will continue to impact collectibility of certain receivables in the future. Fuller Brands' expense provision increased in 2006 versus 2005, but still remains low as a percentage of gross receivables, as supported by low historical receivable write-offs. The provision added in 2005 versus 2004 was primarily related to the Imaging Segment, whose customers and markets reflect the "softness" of the traditional photographic market, due to the impact of digital imaging.

Inventory Reserves

The Company values its inventory at the lower of cost or market. As part of this valuation, reserve provisions are made to reduce inventory carrying values based on estimates of what is excess, slow moving, or obsolete, or for inventory whose carrying value is in excess of net realizable value. These provisions are based on current assessments about future demands, market conditions, and related management initiatives. If in the future, the Company determines that market conditions and actual demands are less favorable than those projected and, therefore, inventory is overvalued, the Company will be required to further reduce the carrying value of the inventory and record an expense at the time the determination is made. The Company recorded an expense provision of $30,000, $134,000 and $457,000, for excess, slow-moving, and obsolete inventory to the consolidated statements of operations for the years ended March 31, 2006, 2005, and 2004, respectively. The continued decrease in the inventory reserve provision for 2006 as compared to 2005 reflected continued inventory disposals in the Fuller Brands Segment for slow-moving or obsolete inventory items identified and reserved for in previous years. With Fuller Brands business increasing in some distribution channels (home shopping networks, retail) and declining in others (direct selling, contract consumer), the Segment will continue to provide for slow-moving stock in future periods. Likewise in the Imaging Segment, uneven ordering patterns for traditional photochemical products, due to the impact of digital imaging, will force a greater emphasis on matching inventory levels with expected demands, which may, from time to time, require the Segment to provide for slow-moving or excess inventory. In 2005 as compared to 2004, both Segments disposed of much of the inventory identified in previous years as unsalable or obsolete. The large provision in 2004 reflected Fuller Brands' phase out of certain product lines sold in the Segment's direct selling business, as well as providing for net realizable issues in certain other product lines.

Company recorded an expense provision of $134,000, $457,000 and $253,000, for excess, slow-moving, and obsolete inventory to the consolidated statements of operations for the years ended March 31, 2005, 2004, and 2003, respectively. In 2005, both Segments disposed of much of the inventory identified in previous years as unsalable or obsolete. Fuller Brands continues to review their inventory, in light of product mix changes for the products being sold through home shopping network and retail distribution channels, and provide for products whose sales appear to be declining. The Imaging Segment continues to try and match current production levels with forecasted sales demand, to avoid an unnecessary buildup in inventory, which could potentially increase the reserve due to excess stock. The increase in 2004 over previous year's expense reflected additional reserve provisions in the Fuller Brands Segment for products experiencing net realizability issues, as well as the phase-out of certain product lines sold in the Segment's direct selling business. In addition, the Company's Imaging operations increased their reserves related to aging chemical and packaging inventory no longer salable.
Valuation of Long-Lived Assets

The Company assesses the carrying value of its identifiable intangible assets, long-lived assets, and goodwill whenever events or changes in circumstances indicate that the carrying amount of the underlying asset may not be recoverable, or in the case of goodwill, at least annually. Certain factors, which may occur and indicate that an impairment exists, include, but are not limited to, significant underperformance relative to actual historical or projected future operating results, significant changes in the manner of the Company's use of the underlying assets, and significant adverse industry or market economic trends. In the event that the carrying value of assets are determined to be unrecoverable, the Company would estimate the fair value of the assets or reporting unit and record an impairment charge for the excess of the carrying value over the fair value. Events or changes in circumstances could occur that may create underperformance relative to projected future cash flows, which could create future impairments. The Company's policy is consistent with current accounting guidance as prescribed by SFAS No. 142, "Goodwill and Intangible Assets" and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."

Valuation Allowances for Deferred Income Taxes

Statement of Financial Accounting Standards No. 109 requires the Company to exercise judgment about its future results in assessing the realizability of its deferred tax assets. At March 31, ~~2005~~2006, the Company has gross deferred tax assets of approximately $~~4.5 million~~6,085,000 of which $~~4.1 million~~5,646,000 pertain to domestic operations. Due to the ~~evidence of~~ cumulative losses incurred over the last three years for the company's domestic operations and CPAC Europe, the Company determined that the likelihood of realization of ~~certain~~the ~~domestic~~related net deferred tax assets for these jurisdictions is uncertain and has recorded a valuation allowance of $~~3.2 million~~4,861,000 inat ~~2005~~March 31, 2006 to reduce the net deferred tax assets to $~~417~~236,000.

The Company expects to maintain a valuation allowance on ~~future~~the net deferred tax ~~benefits~~assets in each of these jurisdictions, until an appropriate level of profitability, ~~primarily~~for ineach ~~the~~entity ~~U.S.,~~ is sustained, or it is able to develop ~~additional~~feasible tax planning strategies that would generate sufficient taxable income. Until then, the Company's tax provision will include only the net tax expense attributable to certain foreign operations. ~~and~~Generally, ~~the~~any ~~expense~~potential or benefit from losses in the U.S. and ~~certain~~CPAC ~~foreign~~Europe ~~operations~~ will be recorded as an adjustment to the valuation allowance.

In addition, a valuation allowance was recorded against a deferred tax asset for a certain receivable balance in CPAC Asia, written off for financial statement purposes, but not yet deducted for tax purposes, due to the uncertainty as to the ultimate success in obtaining regulatory approval required to make a claim to deduct this previous bad debt.

Impact of Inflation

~~During~~Throughout ~~the~~2006, ~~third~~both ~~and~~the ~~fourth~~Fuller ~~quarters~~Brands ofand ~~fiscal~~Imaging ~~2005, each of the Company's~~ Segments experienced significant increases in raw material product and packaging costs. ~~Previously~~ Traditionally, ~~inflation~~due ~~has~~to ~~not~~intense ~~had~~competition ain ~~material~~both ~~adverse~~Segments, ~~effect~~inflationary ~~on the Company's~~ costs~~. Historically,~~ ~~due~~were difficult to ~~the~~pass ~~competitive~~onto ~~sales~~customers. ~~pressures~~However, in ~~both~~ the ~~Fuller~~later ~~Brands~~half ~~and~~of ~~Imaging Segments~~2006, ~~any~~selected ~~inflation~~price ~~experienced~~increases ~~has~~were ~~been~~introduced ~~difficult~~for toindividual ~~pass~~product ongroups, which helped to ~~the~~limit ~~customer~~gross margin pressures. ~~However,~~ ~~both~~The ~~Segments~~Company ~~will~~believes ~~selectively~~that ~~target~~inflation ~~individual~~will ~~products~~continue ~~for~~to ~~price~~impact ~~increases~~the Company in ~~fiscal 2006~~2007, ~~while~~but ~~continuing~~expects tothat ~~seek~~increased ~~productivity~~production ~~improvements~~volumes toand ~~offset~~improvement ~~potential~~in ~~negative~~efficiencies ~~impacts~~will ofhelp ~~inflation~~to inmitigate ~~the~~inflationary ~~near future~~effects.

Environmental Contingency

Remediation efforts related to issues raised by the state of Kansas when The Fuller Brush Company was acquired in 1995 are ~~substantially~~ complete~~. Although~~, as the Company has ~~not yet~~ received final acceptance from the applicable state agencies~~, management believes that the Company will not incur any significant, future costs related to this project~~.

New Accounting Standards

In ~~January~~December ~~2003~~2004, the FASB ~~Interpretation~~issued SFAS No. 46123 (~~FIN~~revised 462004), "~~Consolidation~~Share-Based ofPayment" ~~Variable~~("SFAS ~~Interest~~123(R)"). ~~Entities,~~This anstatement ~~interpretation~~is a revision of ~~ARB~~FASB Statement No. 123, 51"Accounting for Stock-Based Compensation," ~~was~~and ~~issued~~will supercede APB Opinion No. ~~The~~ 25, ~~Interpretation~~"Accounting ~~provides~~for Stock Issued to Employees," and its related implementation guidance. onThe ~~the~~revised ~~identification~~statement offocuses ~~entities~~primarily on accounting for ~~which~~transactions ~~control~~in iswhich ~~achieved~~an ~~through~~entity ~~means~~obtains ~~other~~employee ~~than~~services ~~through~~in ~~voting~~share-based ~~rights~~payment ~~("variable~~transactions. ~~interest~~It requires entities" orto ~~"VIEs")~~measure ~~and~~the ~~how~~cost toof ~~determine~~employee ~~when~~services ~~and~~received ~~which~~in ~~business~~exchange ~~enterprise~~for ~~should~~an ~~consolidate~~award ~~the~~of ~~VIE~~equity (instruments based on the ~~"primary~~grant-date ~~beneficiary"). This~~fair ~~new~~value ~~model~~of ~~for~~the ~~consolidation~~award, ~~applies~~over tothe anperiod ~~entity~~during which ~~either~~an ~~(1)~~employee ~~the~~is ~~equity~~required ~~investors~~to doprovide ~~not~~service ~~have~~in aexchange ~~controlling~~for ~~financial~~the ~~interest~~award. orIn ~~(2)~~addition, the ~~equity~~adoption ~~investment~~of atSFAS ~~risk~~123(R) isrequires ~~insufficient~~additional toaccounting ~~finance~~and ~~that~~disclosure ~~entity's~~related ~~activities~~to ~~without~~the ~~receiving~~income ~~additional~~tax ~~subordinated~~and ~~financial~~cash ~~support~~flow effects, resulting from ~~other~~share-based ~~parties~~payment arrangements. In ~~addition,~~SFAS ~~FIN~~123(R) 46is ~~requires~~effective ~~that~~as ~~both~~of the ~~primary~~first ~~beneficiary~~annual ~~and~~reporting ~~all~~period ~~other~~beginning ~~enterprises~~after ~~with~~June 15, a2005. ~~significant~~The ~~variable~~Company ~~interest~~expects inthat athe ~~VIE~~impact ~~make~~of ~~additional~~adoption ~~disclosures. The~~of ~~Interpretation~~this ~~applies~~pronouncement ~~immediately~~will tobe ~~variable~~immaterial ~~interest~~on ~~entities~~the ~~created~~reported ~~after~~results ~~January 31,~~of operations and financial position.

~~2003~~ In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments-an amendment of FASB Statements No. 133 and 140." This Statement amends FASB Statements No. 133, "Accounting for Derivative Instruments and Hedging Activities", and No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" to ~~variable~~clarify ~~interest~~certain ~~entities~~issues addressed in ~~which~~the anaforementioned ~~enterprise~~pronouncements. ~~obtains~~Statement No. 155 will permit remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only ~~after~~strips and principal-only strips are not subject to the requirements of Statement 133; established a requirement to evaluate interests in securitized financial assets to identify interests that ~~date. It~~are ~~applies~~freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the ~~first~~form ~~reporting~~of ~~period~~subordination ~~beginning~~are ~~after~~not ~~March 15,~~embedded ~~2004~~derivatives; and amends Statement No. 140 to ~~variable~~eliminate ~~interest~~the ~~entities~~prohibition inon ~~which~~a anqualifying ~~enterprise~~special-purpose ~~holds~~entity from holding a ~~variable~~derivative ~~interest~~financial instrument that itpertains to a beneficial interest other than another derivative financial instrument. This Statement is effective for all financial instruments acquired ~~before~~or ~~February~~issued 1after the beginning of an entity's first fiscal year that begins after September 15, ~~2003~~2006. The fair value election provided for in paragraph 4(c) of this Statement may also be applied upon adoption ~~did~~of ~~not~~this ~~have~~Statement anfor ~~impact~~hybrid onfinancial instruments that had been bifurcated under paragraph 12 of Statement 133 prior to the ~~Company~~adoption of this Statement. Earlier adoption is permitted as of the beginning of an entity's ~~reported~~fiscal ~~results~~year, ofprovided ~~operations~~the ~~and~~entity has not yet issued financial ~~position~~statements, including financial statements for any interim period for that fiscal year. Provisions of this Statement may be applied to instruments that an entity holds at the date of adoption on an instrument-by-instrument basis. The

In December 2003, the Financial Accounting Standards Board issued SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits--an amendment of FASB Statements No. 87, 88, and 106." This statement requires new annual disclosures about the types of plan assets, investment strategy, measurement date, plan obligations, and cash flows, as well as the net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The statement is effective for financial statements with fiscal years ending after December 15, 2003, with disclosure of information about foreign plans effective for fiscal years ending after June 15, 2004. The Company does not provide a defined benefit pension plan, nor any defined benefit postretirement plan; the impact of this pronouncement is expected to be minimal. Disclosures concerning the Company's defined contribution plans in its foreign operating units, where applicable, were made for the fiscal year ending March 31, 2005.25

InCompany ~~November~~does ~~2004,~~not ~~the~~believe FASB issued SFAS No. 151 "Inventory Costs, an amendment of ARB No. 43, Chapter 4." This statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to require the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) to be handled as a current period charge. The statement also requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005, with earlier application permitted during fiscal years beginning after the date the statement was issued (November 2004). The Company is currently assessing the impact adoption of this pronouncement will have any impact on ~~the~~its reported results of operations and financial position.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)"). This statement is a revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation," and will supercede APB Opinion No. 25, "Accounting for Stock Issued to Employees," and its related implementation guidance. The revised statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. It requires entities to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award, over the period during which an employee is required to provide service in exchange for the award. In addition, the adoption of SFAS 123(R) requires additional accounting and disclosure related to the income tax and cash flow effects, resulting from share-based payment arrangements. SFAS 123(R) is effective as of the first annual reporting period beginning after June 15, 2005. The Company is currently assessing the impact adoption of this pronouncement will have on the reported results of operations and financial position.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets-an amendment of APB Opinion No. 29." This statement amends APB Opinion No. 29 to eliminate the specific exception regarding the basic measurement principle (fair value) for exchanges of similar productive assets and replaces it with a general exception for exchange transactions that do not have commercial substance (i.e. -- are not expected to result in significant changes of the cash flows of the reporting entity). SFAS No. 153 is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005, with earlier application permitted regarding non-monetary exchanges beginning after the statement was issued (December 2004). The Company is currently assessing the impact adoption of this pronouncement may have, if any, on the reported results of operations and financial position.
In May 2005 the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections." This Statement replaces APB Opinion No. 20, "Accounting Changes" and FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements," and changes the requirements for the accounting and reporting of a change in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. Different from APB No. 20, this statement requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period specific effects or the cumulative effect of the change. The Statement defines retrospective application, as the application of a different accounting principle to prior accounting periods, as if that principle had always been used, or as the adjustment of previously issued financial statements to reflect a change in the reporting entity. This Statement also redefines restatement, as the revising of previously issued financial statements to reflect the correction of an error, and requires that a change in depreciation, amortization, or depletion method for long-lived, nonfinancial assets be accounted for as a change in accounting estimates effected by a change in accounting principle. This Statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, with early adoption permitted for accounting changes and corrections of errors made in fiscal years beginning after May 2005. The Company is currently reviewing the standard to determine upon adoption the impact, if any, on the reported results of operations and financial position.
Forward-Looking Statements

This Form 10-K contains forward-looking statements that are based on current expectations, estimates, and projections about the industries in which the Company operates, as well as management's beliefs and assumptions. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions ("Future Factors") that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

The Future Factors that may affect the operations, performance and results of the Company's business include the following:

a. general economic and competitive conditions in the markets and countries in which the Company operates; b. risk inherent in international operations including, but not limited to, safeguarding of assets such as cash, inventories, and property, plant and equipment, as well as protection of other intellectual properties; c. the level of competition and consolidation within the commercial cleaning supply industry; d. the success of Fuller Brands' entry into the retail marketplace; e. the effect of changes in the distribution channels for Fuller Brands; f. the ability to increase volume through the Great Bend manufacturing plant to absorb fixed overhead; g. the success of Stanley Home Products' new direct sales strategy that involves changes to its compensation plan, product focus, and recruiting methods to attract new independent representatives; h. the level of demand for the Company's Imaging products and the impact of digital imaging; i. the ability of the CPAC Imaging Segment to become a provider of worldwide manufacturing services for other companies in the traditional imaging markets; j. the strength of the U.S. dollar against currencies of other countries where the Company operates, as well as cross-currencies between the Company's operations outside of the U.S. and other countries with which it transacts business; k. changes in business, political and economic conditions, and the threat of future terrorist activity in the U.S. and other parts of the world and related U.S. military action; and l. costs associated with meeting the requirements of Section 404 of the Sarbanes-Oxley Act of 2002.

Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in the forward-looking statements. The Company does not intend to update forward-looking statements.

Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest Rates

The Company's exposure to changes in interest rates results from investing and borrowing activities. At March 31, ~~2005~~2006, the Company has no interest rate swap agreements in place, which would limit its exposure to upward movements in interest rates. In ~~the~~The ~~event~~Company's primary domestic debt instruments have variable interest rates, ~~were~~while tothe ~~increase~~international oroperation's ~~decrease~~debt byinstruments ~~1%,~~have primarily fixed interest rates. In the ~~effect~~event onthat average interest ~~expense~~rates ~~would~~under ~~not~~these beborrowings ~~material~~had ~~compared~~increased toby ~~that~~one ~~which~~hundred ~~would~~basis ~~result~~points, ifit ~~rates~~is ~~remained~~estimated ~~constant~~that ~~and~~the atCompany's ~~rates~~interest ~~which~~expense ~~existed~~for atthe fiscal year ended March 31, ~~2005~~2006 would have increased by approximately $70,000.

Foreign Currency Exposure

Approximately 8381% of the Company's sales are denominated in U.S. dollars. The remainder of the Company's sales are denominated in Euros, African Rand, Thai Baht, and ~~Thai~~Chinese ~~baht~~Renminbi. A 10% change in the value of these currencies would impact the Company's revenues by approximately 2%. The Company monitors the relationship between the U.S. and its foreign currencies on a continuous basis and adjusts sales prices for products and services sold in those currencies as appropriate safeguards to the profitability of sales recorded in those currencies.

Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of
CPAC, Inc.

In our opinion, the Consolidated Financial Statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of CPAC, Inc. and its subsidiaries at March 31, ~~2005~~2006 and ~~2004~~2005, and the results of their operations and their cash flows for each of the three years in the period ended March 31, ~~2005~~2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related Consolidated Financial Statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As/s/ ~~discussed~~PricewaterhouseCoopers inLLP PricewaterhouseCoopers ~~Note 2 to the Consolidated Financial Statements~~LLP Rochester, ~~the~~New ~~Company changed the manner in which it accounts for its investment in affiliate~~York June 7, ~~and as such~~2006, ~~has~~except ~~restated~~for ~~its prior period financial statements to reflect this change. As discussed in~~ Note ~~6 to the Consolidated Financial Statements~~7, as ofto which ~~April 1, 2002,~~ the ~~Company~~date ~~adopted~~is ~~the provisions of Statement of Financial Accounting Standards No.~~June ~~142~~21, ~~"Goodwill and Other Intangible Assets."~~2006

~~/s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Rochester, New York July 8, 2005~~ 27

CPAC, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

MARCH 31, ~~2005~~2006 AND ~~2004~~2005

ASSETS		~~ASSETS~~2006		2005		~~2004~~
Current assets:
Cash and cash equivalents		~~Cash~~$ ~~and cash equivalents~~6,188,060		$ 7,710,031		~~$ 7,747,481~~
		Accounts receivable (net of allowance for doubtful accounts of $1,557,000 and $1,542,000 at March 31, 2005 and 2004, respectively)		10,261,408		11,532,459
Accounts receivable (net of allowance for doubtful accounts of $1,563,000 and $1,557,000 at March 31, 2006 and 2005, respectively)		11,885,074		10,261,408
Inventory, net		~~Inventory~~20, ~~net~~135,361		18,757,863		~~17,230,999~~
Prepaid expenses and other current assets		~~Prepaid expenses and other current assets~~2,055,795		3,~~009~~060,~~825~~484		~~2,271,978~~
Deferred tax assets, current		~~Deferred tax assets~~176, ~~current~~069		~~243~~311,~~658~~495		~~1,124,790~~
Total current assets		~~Total current assets~~40,440,359		3940,~~982~~101,~~785~~281		~~39,907,707~~
Property, plant and equipment, net		13,595,372		15,281,286		~~16,269,021~~
Goodwill		192,426		192,426		~~192,426~~
Intangible assets (net of amortization of $1,544,446 and $1,383,861 at March 31, 2005 and 2004, respectively)				776,230		930,681
Intangible assets (net of amortization of $1,686,559 and $1,544,446 at March 31, 2006 and 2005, respectively)		617,387		776,230
Deferred tax assets, long-term		239,244		417,018		~~2,652,214~~
Other assets		2,960,360		2,771,547		~~3,561,484~~
Assets held for sale				--		1,219,153
		$ 58,045,148		$ 59,539,788
				$ 59,421,292		$ 64,732,686
LIABILITIES AND SHAREHOLDERS' EQUITY
	LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current liabilities:
Current portion of long-term debt		$ 238,624		$ 263,772
	Current portion of long-term debt			$ 263,772		$ 210,174
Accounts payable		5,867,766		4,648,639
	Accounts payable			4,648,639		5,551,570
Accrued payroll and related expenses		1,422,294		1,970,780
	Accrued payroll and related expenses			1,970,780		1,692,167
Other accrued expenses and liabilities		2,873,002		2,712,479
	Other accrued expenses and liabilities			2,722,649		2,385,488
Total current liabilities		10,401,686		9,595,670
	Total current liabilities			9,605,840		9,839,399
Long-term debt, net of current portion		6,519,149		6,828,649
Long-term debt, net of current portion				6,828,649		6,771,471
Deferred tax liabilities, long-term		179,469		374,070
Deferred tax liabilities, long-term				245,404		--
Other long-term liabilities		4,097,586		4,134,351
Other long-term liabilities				4,134,351		4,204,323
Minority interests		284,564		219,020
Minority interests				219,020		830,328
Shareholders' equity:
Shareholders' equity:
Common stock, par value $0.01 per share; Authorized 30,000,000 shares; Issued 5,032,081 shares at March 31, 2006 and 2005, respectively		50,321		50,321
	Common stock, par value $0.01 per share; Authorized 30,000,000 shares; Issued 5,032,081 shares at March 31, 2005 and 2004, respectively			50,321		50,321
Additional paid-in capital		9,613,906		9,613,906
	Additional paid-in capital			9,613,906		9,613,906
Retained earnings		27,221,064		28,141,791
	Retained earnings			28,141,791		33,374,205
Accumulated other comprehensive income		267,591		1,172,198
	Accumulated other comprehensive income (loss)			1,172,198		638,921
		37,152,882		38,978,216
				38,978,216		43,677,353
Less: Treasury stock, at cost, 85,307 shares at March 31, 2006 and 2005, respectively		(590,188	)	(590,188	)
Less: Treasury stock, at cost, 85,307 shares at March 31, 2005 and 2004, respectively				(590,188	)	(590,188	)
Total shareholders' equity		36,562,694		38,388,028
	Total shareholders' equity			38,388,028		43,087,165
		$ 58,045,148		$ 59,539,788
				$ 59,421,292		$ 64,732,686

The accompanying notes are an integral part of the financial statements.

CPAC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

FOR THE YEARS ENDED MARCH 31, 2006, 2005, ~~2004~~ AND ~~2003~~2004

			2005		2004		2003
		2006		2005		2004
Net sales		$ 87,000,393	~~$ 87,213,244~~	$ 87,213,244	~~$ 90,010,745~~	$ 90,010,745	~~$ 95,290,340~~
Costs and expenses:
Cost of sales	~~Cost of sales~~	50,431,479	~~50,054,655~~	50,054,655	~~51,270,837~~	51,270,837	~~52,367,255~~
Selling, administrative and engineering expenses	~~Selling, administrative and engineering expenses~~	34,758,266	~~36,204,797~~	36,204,797	~~36,953,686~~	36,953,686	~~38,394,871~~
Research and development expense	~~Research and development expense~~	836,323	~~897,480~~	897,480	~~734,565~~	734,565	~~653,295~~
Restructuring expenses	~~Restructuring expenses~~	--	--	--	~~1,275,349~~	1,275,349	--
Interest income	~~Interest income~~	(151,142	~~(89,388~~)	)(89,388	~~(64,642~~)	)(64,642	~~(131,268~~)	)
Interest expense	~~Interest expense~~	559,122	~~480,180~~	480,180	~~525,541~~	525,541	~~578,080~~
			87,547,724		90,695,336		91,862,233
		86,434,048		87,547,724		90,695,336
Income (loss) before non-operating income (expense), income taxes, and cumulative effect of change in accounting principle			(334,480	)	(684,591	)	3,428,107
Income (loss) before non-operating income (expense) and income taxes		566,345		(334,480	)	(684,591	)
Non-operating income (expense):
Minority interests	~~Minority interests~~	(65,544	~~(174,970~~)	)(174,970	~~(219,372~~)	)(219,372	~~(151,088~~)	)
Equity in loss of affiliate, net of impairment	~~Equity in loss of affiliate, net of impairment~~	--	~~(250,436~~	)(250,436	~~(2,914,577~~)	)(2,914,577	~~(179,584~~)	)
Other investment expense	~~Other investment expense~~	--	~~(500,000~~	)(500,000	--)	--	--
			(925,406	)	(3,133,949	)	(330,672	)
		(65,544	)	(925,406	)	(3,133,949	)
Income (loss) before income tax and cumulative effect of change in accounting principle			(1,259,886	)	(3,818,540	)	3,097,435
Income (loss) before income tax		500,801		(1,259,886	)	(3,818,540	)
Provision (benefit) for income tax		36,000	~~2,587,000~~	2,587,000	~~(469,000~~	)(469,000	~~1,056,000~~)
Income (loss) before cumulative effect of change in accounting principle			(3,846,886	)	(3,349,540	)	2,041,435
Net income (loss)		$ 464,801		$ (3,846,886	)	$ (3,349,540	)
Cumulative effect of change in accounting principle			--		--		(6,281,251	)
Net income (loss) per common share:
	Net loss		$ (3,846,886	)	$ (3,349,540	)	$ (4,239,816	)
Basic net income (loss) per share		$ 0.09		$ (0.78	)	$ (0.68	)
Net income (loss) per common share:
Diluted net income (loss) per share		$ 0.09		$ (0.78	)	$ (0.68	)
	Basic:
Average common shares outstanding:
	Before cumulative effect of change in accounting principle		$ (0.78	)	$ (0.68	)	$ 0.40
Basic		4,946,774		4,946,774		4,945,717
	Cumulative effect of change in accounting principle, net		--		--		(1.24	)
Diluted		4,946,774		4,946,774		4,945,717
	Basic net loss per share		$ (0.78	)	$ (0.68	)	$ (0.84	)
Comprehensive income (loss):
	Diluted:
Net income (loss)		$ 464,801		$ (3,846,886	)	$ (3,349,540	)
	Before cumulative effect of change in accounting principle		$ (0.78	)	$ (0.68	)	$ 0.40
Other comprehensive income (loss)		(904,607	)	533,277		1,353,924
	Cumulative effect of change in accounting principle		--		--		(1.24	)
Comprehensive loss		$ (439,806	)	$ (3,313,609	)	$ (1,995,616	)
	Diluted net loss per share		$ (0.78	)	$ (0.68	)	$ (0.84	)
Average common shares outstanding:
	Basic		4,946,774		4,945,717		5,069,347
	Diluted		4,946,774		4,945,717		5,077,728
Comprehensive income (loss):
	Net loss		$ (3,846,886	)	$ (3,349,540	)	$ (4,239,816	)
	Other comprehensive income		533,277		1,353,924		1,028,332
	Comprehensive loss		$ (3,313,609	)	$ (1,995,616	)	$ (3,211,484	)

The accompanying notes are an integral part of the financial statements.

CPAC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE YEARS ENDED MARCH 31, 2006, 2005, ~~2004~~ AND ~~2003~~2004

	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Stock at Cost
BALANCE, MARCH 31, 2002	$ 52,088		$ 10,538,823		$ 43,774,842		$ (1,743,335	)	$ (590,188	)
BALANCE, MARCH 31, 2003	$ 50,305		$ 9,605,984		$ 38,108,946		$ (715,003	)	$ (590,188	)
Repurchase and retirement of 178,287 shares of common stock	(1,783	)	(932,839	)	--		--		--
Net loss for the year	--		--		(4,239,816	)	--		--
Cash dividends declared at $.28 a share	--		--		(1,426,080	)	--		--
Translation adjustments	--		--		--		1,028,332		--
BALANCE, MARCH 31, 2003	50,305		9,605,984		38,108,946		(715,003	)	(590,188	)
Exercise of employee stock options	16		7,922		--		--		--
Net loss for the year	--		--		(3,349,540	)	--		--
Cash dividends declared at $.28 a share	--		--		(1,385,201	)	--		--
Translation adjustments	--		--		--		1,353,924		--
BALANCE, MARCH 31, 2004	50,321		9,613,906		33,374,205		638,921		(590,188	)
Net loss for the year	--		--		(3,846,886	)	--		--
Cash dividends declared at $.28 a share	--		--		(1,385,528	)	--		--
Translation adjustments	--		--		--		533,277		--
BALANCE, MARCH 31, 2005	$ 50,321		$ 9,613,906		$ 28,141,791		$ 1,172,198		$ (590,188	)
Net income for the year	--		--		464,801		--		--
Cash dividends declared at $.28 a share	--		--		(1,385,528	)	--		--
Translation adjustments	--		--		--		(904,607	)	--
BALANCE, MARCH 31, 2006	$ 50,321		$ 9,613,906		$ 27,221,064		$ 267,591		$ (590,188	)

The accompanying notes are an integral part of the financial statements.

CPAC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED MARCH 31, 2006, 2005, ~~2004~~ AND ~~2003~~2004

	2005		2004		2003
	2006		2005		2004
Cash flows from operating activities:
Net (loss)	$ (3,846,886	)	$ (3,349,540	)	$ (4,239,816	)
Net income (loss)	$ 464,801		$ (3,846,886	)	$ (3,349,540	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	2,~~430~~194,~~525~~326		2,~~530~~430,~~698~~525		2,~~542~~530,~~985~~698
Amortization of intangible assets	154,167		154,167		~~183~~154,~~980~~167
Deferred income taxes	343,~~194,~~000		(53,194,000	)	~~176~~(5,000	)
Minority interest in consolidated foreign subsidiaries	~~174~~65,~~970~~544		~~219~~174,~~372~~970		~~151~~219,~~088~~372
Equity in loss of affiliate, including impairment	~~250,436~~--		2250,~~914,577~~436		~~179~~2,~~584~~914,577
Other investment expense	~~500,000~~--		--500,000		--
Gain on sale of property, plant and equipment	~~(62,902~~--	)	--(62,902	)	--
Cumulative effect of accounting change	--		--		6,281,251
Changes in assets and liabilities:
Accounts receivable	(1,~~344~~771,~~608~~152	)	~~480~~1,~~501~~344,608		1480,~~634,167~~501
Inventory	(1,~~392~~627,~~402~~365	)	~~865~~(1,~~622~~392,402	)	~~(10~~865,~~666~~622	)
Income taxes, net	~~(814~~942,~~751~~910	)	(~~909~~894,~~345~~042	)	(~~537~~909,~~386~~345	)
Accounts payable	~~(869~~1,~~608~~146,200	)	~~638~~(869,~~136~~608	)	~~317~~638,~~875~~136
Accrued payroll and related expenses	~~292~~(566,~~740~~136	)	~~108~~292,~~207~~740		~~(45~~108,~~414~~207	)
Other changes, net	~~693~~(62,~~786~~117	)	~~440~~773,~~678~~077		~~(480~~440,~~970~~678	)
Total adjustments	5519,~~895,569~~377		75,~~437~~895,~~613~~569		107,~~392~~437,~~494~~613
Net cash provided by operating activities	2984,~~048,683~~178		42,~~088~~048,~~073~~683		64,~~152~~088,~~678~~073
Cash flows from investing activities:
Sale of property, plant and equipment	~~1,282,055~~--		--1,282,055		--
Purchase of property, plant and equipment, net	(1677,~~610,104~~122	)	(21,~~705~~610,~~182~~104	)	(12,~~662~~705,~~428~~182	)
Investment in affiliate	--		~~(1,300,000~~--	)	--(1,300,000	)
Business investment	~~(300,000~~--	)	--(300,000	)	--
Net cash used in investing activities	(~~628~~677,~~049~~122	)	(4628,~~005,182~~049	)	(14,~~662~~005,~~428~~182	)
Cash flows from financing activities:
Proceeds from exercise of employee stock options	--		~~7,938~~--		--7,938
Repurchase of common stock	--		--		(934,622	)
Repayment of long-term borrowings	(417,627	)	(82,375	)	(861,966	)
Proceeds from long-term borrowings	--		--		242,136
Payment of cash dividends	(1,385,528	)	(1,385,528	)	(1,385,201	)
Repayment of long-term borrowings	(82,375	)	(861,966	)	(516,248	)
Net cash used in financing activities	(1,803,155	)	(1,467,903	)	(2,239,229	)
Payment of cash dividends	(1,385,528	)	(1,385,201	)	(1,426,080	)
Effect of exchange rate changes on cash	(25,872	)	9,819		37,280
Net cash used in financing activities	(1,467,903	)	(2,239,229	)	(2,634,814	)
Net decrease in cash and cash equivalents	(1,521,971	)	(37,450	)	(2,119,058	)
Effect of exchange rate changes on cash	9,819		37,280		19,269
Cash and cash equivalents -- beginning of year	7,710,031		7,747,481		9,866,539
Net (decrease) increase in cash and cash equivalents	(37,450	)	(2,119,058	)	1,874,705
Cash and cash equivalents -- end of year	$ 6,188,060		$ 7,710,031		$ 7,747,481
Cash and cash equivalents -- beginning of year	7,747,481		9,866,539		7,991,834
Cash and cash equivalents -- end of year	$ 7,710,031		$ 7,747,481		$ 9,866,539

The accompanying notes are an integral part of the financial statements.

CPAC, Inc. And Subsidiaries

Notes to Consolidated Financial Statements

for the Years Ended March 31, 2006, 2005, ~~2004~~ and ~~2003~~2004

1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

The Company

CPAC, Inc. and Subsidiaries ("the Company") develops, manufactures, markets, and distributes both in North America and internationally branded consumer and commercial cleaning products, as well as prepackaged chemical formulations, supplies, and equipment systems to the photographic, health care, and graphic arts imaging industry.

Basis of Consolidation

The consolidated financial statements of the Company include the accounts of the Company, its wholly-owned subsidiaries, its 98% owned subsidiary (CPAC Europe, N.V.), and its 80% owned subsidiary (CPAC Africa (Pty) LTD). The Company's foreign subsidiaries are included in the consolidated financial statements utilizing a December 31 fiscal year to facilitate prompt reporting of financial results. All significant intercompany accounts and transactions have been eliminated. The Company ~~accounts~~accounted for its 40% investment in TURA AG (TURA) on the equity method (See Note 2 to the Consolidated Financial Statements). The cost method of accounting is used for investments in which the Company has less than a 20% ownership interest, and the Company does not have the ability to exercise significant influence. These investments are carried at cost and are adjusted only for other than temporary declines in fair values. Profits or losses of the investee are not recognized in the consolidated financial statements of the Company. The carrying value of these investments is reported in other long-term assets.

The Company recorded an impairment loss of $500,000 during the year ended March 31, 2005, as a result of the Company's assessment of an "other than temporary" decline in the fair market value of an investment it was carrying under the cost method of accounting. This expense is presented in the consolidated statements of operations as a non-operating expense for 2005, and reduced the carrying value of this investment to zero.

Inventory

Inventory is stated at the lower of cost or market, on a first-in, first-out, basis. The Company provides inventory reserves for excess, obsolete, or slow-moving inventory based on changes in customer demands or technology developments.

Property, Plant and Equipment

Property, plant and equipment are stated at cost and are depreciated over their estimated useful lives on the straight-line and accelerated methods (buildings and improvements 15 to 39 years; machinery and equipment 3 to 12 years; leasehold improvements 5 to 12 years; furniture and fixtures 5 to 12 years). Leasehold improvements are amortized over the shorter of the lease period or the expected useful lives of the improvements using the straight-line method. At the time of retirement or other disposition of property, the cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in income. Repairs and maintenance are charged to expense as incurred.

Impairment of Long-Lived Assets

The Company reviews the carrying value of long-lived assets and intangibles whenever events or changes in circumstances indicate that the carrying value of such items may not be recoverable from undiscounted net cash flows of the related business or asset.

Warranty Costs

The Company has warranty obligations in connection with sales of its equipment sold in the imaging market. The warranty period generally ranges from six to twelve months. The costs incurred to provide for these warranty obligations are estimated and recorded as an accrued liability at the time of sale. The Company estimates its warranty cost at the time of sale for a given product based on historical failure rates and related costs to repair. The change in the Company's accrued warranty obligations from March 31, ~~2004~~2005 to March 31, ~~2005~~2006 was as follows (in thousands):

Accrued warranty obligations at March 31, 2004		$ 33
Accrued warranty experience during 2005		(5)
2005 warranty provisions		4
Accrued warranty obligations at March 31, 2005		$ 32
Accrued warranty experience during 2006		(2)
2006 warranty provisions		1
Accrued warranty obligations at March 31, 2006		$ 31

Revenue Recognition

~~CPAC, Inc. And Subsidiaries~~32

Notes to Consolidated Financial Statements

for the Years Ended March 31, 2005, 2004 and 2003

Shipping and Handling Fees and Costs

In accordance with EITF 00-10, "Accounting for Shipping and Handling Fees and Costs," the Company classifies shipping and handling costs billed to customers as revenue. Shipping and handling costs for the Fuller Brands Segment amounting to $6,~~082~~083,000, $6,~~026~~082,000, and $6,~~272~~026,000 in ~~2005~~2006, ~~2004~~2005, and ~~2003~~2004, respectively, are included in selling, administrative and engineering expenses. Similar costs for the Imaging Segment amounting to $23,~~694~~059,000, $32,~~090~~694,000, and $3,~~056~~090,000 in ~~2005~~2006, ~~2004~~2005, and ~~2003~~2004, respectively, are included in cost of sales.

Research and Development

The Company charges research and development expenditures to income as incurred.

Advertising

The Company charges advertising expenditures to income as incurred and includes the expenses in "selling, administrative, and engineering expenses."

Stock-Based Compensation

As permitted under SFAS No. 123, "Accounting for Stock Based Compensation," the Company continues to apply the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25 in accounting for its stock option plans. Accordingly, no expense is charged to net income as all options granted had an exercise price equal to the market value of the underlying common stock on the date of the grant.

In accordance with SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," the following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" to its stock options plans:

	2005		2004		2003
	2006		2005		2004
Net loss as reported	$ (3,846,886	)	$ (3,349,540	)	$ (4,239,816	)
Net income (loss) as reported	$ 464,801		$ (3,846,886	)	$ (3,349,540	)
Total stock-based compensation expense determined under fair value method for all awards, net of tax	6972,000		8269,000		7782,000
Proforma net loss	$ (3,915,886	)	$ (3,431,540	)	$ (4,316,816	)
Pro forma net income (loss)	$ 392,801		$ (3,915,886	)	$ (3,431,540	)
Net loss per common share:
Basic-as reported	$ (0.7809	)	$ (0.6878	)	$ (0.8468	)
Basic-proforma	$ (0.79	)	$ (0.69	)	$ (0.85	)
Basic-pro forma	$ 0.08		$ (0.79	)	$ (0.69	)
Diluted-as reported	$ (0.7809	)	$ (0.6878	)	$ (0.8468	)
Diluted-proforma	$ (0.79	)	$ (0.69	)	$ (0.85	)
Diluted-pro forma	$ 0.08		$ (0.79	)	$ (0.69	)

~~CPAC, Inc. And Subsidiaries~~33

Notes to Consolidated Financial Statements

for the Years Ended March 31, 2005, 2004 and 2003

Foreign Currency

All assets and liabilities of the Company's wholly-owned and majority-owned foreign subsidiaries are translated from their functional currency to U.S. dollars at year end exchange rates. Revenues and expenses are translated from functional currencies to U.S. dollars using an average exchange rate for the year. Translation gains and losses are not included in determining net income, but are accumulated as a separate component of shareholders' equity. Foreign currency transaction gains and losses are included in the determination of net income. Included in consolidated net income are net foreign currency transaction gain (losses) of ($49132,000), ($3949,000), and ($7739,000), realized during fiscal ~~2005~~2006, ~~2004~~2005, and ~~2003~~2004, respectively.

The Company has occasionally utilized hedging programs (primarily forward foreign currency exchange contracts) to minimize the impact of currency fluctuations on the result of operations. At March 31, ~~2005~~2006 and ~~2004~~2005, no forward foreign currency exchange contracts were outstanding. The Company does not hold or issue derivatives for trading purposes and is not a party to leveraged derivative transactions.

Net Income Per Common Share

Basic EPS is computed as net earnings divided by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock-based compensation including stock options. In instances where assumed exercise of stock options would be anti-dilutive due to losses from continuing operations, diluted earnings per share is computed using the weighted-average number of common shares.

The table below summarizes the amounts used to calculate basic and dilutive earnings per share:

	2005	2004	2003
	2006	2005	2004
Basic weighted average number of shares outstanding	4,946,774	4,~~945~~946,~~717~~774	54,~~069~~945,~~347~~717
Effect of dilutive stock options	0	0	~~8,381~~0
Diluted shares outstanding	4,946,774	4,~~945~~946,~~717~~774	54,~~077~~945,~~728~~717

Unexercised stock options to purchase ~~916~~860,~~417~~800 shares of the Company's common stock as of March 31, ~~2003,~~2006 were not included in the computations of diluted ~~EPS~~earnings per share, because the ~~options'~~ exercise prices of these options were greater than the average market price of the Company's common stock during the respective ~~period~~periods. Unexercised stock options to purchase 960,911 and 1,041,936 shares of the Company's common stock as of March 31, 2005 and 2004, respectively, were not included in the computation of EPS, because they would be anti-dilutive due to the net loss incurred by the Company for the years ended March 31, 2005 and 2004. These options, issued at various dates from ~~1995~~1996 through August ~~2004~~2005, are still outstanding at the end of the year.

Statements of Cash Flows

For purposes of the statements of cash flows, the Company considers marketable securities with a maturity of three months or less at the time of purchase to be cash equivalents. The Company also considers payments due from banks for customer credit card transactions that process within 24 to 48 hours as cash equivalents. Credit card amounts due from banks classified as cash equivalents total approximately $~~566~~517,000 and $~~631~~566,000 at March 31, ~~2005~~2006 and ~~2004~~2005, respectively. The Company paid interest of $~~486~~550,000, $~~563~~486,000, and $~~585~~563,000, in fiscal ~~2005~~2006, ~~2004~~2005, and ~~2003~~2004, respectively. In addition, the Company paid income taxes net of (refunds) of ($50895,000), ($~~445~~50,000), and $1445,~~417,~~000, in fiscal ~~2005~~2006, ~~2004~~2005, and ~~2003~~2004, respectively.

Goodwill and Intangible Assets

~~Prior~~The toCompany ~~adoption~~follows ~~of Statement of Financial Accounting Standards (~~SFAS) No. 142, ~~the~~"Goodwill ~~Company amortized goodwill~~ and ~~certain~~Other ~~intangibles~~Intangible ~~assets on a straight-line basis over the estimated useful lives of such assets~~Assets," ~~using~~which ~~amortizable periods ranging from 3 to 40 years, respectively. The Company adopted the provisions of SFAS No. 142 effective April 1, 2002. The pronouncement~~ requires an annual impairment test (comparison of estimated fair value to carrying value) in lieu of monthly amortization for goodwill. To determine potential impairment, fair value of the applicable business operations is determined by computing the present value of expected future cash flows.

In conjunction with adoption, goodwill's carrying value was reduced by approximately $6.3 million, net of income tax benefit of $4.2 million, or $1.24 per diluted share (See Note 6 to the Consolidated Financial Statements).

Business and Credit Concentrations

Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of temporary cash investments and trade accounts receivable. The Company places its temporary cash investments with high credit quality financial institutions. The Company's customers are not concentrated in any specific geographic region, but are broadly concentrated in the cleaning and personal care products and imaging industries. Concentrations of credit risk with respect to trade receivables are limited due to the large number of domestic and foreign customers comprising the Company's customer

~~CPAC, Inc. And Subsidiaries~~34

~~Notes~~base, toand ~~Consolidated~~their ~~Financial~~dispersion ~~Statements~~across several different business sectors participating in different facets of the cleaning and personal care products and imaging industries.

for the Years Ended March 31, 2005, 2004 and 2003

concentrated in the cleaning and personal care products and imaging industries. Concentrations of credit risk with respect to trade receivables are limited due to the large number of domestic and foreign customers comprising the Company's customer base, and their dispersion across several different business sectors participating in different facets of the cleaning and personal care products and imaging industries.

Fair Values of Financial Instruments

The fair value of financial instruments classified as current assets or liabilities including cash and cash equivalents, receivables, and accounts payable approximates their carrying values due to the short-term maturity of the instruments. The fair value of short-term and long-term debt approximates their carrying value based on their effective interest rates compared to current market rates.

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 amount of assets and liabilities at year end and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Income Taxes

Income tax expense (benefit) is based on reported income (loss) before income tax expense (benefit). Deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable in future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. "The Company does not provide for U.S. taxes on the undistributed earnings of foreign subsidiaries that are considered to be reinvested indefinitely, except for the dividends that were distributed under the American Jobs Creation Act of 2004." Calculation of the unrecognized, deferred tax liability for temporary differences related to these earnings is not practical.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized (See Note 10 to the Consolidated Financial Statements).

Other Comprehensive Income

Other comprehensive income includes foreign currency translation adjustments. Because cumulative translation adjustments are considered a component of permanently invested, unremitted earnings of subsidiaries outside the United States, no taxes are provided on such amounts.

Segment Reporting

The Company has two operating Segments. The basis for determining the Company's operating Segments is the manner in which the Company in its operations uses financial information. Management operates and organizes itself according to business operations, which comprise unique products and services across geographic locations.

New Accounting Standards

In ~~January~~December ~~2003~~2004, the FASB ~~Interpretation~~issued SFAS No. 46123 (~~FIN~~revised 462004), "~~Consolidation~~Share-Based ofPayment" ~~Variable Interest Entities, an interpretation of ARB No. 51,~~("SFAS ~~was issued~~123(R)"). ~~The~~ ~~Interpretation~~This ~~provides~~statement ~~guidance~~is ona ~~the~~revision ~~identification~~ of ~~entities~~FASB ~~for~~Statement ~~which~~No. ~~control~~123, is"Accounting ~~achieved~~for ~~through~~Stock-Based ~~means~~Compensation," ~~other~~and ~~than~~will ~~through~~supercede ~~voting~~APB ~~rights~~Opinion ~~("variable~~No. 25, ~~interest entities~~"Accounting orfor ~~"VIEs")~~Stock ~~and~~Issued ~~how~~ to ~~determine~~Employees," ~~when~~ and ~~which~~its ~~business~~related ~~enterprise~~implementation ~~should~~guidance. ~~consolidate~~The ~~the~~revised ~~VIE~~statement ~~(the~~focuses ~~"primary~~primarily ~~beneficiary"). This~~on ~~new~~accounting ~~model~~ for ~~consolidation~~transactions ~~applies~~in towhich an entity ~~which~~obtains ~~either~~employee ~~(1)~~services ~~the~~in ~~equity~~share-based ~~investors~~payment dotransactions. ~~not~~It ~~have~~requires aentities ~~controlling~~to ~~financial~~measure ~~interest or (2)~~ the ~~equity~~cost ~~investment~~of atemployee ~~risk~~services isreceived ~~insufficient~~in toexchange ~~finance~~for ~~that~~an ~~entity's~~award ~~activities~~of ~~without~~equity ~~receiving~~instruments ~~additional~~based ~~subordinated~~on ~~financial~~the ~~support~~grant-date ~~from~~fair ~~other~~value ~~parties. In~~of ~~addition~~the award, ~~FIN~~over 46the ~~requires~~period ~~that~~during ~~both~~which ~~the~~an ~~primary~~employee ~~beneficiary~~is ~~and~~required ~~all~~to ~~other~~provide ~~enterprises~~service ~~with~~in aexchange ~~significant~~for ~~variable~~the ~~interest~~award. inIn aaddition, ~~VIE~~the ~~make~~adoption ~~additional~~of ~~disclosures. The~~SFAS ~~Interpretation~~123(R) ~~applies~~requires ~~immediately~~additional toaccounting ~~variable~~and ~~interest~~disclosure ~~entities~~related ~~created~~to ~~after~~the ~~January 31,~~income ~~2003,~~tax and tocash ~~variable~~flow ~~interest~~effects, ~~entities~~resulting infrom ~~which~~share-based anpayment ~~enterprise~~arrangements. ~~obtains~~SFAS an123(R) ~~interest~~is ~~after~~effective ~~that~~as ~~date. It~~of ~~applies in~~ the first annual reporting period beginning after ~~March~~June 15, ~~2004~~2005. toThe ~~variable~~Company ~~interest~~expects ~~entities in which an enterprise holds a variable interest~~ that itthe ~~acquired~~impact ~~before~~of ~~February 1, 2003. The~~ adoption ~~did~~of ~~not~~this ~~have~~pronouncement anwill ~~impact~~be onimmaterial to the ~~Company's~~ reported results of operations and financial position.

In ~~December~~February ~~2003~~2006, the ~~Financial~~FASB ~~Accounting Standards Board~~ issued SFAS No. ~~132 (revised 2003)~~155, "~~Employers'~~Accounting ~~Disclosures~~for ~~about~~Certain ~~Pensions~~Hybrid ~~and~~Financial ~~Other Postretirement Benefits~~Instruments--an amendment of FASB Statements No. ~~87,~~133 ~~88,~~ and ~~106~~140." This ~~statement~~Statement ~~requires~~amends ~~new~~FASB ~~annual~~Statements ~~disclosures~~No. 133, ~~about~~"Accounting ~~the~~for ~~types~~Derivative ofInstruments ~~plan~~and ~~assets~~Hedging Activities", ~~investment~~and ~~strategy~~No. 140, ~~measurement~~"Accounting ~~date,~~for ~~plan~~Transfers ~~obligations,~~and Servicing of Financial Assets and ~~cash~~Extinguishments ~~flows,~~of asLiabilities" ~~well~~to asclarify certain issues addressed in the ~~net~~aforementioned ~~periodic~~pronouncements. ~~benefit~~Statement ~~cost~~No. 155 ofwill ~~defined~~permit ~~benefit~~remeasurement ~~pension~~for ~~plans~~any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and ~~other~~principal-only ~~defined~~strips ~~benefit~~are ~~postretirement~~not subject to the requirements of

~~CPAC, Inc. And Subsidiaries~~35

~~Notes~~Statement 133; established a requirement to ~~Consolidated~~evaluate ~~Financial~~interests ~~Statements~~in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and amends Statement No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This Statement is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. The fair value election provided for in paragraph 4(c) of this Statement may also be applied upon adoption of this Statement for hybrid financial instruments that had been bifurcated under paragraph 12 of Statement 133 prior to the adoption of this Statement. Earlier adoption is permitted as of the beginning of an entity's fiscal year, provided the entity has not yet issued financial statements, including financial statements for any interim period for that fiscal year. Provisions of this Statement may be applied to instruments that an entity holds at the date of adoption on an instrument-by-instrument basis. The Company does not believe that adoption of this pronouncement will have any impact on its reported results of operations and financial position.

for the Years Ended March 31, 2005, 2004 and 2003

plans. The statement is effective for financial statements with fiscal years ending after December 15, 2003, with disclosure of information about foreign plans effective for fiscal years ending after June 15, 2004. The Company does not provide a defined benefit pension plan, nor any defined benefit postretirement plan; the impact of this pronouncement is expected to be minimal. Disclosures concerning the Company's defined contribution plans in its foreign operating units, where applicable, were made for the fiscal year ending March 31, 2005.

In November 2004, the FASB issued SFAS No. 151 "Inventory Costs, an amendment of ARB No. 43, Chapter 4." This statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to require the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) to be handled as a current period charge. The statement also requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005, with earlier application permitted during fiscal years beginning after the date the statement was issued (November 2004). The Company is currently assessing the impact adoption of this pronouncement will have on the reported results of operations and financial position.

In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets-an amendment of APB Opinion No. 29." This statement amends APB Opinion No. 29 to eliminate the specific exception regarding the basic measurement principle (fair value) for exchanges of similar productive assets and replaces it with a general exception for exchange transactions that do not have commercial substance (i.e. -- are not expected to result in significant changes of the cash flows of the reporting entity). SFAS No. 153 is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005, with earlier application permitted regarding non-monetary exchanges beginning after the statement was issued (December 2004). The Company is currently assessing the impact adoption of this pronouncement may have, if any, on the reported results of operations and financial position.

In May 2005 the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections." This Statement replaces APB Opinion No. 20, "Accounting Changes" and FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements," and changes the requirements for the accounting and reporting of a change in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. Different from APB No. 20, this statement requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period specific effects or the cumulative effect of the change. The Statement defines retrospective application, as the application of a different accounting principle to prior accounting periods, as if that principle had always been used, or as the adjustment of previously issued financial statements to reflect a change in the reporting entity. This Statement also redefines restatement, as the revising of previously issued financial statements to reflect the correction of an error, and requires that a change in depreciation, amortization, or depletion method for long-lived, nonfinancial assets be accounted for as a change in accounting estimates effected by a change in accounting principle. This Statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, with early adoption permitted for accounting changes and corrections of errors made in fiscal years beginning after May 2005. The Company is currently reviewing the standard to determine upon adoption the impact, if any, on the reported results of operations and financial position.

Reclassification

Certain ~~2004~~prior ~~and~~period ~~2003~~ financial statement and related footnote amounts have been reclassified to conform to the ~~2005~~current year presentation.

2 - INVESTMENT IN AFFILIATE

In the first quarter of fiscal 2004, the Company invested $1,300,000 to increase its ownership percentage in TURA AG (TURA) of Düren, West Germany, to 40%. As a result of its additional equity ownership, the Company adopted the equity method of accounting and treated the transaction as a change in reporting entity and restated the prior period's financial statements, as if the equity method of accounting had been utilized at inception. The Company recorded its equity in the income or losses of TURA on a three month lag and included its share of the TURA earnings and losses as "Equity in loss of affiliate" on the Consolidated Statement of Operations. In addition, the purchase price to acquire the cumulative 40% ownership exceeded the Company's proportionate share of TURA's net assets. A portion of this allocated excess purchase price was also amortized into equity earnings. For fiscal 2003 and the first quarter of fiscal 2004, the Company recorded its 19% proportionate share of TURA's losses, plus amortization of the allocated excess purchase price.

CPAC, Inc. And Subsidiaries

Notes to Consolidated Financial Statements

for the Years Ended March 31, 2005, 2004 and 2003

method of accounting and treated the transaction as a change in reporting entity and restated the prior period's financial statements, as if the equity method of accounting had been utilized at inception. The Company recorded its equity in the income or losses of TURA on a three month lag and included its share of the TURA earnings and losses as "Equity in loss of affiliate" on the Consolidated Statement of Operations. In addition, the purchase price to acquire the cumulative 40% ownership exceeded the Company's proportionate share of TURA's net assets. A portion of this allocated excess purchase price was also amortized into equity earnings. For fiscal 2003 and the first quarter of fiscal 2004, the Company recorded its 19% proportionate share of TURA's losses, plus amortization of the allocated excess purchase price.

In the fourth quarter of fiscal 2004, the Company had determined, due to recognition of significant equity losses, that TURA's financial decline was other than temporary and recorded an impairment loss of approximately $2,320,000 or $0.47 a diluted share for the year ended March 31, 2004. This reduced the Company's investment at March 31, 2004 to the estimated fair market value of $250,000. The impairment adjustment also reduced the previously allocated excess purchase price, leaving a value that the Company believed was largely attributable to the supply contracts between the Company and TURA.

During fiscal 2005, the Company's recognition of the 40% share of the losses of TURA during the first six months effectively reduced the basis of its investment to zero. ~~The~~ Since the Company was not obligated to fund any future losses orof ~~record~~TURA, it has not recorded its 40% share of TURA equity earnings or losses, insince ~~future~~the ~~periods~~second quarter of fiscal 2005, ~~unless~~as TURA ~~became~~has not been profitable. ~~Over~~ ~~the~~Although ~~last six months,~~ TURA attempted to restructure its ~~operations by reducing its~~ workforce, ~~replacing its former president,~~ and ~~terminating~~replaced ~~financial~~ management in an effort to reduce operating losses and improve cash flows~~. However~~, ~~TURA~~the ~~was~~efforts were unsuccessful. ~~and~~TURA iscontinues ~~currently~~to ~~undergoing~~be involved with liquidation procedures, which began in late 2005 under German government supervision. The liquidation and bankruptcy proceedings are not expected to generate any additional costs or liabilities for CPAC. The Company has not received complete financial statements from TURA ~~management~~ since the second quarter of fiscal 2005, and therefore, has not disclosed condensed financial statement information concerning TURA, ~~for~~since ~~fiscal~~the ~~2005~~year ended March 31, 2004.

~~At March 31, 2003, the proportionate share of the Company's investment in the net assets of TURA, as well as the unamortized value of the allocated excess purchase price, was allocated as follows:~~ 36

		March 31, 2003
CPAC, Inc.'s proportionate share of TURA net assets		$ 365,174
Property, plant and equipment		180,000
Supply contracts		375,000
Goodwill		847,480
Net investment		$ 1,767,654

Summarized, approximate, financial information for TURA for the year ended March 31, 2004 is shown below:

The difference between the original purchase price for the Company's equity interests in TURA and the net investment balance shown above at March 31, 2003 represents the Company's subsequent recognition of its proportionate share of TURA's net loss, amortization of the purchase price, and foreign currency translation adjustments.

	March 31, 2004
Condensed Statement of Operations:
Net revenue	$ 17,747,000
Cost of sales	13,975,000
Operating expenses	4,586,000
Operating income (loss)	(814,000	)
Interest expense	398,000
Tax provision (benefit)	--
Net income (loss)	$ (1,212,000	)
Condensed Balance Sheet:
Current assets	$ 9,112,000
Non-current assets	4,743,000
	$ 13,855,000

Current liabilities	$ 12,338,000
Non-current liabilities	531,000
Shareholders' equity	986,000
	$ 13,855,000

Summarized, approximate, financial information for TURA for the years ended March 31, 2004 and 2003 is shown below:
For the Years Ended
March 31, 2004 March 31, 2003
Condensed Statement of Operations:
Net revenue $ 17,747,000 $ 24,075,000
Cost of sales 13,975,000 18,446,000
Operating expenses 4,586,000 5,403,000
Operating income (loss) (814,000 ) 226,000
Interest expense 398,000 516,000
Tax provision (benefit) -- (108,000 )
Net income (loss) $ (1,212,000 ) $ (182,000 )
Condensed Balance Sheet:
Current assets $ 9,112,000 $ 7,044,000
Non-current assets 4,743,000 4,234,000
$ 13,855,000 $ 11,278,000
Current liabilities $ 12,338,000 $ 8,909,000
Non-current liabilities 531,000 447,000
Shareholders' equity 986,000 1,922,000
$ 13,855,000 $ 11,278,000
CPAC, Inc. And Subsidiaries
Notes to Consolidated Financial Statements
for the Years Ended March 31, 2005, 2004 and 2003
As required by APB No. 18, the change from the cost method to the equity method in accounting for the TURA investment requires restatement of prior period financial statements. Beginning in the Company's second quarter of fiscal 2004, the Company recognized 40% of the income or loss of TURA, adjusted for the purchase price amortization of $41,250. The amounts included in 2003 represented 19% of the affiliate's losses, adjusted for the purchase price amortization of $145,000. The following table presents the restated 2003 earnings and earnings per share, as if the equity method of accounting had been applied for the year ended March 31, 2003:
For the Year Ended March 31, 2003
Reported CPAC, Inc. net loss $ (4,060,232 )
Equity in loss of TURA (179,584 )
Adjusted CPAC, Inc. net loss $ (4,239,816 )
Basic earnings per share before change in reporting entity:
Reported CPAC, Inc. basic earnings per common share $ (0.80 )
Equity in loss of TURA (0.04 )
Adjusted CPAC, Inc. basic earnings per common share $ (0.84 )
Diluted earnings per share before change in reporting entity:
Reported CPAC, Inc. diluted earnings per common share $ (0.80 )
Equity in loss of TURA (0.04 )
Adjusted CPAC, Inc. diluted earnings per common share $ (0.84 )
Reported CPAC, Inc. comprehensive loss $ (3,088,396 )
Equity in loss of TURA (179,584 )
Other comprehensive income of TURA 56,496
Adjusted CPAC, Inc. comprehensive loss $ (3,211,484 )
3 - BUSINESS INVESTMENT

In September 2004, the Company acquired the remaining 20% ownership interest in its then majority-owned subsidiary CPAC Asia Imaging Products Limited for $600,000; $300,000 in cash, and a three-year, non-interest bearing promissory note for $300,000 (principal payments of $100,000 annually). The amount paid represents a discount to CPAC Asia's net asset fair market value, and as such, has resulted in a proportionate reduction in the subsidiaries' property, plant, and equipment.

From the date of the acquisition, the Company recognized 100% of the operating results of CPAC Asia in its consolidated statement of operations.

4 - INVENTORY

Inventory as of March 31, ~~2005~~2006 and ~~2004~~2005 is summarized as follows:

	2005	2004
	2006	2005
Raw materials and purchased parts	$ 68,~~919~~451,~~868~~264	$ 6,~~602~~919,~~331~~868
Work-in-process	1,~~163~~271,~~805~~515	1,~~175~~163,~~438~~805
Finished Goods	10,~~674~~412,~~190~~582	910,~~453~~674,~~230~~190
	$ 18,757,863	$ 17,230,999
	$ 20,135,361	$ 18,757,863

The balances presented above are net of inventory reserves amounting to approximately $1,~~170~~037,000 and $1,~~350~~170,000 at March 31, ~~2005~~2006 and ~~2004~~2005, respectively.

CPAC, Inc. And Subsidiaries
Notes to Consolidated Financial Statements
for the Years Ended March 31, 2005, 2004 and 2003
5 - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are comprised of the following at March 31:

	2005		2004
	2006		2005
Land	$ ~~844~~794,~~925~~296		$ ~~898~~844,~~488~~925
Buildings and improvements	12,~~808~~615,~~323~~605		12,~~803~~808,~~058~~323
Machinery and equipment	24,~~585~~123,~~419~~849		2324,~~607~~585,~~629~~419
Furniture and fixtures	1988,~~015,745~~557		~~950~~1,~~967~~015,745
Leasehold improvements	2,~~102~~086,~~299~~763		2,~~172~~102,~~492~~299
Construction-in-progress	~~106~~145,~~131~~458		~~347~~106,~~982~~131
	41,462,842		40,780,616
	40,754,528		41,462,842
Less: Accumulated depreciation	(2627,~~181~~159,~~556~~156	)	(2426,~~511~~181,~~595~~556	)
	$ 15,281,286		$ 16,269,021
	$ 13,595,372		$ 15,281,286

~~Depreciation expense for the years ended March 31, 2005, 2004, and 2003 was $2,430,525, $2,530,698, and $2,542,985, respectively.~~ 37

Depreciation expense for the years ended March 31, 2006, 2005, and 2004 was $2,194,326, $2,430,525, and $2,530,698, respectively.

6 - GOODWILL AND INTANGIBLE ASSETS

OnA ~~April~~summary ~~1, 2002 the Company adopted the provisions~~ of ~~SFAS~~changes ~~No. 142,~~in ~~"Goodwill and Other Intangible Assets." As required by~~ the ~~new standard, the methodologies to be followed differed somewhat from the previous accounting standard followed by the~~ Company,'s ~~SFAS~~goodwill ~~No. 121, "Accounting~~ for the ~~Impairment~~year ofended ~~Long-lived Assets." Of the $10.7~~March ~~million of net goodwill recorded on the balance sheet at April 1~~31, ~~2002,~~2006 ~~approximately~~and ~~$10.5 million~~2005 ~~pertained~~by toSegment ~~the~~is ~~Company's~~as ~~fiscal~~follows ~~1998~~(in ~~acquisition of a commercial cleaning operation subsequently named Cleaning Technologies Group.~~ thousands):

At the time of the asset purchase, the acquisition accounting used in allocating the purchase price resulted in the establishment of approximately $11.9 million of goodwill. This purchase price reflected market prices for entities that owned well-established brands. In the subsequent four years that the Company owned this operation, prior to adoption of SFAS No. 142, traditional distribution markets began a slow trend towards consolidation; and the expected efficiencies from integrating manufacturing became more difficult than originally thought. Despite management changes in key sales and marketing positions, expected sales growth never materialized. In early fiscal 2003, it became apparent that post "9/11" impacts on the entity's distribution channels were not temporary and that the Company's biggest customer would be using the Company's products on a reduced basis, due to closing numerous locations during their bankruptcy proceedings. In connection with the Company's adoption of SFAS No. 142, the CTG business discounted cash flow analysis was used to determine the fair market value of CTG's net assets, incorporating projected earnings based on historical and budgeted 2003 estimates. The first step of the impairment test calculation using these amounts showed that the fair market value of the CTG business (as measured by future, discounted cash flows) was less than the recorded carrying value of the net assets of the entity, indicating potential impairment. Step two of the impairment calculation demonstrated that the entire amount of goodwill recorded on the balance sheet for CTG was impaired, thus, necessitating the SFAS No. 142 adoption adjustment. The effect was to reduce the carrying value of goodwill by approximately $6.3 million, net of income tax benefit of $4.2 million, or $1.24 per diluted share. The adjustment is shown as a cumulative effect of change in accounting principle in the consolidated statements of operations and comprehensive income for the year ended March 31, 2003. The income tax benefit realized, netted with the previously recognized deferred tax credit, resulted in the recording of a long-term deferred tax asset upon adoption. This asset has been grouped with other long-term deferred tax assets on the Company's consolidated balance sheet.

	March 31, 2006	March 31, 2005
Fuller Brands	$ 0	$ 0
Imaging	193	193
Total	$ 193	$ 193

AAt ~~summary~~March 31, 2006 and 2005, other intangible assets consisted primarily of ~~changes~~a incontractual license agreement allowing the Company's ~~goodwill~~to ~~for~~manufacture and distribute products through the ~~year~~use ~~ended~~of the trademarks and formulas of Stanley Home Products. The license is being amortized over the contract period, which expires on March 31, 2010. The original cost pertaining to this intangible at March 31, 2006 and 2005 bywas ~~Segment~~$2,250,000, while accumulated amortization at March 31, 2006 and 2005 amounted to $1,650,000 and $1,500,000, respectively. Estimated annual amortization for all intangibles is asexpected ~~follows~~to ~~(in~~approximate ~~thousands):~~$154,000 for the years ending March 31, 2007 through March 31, 2010.

March 31, 2005 March 31, 2004
Fuller Brands $ 0 $ 0
Imaging 193 193
Total $ 193 $ 193
At March 31, 2005 and 2004, other intangible assets consisted primarily of a contractual license agreement allowing the Company to manufacture and distribute products through the use of the trademarks and formulas of Stanley Home Products. The license is being amortized over the contract period, which expires on March 31, 2010. The original cost pertaining to this intangible at March 31, 2005 and 2004 was $2,250,000 and $2,250,000, while accumulated amortization at March 31,
CPAC, Inc. And Subsidiaries
Notes to Consolidated Financial Statements
for the Years Ended March 31, 2005, 2004 and 2003
2005 and 2004 amounted to $1,500,000 and $1,350,000, respectively. Estimated annual amortization for all intangibles is expected to approximate $154,000 for the years ending March 31, 2006 through March 31, 2010.
7 - DEBT

At March 31, 2005 and 2004, debt consisted of the following:
At March 31, 2006 and 2005, debt consisted of the following:
	2005	2004
	2006	2005
Revolving credit agreement with a bank with interest payable monthly at the 30 day LIBOR rate plus 1.25% to 2.00%, based on funded debt to EBITDA parameters. LIBOR rate was 2.88% at March 31, 2005. The maximum availability under this agreement is $3,000,000 ($5,000,000 at March 31, 2004), with all amounts outstanding due October 31, 2007. The revolving credit agreement is collateralized by substantially all of the assets of the Company, excluding CPAC Europe, N.V., and CPAC Asia Imaging Products Limited.	$ 0	$ 0
Revolving credit agreement with a bank with interest payable monthly at the 30 day LIBOR rate plus 1.25% to 2.00%, based on funded debt to EBITDA parameters. LIBOR rate was 4.83% at March 31, 2006. The maximum availability under this agreement is $3,000,000, with all amounts outstanding due October 31, 2007. The revolving credit agreement is collateralized by substantially all of the assets of the Company, excluding CPAC Europe, N.V., and CPAC Asia Imaging Products Limited.	$ 0	$ 0
Industrial Revenue Bonds, with interest payable monthly at a variable rate 2.87% at March 31, 2005 (1.10% at 2004), maturing in June 2009. The bonds are collateralized by a standby letter of credit (LOC) issued by a bank, which requires an annual fixed fee payment of 1.25% of the LOC value.	6,000,000	6,000,000
Industrial Revenue Bonds, with interest payable monthly at a variable rate 4.88% at March 31, 2006 (2.87% at 2005), maturing in June 2009. The bonds are collateralized by a standby letter of credit (LOC) issued by a bank, which requires an annual fixed fee payment of 1.25% of the LOC value.	6,000,000	6,000,000
Term notes and revolving credit agreement with a foreign bank with interest rates ranging from 5.36% to 6.30%. The revolving credit agreement is collateralized by the net assets of CPAC Europe, N.V.	730,949	809,675
Term notes and revolving credit agreement with a foreign bank with interest rates ranging from 5.45% to 6.30%. The revolving credit agreement is collateralized by the net assets of CPAC Europe, N.V.	540,484	730,949
Other	~~361~~217,~~472~~289	~~171~~361,~~970~~472
	7,092,421	6,981,645
	6,757,773	7,092,421
Less: Amounts due within one year	~~263~~238,~~772~~624	~~210~~263,~~174~~772
	$ 6,828,649	$ 6,771,471
	$ 6,519,149	$ 6,828,649

On June 10, 2005, the Company's line of credit agreement (Agreement) with Bank of America, N.A. (BOA) was amended, reducing its maximum borrowing capacity under the facility to $3,000,000 and extending its maturity date until October 31, 2007. The Agreement requires the Company to meet various debt covenants, including minimum deposit liquidity, minimum net worth, debt service coverage, funded debt to EBITDA, as well as limitations on capital expenditures, and amounts spent on acquisitions~~, of which the Company was in compliance or received appropriate waivers~~. The Company also renewed its $6.2 million letter of credit facility, which collateralizes the Fuller Brands' Industrial Revenue Bonds, until October 31, 2007~~, and as such, has continued to classify the Bonds as long-term at March 31, 2005~~.

~~The~~At ~~Company's~~September 30, ~~wholly-owned~~2005 ~~subsidiary~~and December 31, ~~CPAC~~2005, ~~Asia~~the ~~Imaging~~Company ~~Products~~was ~~Limited,~~in ~~has~~violation aof ~~line~~the ofminimum ~~credit~~net ~~with~~worth, andebt ~~international~~service ~~bank~~coverage, ~~amounting~~and funded debt to ~~20 million~~EBITDA ~~baht~~covenants. ~~(approximately~~Although ~~$514,000~~the ~~based~~Company onhad ~~the~~not ~~year-end~~borrowed ~~conversion~~under ~~rate~~its inrevolving ~~Thailand). Interest~~credit onagreement ~~the~~with ~~line~~BOA isin atseveral years, the ~~bank~~Company's ~~announced~~Agreement ~~prime~~contains ~~rate~~a inprovision ~~Thailand,~~related ~~which~~to ~~was~~the ~~7.75%~~letter atof ~~March~~credit that BOA provided (maturing on October 31, ~~2005. CPAC~~2007), ~~Asia~~which ~~had~~collateralizes ~~borrowings against~~ the ~~line~~$6,000,000 atIndustrial ~~March 31~~Revenue Bonds, ~~2005~~which ~~and~~are ~~2004~~scheduled ofto $0mature ~~and~~in ~~$1,402,~~June ~~respectively~~2009.

~~Annual maturities of debt for the next five fiscal years are as follows: 2006: $263,772; 2007: $250,646; 2008: $143,228; 2009: $123,089, and 2010: $6,113,587.~~38

On November 9, 2005, Bank of America issued a letter formally acknowledging that Events of Default had occurred related to the Agreement. The Bank did not agree to any waiver of the covenant violations or Events of Default, and required and demanded, strict compliance with the terms of the Agreement. In addition, although they reiterated that the line of credit was still in place, they discontinued the automatic borrowing and repayment procedures applicable to the line of credit and required future request for advances under the line to be evaluated on a case-by-case basis and made at the Bank's sole and absolute discretion.

Although the Bank did not cancel the letter of credit they previously provided, which was scheduled to mature as of October 31, 2007, and as indicated above, served as collateral for the Industrial Revenue Bonds, due to the covenant violations (Events of Default), the Company re-classified the debt obligation related to the Industrial Revenue Bonds to a current liability as of September 30 and December 31, 2005.

The Company's wholly-owned subsidiary, CPAC Asia Imaging Products Limited, has a line of credit with an international bank amounting to 20 million Baht (approximately $488,000 based on the year-end conversion rate in Thailand). Interest on the line is at the bank's announced prime rate in Thailand, which was 8.25% at March 31, 2006. CPAC Asia had not accessed its line of credit at March 31, 2006 and 2005, respectively.

Annual maturities of debt for the next five fiscal years are as follows: 2007: $238,624; 2008: $6,128,952; 2009: $110,777; 2010: $100,065; and 2011: $63,028

8 - SHAREHOLDERS' EQUITY

Stock Transactions

During fiscal 2003, the Company repurchased and retired 178,287 shares of its common stock, respectively, at an average cost of $5.24 per share, for a total cost of approximately $935,000, as part of previously announced Board of Directors' authorized stock buy back plans.

Stock Options

The Company maintains an Executive Long-Term Stock Investment Plan (the Plan) for key employees, which allows issuance of incentive stock options, nonqualified stock options, reload options, and restricted performance shares. The Plan has reserved for issuance to key employees 350,000 shares of the Company's common stock. Upon exercise, an employee granted an option under the Plan may pay for the Company's stock either with cash or with Company stock already owned by the employee, valued at the fair market value of the stock on the exercise date. The term of the option is determined by the Compensation Committee (the Committee), with most grants having terms of ten years (five years in the case of a greater than 10% shareholder). The options may be exercised in cumulative annual increments of the greater of 25% or 2,500 commencing one year after the date of the grant.

~~CPAC~~The Company also maintains a Non-Employee Directors Stock Option Plan. At the inception of the Plan, ~~Inc~~each non-employee director was granted an option to purchase 10,000 shares of the Company's common stock, on a one-time basis for past service rendered to the Board of Directors, at the fair market value at the date of the grant. ~~And~~The ~~Subsidiaries~~term of the option grants is for ten years. In addition, the Directors Plan calls for an annual automatic grant for the purchase of 3,000 shares, per director, of the Company's common stock, on the first Friday after the annual meeting of Shareholders, at a price equal to the fair market value at that date. The term of these grants is also ten years. During fiscal 2006, 2005, and 2004, options of 15,000, 12,000, and 9,000 were granted each year, respectively, pursuant to the Directors Plan.

Notes to Consolidated Financial Statements

for the Years Ended March 31, 2005, 2004 and 2003

The Company also maintains a Non-Employee Directors Stock Option Plan. At the inception of the Plan, each non-employee director was granted an option to purchase 10,000 shares of the Company's common stock, on a one-time basis for past service rendered to the Board of Directors, at the fair market value at the date of the grant. The term of the option grants is for ten years. In addition, the Directors Plan calls for an annual automatic grant for the purchase of 3,000 shares, per director, of the Company's common stock, on the first Friday after the annual meeting of Shareholders, at a price equal to the fair market value at that date. The term of these grants is also ten years. During fiscal 2005, 2004, and 2003, options of 12,000, 9,000, and 9,000 were granted each year, respectively, pursuant to the Directors Plan.

In addition, the Company has customarily granted new Directors options to purchase 15,000 shares upon their election.

~~As of March 31, 2005, total options outstanding are summarized as follows:~~39

	Shares		Range of Option Price Per Share
Options outstanding -- March 31, 2002	996,213		$ 5.08	--	$ 12.00
Exercised	0
Expired	(103,425	)	6.25	--	11.56
Granted	69,000		5.02	--	6.16
Options outstanding -- March 31, 2003	961,788		$ 5.02	--	$ 11.81
Exercised	(1,562	)	5.08
Expired	(177,290	)	5.08	--	11.56
Granted	259,000		5.27	--	6.27
Options outstanding -- March 31, 2004	1,041,936		$ 5.02	--	$ 12.00
Exercised	0
Expired	(93,025	)	5.33	--	11.56
Granted	12,000		5.30
Options outstanding -- March 31, 2005	960,911		$ 5.02	--	$ 12.00
Options exercisable:
March 31, 2005	794,411		$ 5.02	--	$ 12.00
March 31, 2004	693,686		$ 5.02	--	$ 12.00

As of March 31, 2006, total options outstanding are summarized as follows:

The following table summarizes information about options outstanding at March 31, 2005:

	Shares		Range of Option Price Per Share
Options outstanding -- March 31, 2003	961,788		$ 5.02	--	$ 11.81
Exercised	(1,562	)	5.08
Expired	(177,290	)	5.08	--	11.56
Granted	259,000		5.27	--	6.27
Options outstanding -- March 31, 2004	1,041,936		$ 5.02	--	$ 12.00
Exercised	0
Expired	(93,025	)	5.33	--	11.56
Granted	12,000		5.30
Options outstanding -- March 31, 2005	960,911		$ 5.02	--	$ 12.00
Exercised	0
Expired	(157,611	)	6.33	--	11.70
Granted	57,500		5.01	--	5.06
Options outstanding -- March 31, 2006	860,800		$ 5.01	--	$ 11.63

Options exercisable:
March 31, 2006	768,550		$ 5.01	--	$ 11,63
March 31, 2005	794,411		$ 5.02	--	$ 12.00

Year Granted	Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Fair Value of Options	Number Exercisable	Weighted Average Exercise Price
1996	152,811	0.83	$4.33	152,811	$ 11.63
1997	58,500	1.30	4.11	58,500	10.62
1998	79,500	2.40	4.02	79,500	11.64
1999	87,000	3.20	3.80	87,000	10.14
2000	99,000	4.20	2.45	99,000	7.56
2001	44,500	5.20	2.15	44,500	6.77
2002	194,600	6.40	1.72	166,850	6.33
2003	49,000	7.70	1.54	31,500	6.34
2004	184,000	8.20	0.76	70,750	5.48
2005	12,000	9.40	0.65	4,000	5.30
Totals	960,911	4.70	--	794,411	$ 8.19

The following table summarizes information about options outstanding at March 31, 2006:

As permitted by SFAS No. 123, the Company will continue to apply the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" in accounting for employee stock options. Had compensation cost been determined based on the fair value at the grant dates for awards under the Company's stock plans in accordance with SFAS No. 123, net income and diluted earnings per share would have been reduced by $69,000 ($0.01), $82,000 ($0.02), and $77,000 ($0.02) in fiscal 2005, 2004, and 2003, respectively.

Year Granted	Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Fair Value of Options	Number Exercisable	Weighted Average Exercise Price
1997	58,500	0.30	$4.11	58,500	$10.62
1998	79,500	1.40	4.02	79,500	11.64
1999	87,000	2.20	3.80	87,000	10.14
2000	99,000	3.20	2.45	99,000	7.56
2001	44,500	4.20	2.15	44,500	6.77
2002	189,800	5.40	1.72	189,800	6.33
2003	49,000	6.70	1.54	40,250	6.36
2004	184,000	7.20	0.76	134,500	5.48
2005	12,000	8.40	0.65	8,000	5.30
2006	57,500	9.10	0.46	27,500	5.05
Totals	860,800	4.70	--	768,550	$ 7.38

~~CPAC~~As permitted by SFAS No. 123, ~~Inc~~the Company will continue to apply the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. ~~And~~25, ~~Subsidiaries~~"Accounting for Stock Issued to Employees" in accounting for employee stock options. Had compensation cost been determined based on the fair value at the grant dates for awards under the Company's stock plans in accordance with SFAS No. 123, net income and diluted earnings per share would have been reduced by $72,000 ($0.01), $69,000 ($0.01), and $82,000 ($0.02) in fiscal 2006, 2005, and 2004, respectively.

~~Notes~~The tofair ~~Consolidated~~value ~~Financial~~of ~~Statements~~these options were estimated at grant date using the Black-Scholes option pricing model with the following weighted-average assumptions for 2006, 2005, and 2004:

for the Years Ended March 31, 2005, 2004 and 2003

	2006	2005	2004
Expected life	5 years	5 years	5 years
Historical volatility	17%	22%	26%
Risk free rate of return	3.9%	3.5%	2.4%-3.0%
Expected dividend yield	5.5%	5.3%	5.2%
Annual forfeiture rate	0%	0%	0%

The fair value of these options were estimated at grant date using the Black-Scholes option pricing model with the following weighted-average assumptions for 2005, 2004, and 2003:

	2005	2004	2003
Expected life	5 years	5 years	5 years
Historical volatility	22%	26%	37%
Risk free rate of return	3.5%	2.4%-3.0%	3.3%-4.3%
Expected dividend yield	5.3%	5.2%	4.6%
Annual forfeiture rate	0%	0%	0%

There have been no charges to income in any of the three years in connection with these options other than incidental expenses related to issuance of options.

Employee Benefits

In December 1999, the Company awarded 25,000 restricted shares of its $.01 par common stock to an executive officer of the Company subject to certain conditions and restrictions. The shares vest ifwhen certain targeted earnings per share levels are reached, at which time the restrictions will lapse. No To date, the Company has not reached the targeted earnings per share amount, and therefore, no expense has been recognized for the years ended March 31, ~~2005~~2006, ~~2004~~2005, and ~~2003~~2004, respectively.

The Company maintains adeferred ~~contributory~~compensation ~~profit~~agreements ~~sharing~~with ~~plan~~one ~~[401(k)] for the benefit~~ of ~~substantially all domestic employees. Contributions to the plan may be made for each plan year in such amounts as the Board of Directors may, at~~ its ~~discretion,~~executive ~~determine. In~~officers ~~addition, the Company will also match to a maximum~~ of ~~3% of~~ the ~~participant's compensation each contribution made by a plan participant for the plan year in an amount equal to $~~Company.50 ~~for~~At ~~each~~March 31, ~~$1.00~~2006 ofand ~~participant~~2005, ~~contribution. A~~total ~~participant~~amounts ~~may~~accrued ~~contribute~~related up to ~~28%~~these ofagreements ~~compensation~~amounted to ~~the~~approximately ~~plan. The amount charged to expense in connection with this plan was~~ $~~346~~2,~~000~~202, ~~$370,~~000, and $~~409~~2,066,000, respectively, ~~for~~and ~~the~~have ~~years~~been ~~ended~~recorded ~~March~~in ~~31,~~other ~~2005,~~long-term ~~2004,~~liabilities ~~and~~in ~~2003~~the consolidated balance sheet.

The Company maintains a contributory profit sharing plan [401(k)] for the benefit of substantially all domestic employees. Contributions to the plan may be made for each plan year in such amounts as the Board of Directors may, at its discretion, determine. In addition, the Company will also match to a maximum of 3% of the participant's compensation each contribution made by a plan participant for the plan year in an amount equal to $.50 for each $1.00 of participant contribution. A participant may contribute up to 28% of compensation to the plan. The amount charged to expense in connection with this plan was $346,000, $346,000, and $370,000, respectively, for the years ended March 31, 2006, 2005, and 2004.

The Company's foreign subsidiaries maintain defined contribution retirement and profit sharing plans, to the extent deemed appropriate, through separate plans. Contributions to these plans vary from Company contributions (CPAC Italia) to the Company matching a certain percentage of employee pretax contributions (CPAC Asia). Total expense for Company contributions for all international plans was not material.

The Company maintains a nonqualified deferred compensation plan for various key executives of the Company. Contributions to the plan consist of "excess" 401(k) deferrals and percentages of salaries and bonuses. No matching contribution by the Company is required. Compensation deferred will be invested by the Company in various investment grade "pooled accounts" on behalf of the participants. At March 31, ~~2005~~2006 and ~~2004~~2005, total assets and liabilities resulting from the nonqualified plan were approximately $~~476~~554,000 and $~~425~~476,000, respectively, and have been recorded in other long-term assets and other long-term liabilities in the consolidated balance sheet.

9 - IMAGING RESTRUCTURING

Related to this endeavor, the Company applied the provisions of SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" and accounted for the employee termination costs and other costs associated with the move under its guidelines. The total expenses incurred in this project were approximately $1,275,000. As of September 30, 2004, all termination benefit costs and other move-related costs accrued at March 31, 2004 were fully paid.

~~CPAC, Inc. And Subsidiaries~~41

Notes to Consolidated Financial Statements

for the Years Ended March 31, 2005, 2004 and 2003

The table below summarizes the total costs accrued and paid under the criteria described in SFAS No. 146:

	Severance Pay and Benefits Reserve		Other Associated Costs Reserve		Total
First Quarter Fiscal 2004 Charges	$ 168,000		$ 12,000		$ 180,000
First Quarter Fiscal 2004 Paid	0		0		0
June 30, 2003 Balance	168,000		12,000		180,000
Second Quarter Fiscal 2004 Charges	294,000		123,000		417,000
Second Quarter Fiscal 2004 Paid	(88,000	)	(107,000	)	(195,000	)
September 30, 2003 Balance	374,000		28,000		402,000
Third Quarter Fiscal 2004 Charges	104,000		430,000		534,000
Third Quarter Fiscal 2004 Paid	(226,000	)	(424,000	)	(650,000	)
December 31, 2003 Balance	252,000		34,000		286,000
Fourth Quarter Fiscal 2004 Charges	10,000		134,000		144,000
Fourth Quarter Fiscal 2004 Paid	(128,000	)	(161,000	)	(289,000	)
March 31, 2004 Balance	134,000		7,000		141,000
First Quarter Fiscal 2005 Charges	0		0		0
First Quarter Fiscal 2005 Paid	(100,000	)	(7,000	)	(107,000	)
June 30, 2004 Balance	34,000		0		34,000
Second Quarter Fiscal 2005 Charges	0		0		0
Second Quarter Fiscal 2005 Paid	(34,000	)	0		(34,000	)
September 30, 2004 Balance	$ 0		$ 0		$ 0

The Company completed the sale of the St. Louis facility on September 27, 2004 and recorded a gain on the sale of approximately $63,000.

In the fourth quarter of fiscal 2005, the Company concluded that it would not utilize, nor was able to sublease, its 35,000 square feet of warehouse space in St. Louis, Missouri, which it was renting under a ten-year lease obligation (with an option to terminate as of January 31, 2007, with 12 month's notification). The Company ~~then~~negotiated ~~entered into negotiations with its landlord, resulting in~~ a "termination of lease agreement" that ~~will~~allowed ~~allow~~ the Company to pay a settlement amount of $150,000 to terminate the lease as of June 30, 2005. The lease termination fee ~~has~~was ~~been~~ accrued at March 31, 2005 and included in the statement of operations under cost of sales. The Company vacated the leased warehouse premises, during the quarter ended June 30, 2005.

10 - INCOME TAX EXPENSE

Income (loss) before income taxes, ~~and cumulative effect adjustments~~ for the three years ended March 31 was as follows:

	2005		2004		2003
	2006		2005		2004
U.S.	$ (21,~~397~~281,~~479~~817	)	$ (52,~~116~~397,~~958~~479	)	$ 2(5,~~142~~116,~~705~~958	)
Foreign	1,~~137~~782,~~593~~618		1,~~298~~137,~~418~~593		~~954~~1,~~730~~298,418
	$ (1,259,886	)	$ (3,818,540	)	$ 3,097,435
	$ 500,801		$ (1,259,886	)	$ (3,818,540	)

Provisions (benefits) for income taxes for the three years ended March 31 were as follows:

	2005		2004		2003
	2006		2005		2004
Federal income taxes:
Current	$ (~~657~~50,000	)	$ (~~694~~657,000	)	$ ~~671~~(694,000	)
Deferred	2(50,~~688,~~000	)	(92,688,000	)	~~133~~(9,000	)
Foreign income taxes:
Current	8103,000		~~211~~8,000		~~138~~211,000
Deferred	3293,000		632,000		196,000
State income taxes:
Current	42(60,000	)	1942,000		7119,000
Deferred	~~474,000~~--		(2474,000	)	24(2,000	)
	$ 2,587,000		$ (469,000	)	$ 1,056,000
	$ 36,000		$ 2,587,000		$ (469,000	)

~~CPAC, Inc. And Subsidiaries~~42

Notes to Consolidated Financial Statements

for the Years Ended March 31, 2005, 2004 and 2003

The income tax provisions for 2003 shown above exclude the U.S. income tax benefit of $4,188,000 recognized in conjunction with the cumulative effect adjustment recorded upon adoption of SFAS No. 142, "Goodwill and other Intangible Assets."

The differences between the provision for income taxes and income taxes computed using the U.S. federal income tax rate are as follows:

	2005		2004		2003
	2006		2005		2004
Income tax expense (benefit) using statutory rates	$ ~~(428~~170,000	)	$ (1428,~~298,~~000	)	$ (1,~~053~~298,000	)
State income tax effect	23(40,000	)	1123,000		6311,000
CPAC Asia Imaging Products Limited earnings repatriation	~~117,000~~--		--117,000		--
Equity in loss of affiliate	~~85,000~~--		~~202~~85,000		61202,000
Investment in affiliate impairment	--		~~789,000~~--		--789,000
Deferred tax valuation reserve	3,215,000		--		--
Basis differential in investment	(1,244,000	)	--		--
Foreign income taxed at different rates	(347,000	)	(224,000	)	(168,000	)
Deferred tax valuation allowance	1,769,000		3,215,000		--
Resolution of tax uncertainties	(98,000	)	--		--
Foreign income taxed at different rates	(589,000	)	(347,000	)	(224,000	)
Nondeductible business expenses	29,000		47,000		45,000
Resolution of tax uncertainties	(50,000	)	(98,000	)	--
Other	(9,000	)	4,000		2,000
Nondeductible business expenses	27,000		29,000		47,000
	$ 2,587,000		$ (469,000	)	$ 1,056,000
Other	(7,000	)	(9,000	)	4,000
	$ 36,000		$ 2,587,000		$ (469,000	)

OnThe ~~October 22~~2006 provision, ~~2004~~due to continuing domestic tax losses, ~~the~~included ~~American~~domestic ~~Jobs~~state ~~Creation~~tax ~~Act~~provisions, ofwhich ~~2004~~reflect ~~(the~~mostly ~~"Act")~~minimum ~~became~~state ~~law~~tax liabilities in the ~~United~~states ~~States. Included~~that in the ~~Act~~Company files, isas awell ~~provision~~as ~~that~~benefits ~~allows~~recorded ~~for~~and areversal ~~one-time~~of certain tax ~~dividends~~reserves ~~received~~previously ~~deduction~~established, in connection with the finalization of ~~85%~~tax audits. The consolidated 2006 provision also included taxes on the combined taxable income of the Company's foreign ~~earnings~~subsidiaries, ~~remitted~~which was impacted by ~~foreign~~the ~~subsidiaries~~benefits toof ~~U.S.~~the ~~parent~~CPAC ~~companies~~Asia ~~through~~tax ~~December 31~~holiday in Thailand, ~~2005. The~~the ~~portions~~utilization of ~~the~~CPAC ~~earnings~~Africa's ~~available~~net ~~for~~operating ~~remittance~~loss ~~are~~carryforward, ~~those~~and ~~earnings~~expense ~~previously~~related ~~designated~~to asvaluation ~~reinvested~~allowances ~~indefinitely~~set up against domestic, CPAC Europe's, and CPAC Asia's net deferred tax assets.

~~The~~In ~~Company~~addition, ~~has~~in ~~evaluated~~2006 the ~~legislation,~~Company ~~and~~recorded ~~determined~~a ~~that~~deferred ~~certain~~tax ~~previously~~asset ~~unremitted~~of ~~earnings~~approximately ~~related~~$1,244,000 ~~only~~in relation to ~~its~~the ~~wholly~~write-~~owned~~off ~~foreign~~of ~~subsidiary,~~its ~~CPAC~~investment ~~Asia~~in ~~Imaging~~TURA ~~Products~~of ~~Limited~~approximately $3,191,000. ~~would~~The bedeferred ~~repatriated~~tax asset was recorded due to the determination by the Company that it will recognize the loss on the investment for tax purposes in the foreseeable future. In ~~March~~The ofloss, ~~2005~~when recognized, ~~CPAC~~will ~~Asia~~qualify ~~declared~~as a ~~special~~capital ~~dividend~~loss, ofwhich ~~$2,297,000~~can ~~payable~~only be used to ~~CPAC,~~offset ~~Inc.~~capital gains and ~~remitted~~can ~~the~~be ~~amount~~carried ~~prior~~back tothree ~~March 31,~~years ~~2005~~and forward five years. The Company ~~has~~also recorded ~~the~~a ~~resulting~~fully ~~federal~~offsetting ~~tax~~valuation ~~liability~~allowance ofagainst ~~approximately~~this ~~$117~~deferred tax asset; because,~~000,~~ ~~after~~at ~~the~~this ~~one-~~time ~~deduction~~, inthe ~~its~~Company ~~2005~~determined ~~tax~~that ~~provision~~it is more likely than not that the benefit will not be realized.

AtIn ~~March~~2005, the Company, after evaluating the October 3122, ~~2005~~2004 American Jobs Creation Act of 2004 (the "Act"), ~~all~~determined ~~other~~that ~~foreign~~certain ~~subsidiary~~previously ~~undistributed~~unremitted earnings ~~were~~related ~~considered~~only to beits ~~permanently~~wholly-owned ~~reinvested~~foreign subsidiary, ~~and~~CPAC asAsia ~~such~~Imaging Products Limited, ~~deferred~~would ~~income~~be ~~taxes~~repatriated. ~~have~~The ~~not~~repatriation ~~been~~took ~~provided~~advantage onof ~~this~~the ~~income,~~provision asin the ~~Company~~Act ~~does~~that ~~not~~allowed ~~plan~~for toa ~~initiate~~one-time ~~any~~tax ~~action~~dividend ~~that~~received ~~would~~deduction ~~require~~of 85% of the ~~payment~~foreign ofearnings ~~income~~remitted ~~taxes~~by foreign subsidiaries to U. ItS. isparent ~~not~~companies ~~practicable~~through December 31, 2005. In March of 2005, CPAC Asia paid a special dividend of $2,297,000 payable to ~~estimate~~CPAC, Inc., with the ~~amount~~Company ofrecording ~~additional~~the resulting federal tax ~~that~~liability ~~might~~of beapproximately ~~payable~~$117,000 onin ~~this~~its ~~foreign~~2005 ~~income~~tax ifprovision, ~~distributed~~after the one-time deduction.

~~The~~Retained earnings of the Company's ~~Asian~~foreign ~~subsidiary~~subsidiaries ~~was~~were ~~granted~~approximately ~~certain~~$6,008,000 ~~exemptions~~and ~~from~~$4,368,000 ~~corporate~~at ~~income~~March 31, ~~tax~~2006 byand ~~Thailand's~~2005. ~~Board~~Deferred oftaxes ~~Investment~~have ~~Promotion,~~not ~~based~~been provided on ~~manufacturing~~such ofundistributed ~~photographic~~earnings, ~~solutions~~as ~~and~~they ~~exporting~~are ~~certain~~considered ~~levels~~to ofbe ~~manufactured~~permanently ~~products. The~~reinvested, ~~exemption commenced in fiscal 2000~~ and ~~expires~~the inCompany ~~August~~does ~~2006~~not ~~subject~~plan to ~~meeting~~initiate ~~certain~~any ~~terms~~action ~~and~~that ~~conditions. The~~would ~~net~~require ~~impact of~~ the ~~holiday~~payment ~~was~~of ~~to increase net~~ income bytaxes ~~approximately~~on ~~$371,000~~these ($earnings.08 ~~per~~It ~~diluted~~is ~~share),~~not ~~$306,000~~practicable ~~($.06~~to ~~per~~estimate ~~diluted~~the ~~share),~~amount ~~and~~of ~~$172,000~~additional ~~($.03~~tax ~~per~~that ~~diluted~~might ~~share),~~be ~~respectively,~~payable ~~for~~on ~~fiscal~~this ~~2005,~~foreign ~~2004,~~income ~~and~~if ~~2003~~distributed.

CPAC Asia was granted certain exemptions from corporate income tax by Thailand's Board of Investment Promotion, ~~Inc~~based on manufacturing of photographic solutions and exporting certain levels of manufactured products. ~~And~~The ~~Subsidiaries~~exemption commenced in fiscal 2000 and expires in August 2006 subject to meeting certain terms and conditions. The net impact of the holiday was to increase net income by approximately $403,000 ($.08 per diluted share), $371,000 ($.08 per diluted share), and $306,000 ($.06 per diluted share), respectively, for fiscal 2006, 2005, and 2004.

~~Notes to Consolidated Financial Statements~~43

for the Years Ended March 31, 2005, 2004 and 2003

Temporary differences and carryforwards, which give rise to deferred tax assets and liabilities at March 31, are as follows:

	2005		2004
	2006		2005
Deferred tax assets:
Current:
Accounts receivable	$ ~~213~~390,000		$ ~~197~~234,000
Inventory	~~437~~316,000		~~526~~439,000
Compensation related accruals	~~374~~311,000		~~388~~374,000
Other	7885,000		1483,000
	1,102,000		1,~~125~~130,000
Noncurrent:
Investment	~~200~~1,244,000		--200,000
Deferred compensation	~~607~~996,000		~~572~~967,000
Foreign NOL carryforward	~~417~~296,000		~~368~~417,000
Domestic NOL carryforward	~~135~~634,000		--135,000
Intangibles	21,~~040~~710,000		2,~~406~~040,000
Other	41103,000		--41,000
	3,440,000		3,346,000
	4,983,000		3,800,000
Total deferred tax assets	46,~~542~~085,000		4,~~471~~930,000
Less valuation allowance	(34,~~215~~861,000	)	--(3,335,000	)
	1,327,000		4,471,000
	1,224,000		1,595,000
Deferred tax liabilities:
Noncurrent:
Property, plant and equipment	(~~910~~733,000	)	(~~687~~1,001,000	)
Other	--		(6,000	)
Deferred investment earnings	(252,000	)	(240,000	)
	(910,000	)	(693,000	)
Other	(3,000	)	--
Net deferred tax assets	$ 417,000		$ 3,778,000
	(988,000	)	(1,241,000	)
Net deferred tax assets	$ 236,000		$ 354,000

In the fourth quarter of fiscal 2005, the Company determined that a valuation allowance against its domestic net deferred tax assets was required. Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109), requires the Company to exercise judgement about its future results in assessing the realizability of our deferred tax assets. SFAS No. 109 requires that greater weight be given to previous cumulative losses than the outlook for future profitability when determining whether deferred assets can be used. At March 31, 2005, the Company has gross deferred tax assets of approximately $4,542,000, of which $4,125,000 pertained to domestic operations, with the remaining representing foreign subsidiary net operating loss carryforwards. Due to the evidence of cumulative losses incurred over the last three years, the Company determined that the likelihood of realization of certain domestic deferred tax assets iswas uncertain and recorded a valuation allowance of $3,215,000 in the fourth quarter of fiscal 2005, to reduce the net deferred tax assets to approximately $~~417~~354,000. ~~When~~ domestic operating results demonstrate sustained profitability, or the Company is able to develop additional tax planning strategies, adjustments to these allowances will be required and may affect future net income. The foreign net operating loss carryforward of approximately $1.4 million attributable to CPAC Africa can be carried forward indefinitely and is expected to be fully utilized. The Company's unused domestic net operating loss of approximately $397,000 can be carried forward for 20 years through March 31, 2025. The Company's domestic alternative minimum tax credits of approximately $40,000 can be carried forward indefinitely.

During the first quarter of fiscal 2006, the Company determined that a valuation allowance was needed against foreign net operating loss carryforwards of CPAC Europe and recorded as such. In addition, with the tax holiday expiring in Thailand in August 2006, a valuation allowance was recorded against a deferred tax asset for a certain receivable balance in CPAC Asia, written off for financial statement purposes, but not yet deducted for tax purposes, due to the uncertainty as to the ultimate success in obtaining regulatory approval to make a claim to deduct this bad debt. When each of the domestic and CPAC Europe operating results demonstrates sustained profitability or the Company is able to develop tax planning strategies that generates sufficient taxable income, adjustments to the related valuation allowances may be required and could affect future net income.

At March 31, 2006, the Company has approximately $800,000 in foreign net operating loss carryforwards in CPAC Africa, which can be carried forward indefinitely, and are expected to be fully utilized. The Company also has approximately $1,865,000 in U.S. net operating loss carryforwards, which can be carried forward for 20 years and begin to expire on March 31, 2025. The Company also has foreign net operating losses of approximately $168,000 in CPAC Europe, which can be carried forward indefinitely. The Company also has general domestic capital loss carryforwards of approximately $176,000, which can be carried forward for 5 years, and has domestic alternative minimum tax credits of approximately $42,000, which can be carried forward indefinitely.

11 - COMMITMENTS

Royalty Agreement

The Company has a license agreement with an unrelated third party to manufacture and distribute products through the use of the trademarks and formulas of Stanley Home Products in the U.S., Puerto Rico, and Canada, over the life of the agreement which expires, unless terminated earlier, on March 31, 2010. The Company is required to pay royalties equal to the greater of $325,000 per year or a maximum of 3% of the net selling price of products sold under the licensing agreement. Total royalties paid in ~~2005~~2006, ~~2004~~2005, and ~~2003~~2004 were $325,000 per year. The Company recorded a liability equal to the net present value of the minimum, annual royalty payments, and capitalized the value of the license agreement, which is being amortized over the contract period. The obligation recorded at March 31, ~~2005~~2006 and ~~2004~~2005 was $1912,~~068,654~~704 and $1,~~203~~068,~~303~~654, respectively, and is included in other liabilities.

CPAC, Inc. And Subsidiaries

Notes to Consolidated Financial Statements

for the Years Ended March 31, 2005, 2004 and 2003

Lease Agreements

The Company leases certain facilities and equipment under operating leases, which expire at various dates through 2010. Some of the leases contain renewal options. Rent expense for the years ended March 31, ~~2005~~2006, ~~2004~~2005, and ~~2003~~2004 was $1,~~435~~364,000, $1,~~506~~435,000, and $1,~~364~~506,000, respectively.

The above leases have been classified as operating leases in accordance with the provisions of the Statement of Financial Accounting Standards No. 13. The future minimum rental payments required under the leases for the fiscal years ended subsequent to March 31, ~~2005~~2006 are as follows:

	2006	$ 1,291,001
	2007	$ 1,170,546
	2007	1,141,110
	2008	962,349
	2008	909,436
	2009	743,922
	2009	684,875
	2010	115,743
	2010	88,468
	2011	--
		$ 4,114,890
		$ 2,992,560

Other Matters

The Company and its subsidiaries are parties to various environmental issues, legal actions, and complaints arising in the ordinary course of business. No such pending matters are expected to have a material adverse effect on the Company's financial position, results of operations, or cash flows.

12 - SEGMENT INFORMATION

Business Segments

	2005		2004		2003
	2006		2005		2004
Net sales to customers:
Fuller Brands	$ 5251,~~851~~700,~~390~~953		$ 52,~~101~~851,~~111~~390		$ 5652,~~068~~101,~~290~~111
Imaging	3435,~~361~~299,~~854~~440		3734,~~909~~361,~~634~~854		3937,~~222~~909,~~050~~634
Total net sales to customers	$ 87,~~213~~000,~~244~~393		$ 9087,~~010~~213,~~745~~244		$ 9590,~~290~~010,~~340~~745
Operating income (loss):
Fuller Brands	$ 1697,~~264,218~~662		$ 1,~~108~~264,~~017~~218		$ 21,~~838~~108,~~727~~017
Imaging	(1765,~~074,902~~317	)	(1,~~288~~074,~~723~~902	)	(1,~~282~~288,~~431~~723	)
	189,316		(180,706	)	4,121,158
	1,462,979		189,316		(180,706	)
Corporate expense	(~~133~~488,~~004~~654	)	(42133,~~986~~004	)	(~~246~~42,~~239~~986	)
Interest expense, net	(~~390~~407,~~792~~980	)	(~~460~~390,~~899~~792	)	(~~446~~460,~~812~~899	)
Consolidated income (loss), before non-operating income (expense), income taxes, and cumulative effect of change in accounting principle	$ (334,480	)	$ (684,591	)	$ 3,428,107
Consolidated income (loss), before non-operating income (expense) and income taxes	$ 566,345		$ (334,480	)	$ (684,591	)
Identifiable assets:
Fuller Brands	$ 2829,~~862~~675,~~451~~456		$ 2928,~~337~~862,~~358~~451		$ 3029,~~834~~337,~~314~~358
Imaging	2021,~~926~~714,~~921~~710		2421,~~530~~006,~~706~~212		24,~~813~~530,~~107~~706
Total segment assets	4951,~~789~~390,~~372~~166		5349,868,~~064~~663		5553,~~647~~868,~~421~~064
Corporate short-term investments	42,~~701~~660,~~635~~659		34,~~771~~701,~~295~~635		53,~~752~~771,~~040~~295
Net deferred income tax assets	--163,964		3282,~~409,177~~863		3,~~398~~409,177
Other corporate assets	43,~~930~~830,~~285~~359		34,~~684~~686,~~150~~627		23,~~881~~684,~~233~~150
Total consolidated assets	$ 5958,~~421~~045,~~292~~148		$ 6459,~~732~~539,~~686~~788		$ 6764,~~678~~732,~~871~~686
Depreciation and amortization:
Fuller Brands	$ 1,~~277~~202,~~266~~693		$ 1,~~370~~277,~~297~~266		$ 1,~~436~~370,~~377~~297
Imaging	1,~~307~~145,~~426~~800		1,~~314~~307,~~568~~426		1,~~290~~314,~~588~~568
Total depreciation and amortization	$ 2,~~584~~348,~~692~~493		$ 2,~~684~~584,~~865~~692		$ 2,~~726~~684,~~965~~865
Capital outlays:
Fuller Brands	$ ~~814~~333,~~139~~668		$ ~~763~~814,~~731~~139		$ ~~397~~763,~~304~~731
Imaging	~~733~~343,~~063~~454		1733,~~941,451~~063		1,~~265~~941,~~124~~451
Total capital outlays	$ 1677,~~547,202~~122		$ 21,~~705~~547,~~182~~202		$ 12,~~662~~705,~~428~~182

CPAC, Inc. And Subsidiaries

Notes to Consolidated Financial Statements

for the Years Ended March 31, 2005, 2004 and 2003

Operating income represents net sales less operating expenses and excludes interest expense (income), non-operating income (expense), and income taxes.

Intercompany receivables (payables) are eliminated from the identifiable assets presentation. Other differences between the Segment's operating results and assets and the Company's consolidated financial statements relate primarily to items recorded at the Corporate level and to other items excluded from Segment operating measurements. Corporate short-term investments are funds held for future use.

Financial information relating to the Company's sales and long-lived assets by geographic area is as follows:

	2005	2004	2003
	2006	2005	2004
Net sales:
United States	$ 7069,~~690~~104,~~342~~216	$ 7370,~~325~~690,~~623~~342	$ 8073,~~417~~325,~~875~~623
Foreign	1617,~~522~~896,~~902~~177	16,~~685~~522,~~122~~902	1416,~~872~~685,~~465~~122
	$ 87,213,244	$ 90,010,745	$ 95,290,340
	$ 87,000,393	$ 87,213,244	$ 90,010,745
Long-lived assets:
United States	$ 1514,~~198~~202,~~324~~688	$ 1715,~~786~~198,~~351~~324	$ 1817,~~822~~786,~~456~~351
Foreign	3,~~823~~162,~~165~~857	43,~~386~~823,~~414~~165	4,~~270~~386,~~015~~414
	$ 19,021,489	$ 22,172,765	$ 23,092,471
	$ 17,365,545	$ 19,021,489	$ 22,172,765

~~Foreign operations are located in Belgium, Italy, South Africa, and Thailand. Net sales are reported in the geographic area in which they originate. Inter-area transfers are not material.~~46

InForeign ~~addition~~operations are located in Belgium, ~~the~~China, ~~Company's~~Italy, ~~U.S.~~South ~~operations~~Africa, ~~had~~and ~~total~~Thailand. ~~export~~Net sales ~~for~~are ~~the~~reported ~~years~~in ~~ended~~the ~~March 31,~~geographic ~~2005,~~area ~~2004,~~in ~~and~~which ~~2003~~they oforiginate. ~~$1,961,988,~~Inter-area ~~$1,931,820,~~transfers ~~and~~are ~~$1,881,520,~~not ~~respectively~~material.

In addition, the Company's U.S. operations had total export sales for the years ended March 31, 2006, 2005, and 2004 of $1,948,626, $1,961,988, and $1,931,820, respectively.

13 - QUARTERLY FINANCIAL DATA (UNAUDITED)

The following table sets forth the unaudited quarterly results of operations for each of the fiscal quarters in the years ended March 31, ~~2005~~2006 and ~~2004~~2005:

	Net Sales	Gross Profit	Net Income (Loss)		Per Share Income Basic(1)		Per Share Income Diluted(1)
2005 Quarters As Previously Reported:
2006 Quarters:
Third	20,385,359	8,662,944	(57,537	)	(0.01	)	(0.01	)
Fourth	$ 23,366,689	$ 9,920,985	$ 1,077,194		$ 0.22		$ 0.22
Second	22,296,870	9,752,572	206,828		0.04		0.04
Third	19,752,858	8,473,425	(260,172	)	(0.05	)	(0.05	)
First	22,085,655	9,726,514	132,327		0.03		0.03
Second	21,457,279	8,656,076	(213,151	)	(0.04	)	(0.04	)
2005 Quarters: (2)
First	22,423,567	9,518,428	(139,070	)	(0.03	)	(0.03	)
Total	$ 87,000,393	$ 36,568,914	$ 464,801		$ 0.09		$ 0.09
2005 Quarters:
Fourth	$ 22,445,360	$ 9,209,586	$ (4,002,477	)	$ (0.81	)	$ (0.81	)
Third, as restated	20,385,359	8,617,478	(87,003	)	(0.02	)	(0.02	)
Second, as restated	22,296,870	9,698,745	172,001		0.03		0.03
First, as restated	22,085,655	9,632,780	70,593		0.01		0.01
Total	$ 87,213,244	$ 37,158,589	$ (3,846,886	)	$ (0.78	)	$ (0.78	)
2004 Quarters:
Fourth	$ 22,789,490	$ 9,271,242	$ (2,713,911	)	$ (0.55	)	$ (0.55	)
Third	20,508,772	8,664,300	(822,188	)	(0.17	)	(0.17	)
Second	23,532,329	10,302,618	(136,363	)	(0.03	)	(0.03	)
First	23,180,154	10,501,748	322,922		0.07		0.07
Total	$ 90,010,745	$ 38,739,908	$ (3,349,540	)	$ (0.68	)	$ (0.68	)
(1) Each quarter is calculated as a discrete period, and the sum of the four quarters may not equal the full year amount.
(2) For the fiscal year ended March 31, 2005, certain items requiring adjustment to previously issued quarterly

~~CPAC, Inc. And Subsidiaries~~47

Notes to Consolidated Financial Statements
for the Years Ended March 31, 2005, 2004 and 2003
financial statements for the year ended March 31, 2005 were noted. The adjustments, which relate to inventory, should have been recorded in earlier quarterly periods within the same fiscal year. The adjustments impacted inventory value, cost of sales, and income tax benefit for each quarter, resulting in a net additional expense in each of the three quarters as restated. The adjustments did not affect revenues, but did impact gross profits, net income (loss), and basic and diluted earnings per share in the range of $.01 to $.02 per quarter. The items requiring adjustment related to the valuation of a component of inventory. Management currently believes that no annual or quarterly financial statement for any prior period thereto, require adjustment. The restated results of operations for the quarter ended June 30, 2004 include a charge of $34,000 in cost of sales relating to the cumulative prior year effect of such adjustments.
Item 9.
CHANGES 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~~CPAC, ~~respectively,~~Inc. ~~have informed~~ (the ~~Board of Directors that, based upon their evaluations of the~~ Company~~'s disclosure controls and procedures as of the end of the period covered by its annual report (Form 10-K~~), ~~such~~maintains disclosure controls and procedures that are ~~not~~designed ~~effective as a result of the material weakness described below~~ to ensure that information required to be disclosed by the Company in ~~the~~ reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported on a timely basis and that such information is accumulated and communicated to management, (including the chief executive officer and the chief financial officer), as appropriate, to allow for timely decisions regarding required disclosure.

OnPreviously, ~~June~~as ~~28,~~described ~~2005,~~in ~~management~~Item 9A of ~~CPAC,~~the ~~Inc.~~Company's (Form 10-K for the ~~"Company")~~year ~~concluded~~ended ~~that~~March 31, 2005, the Company's ~~previously~~Chief ~~filed~~Executive ~~unaudited~~Officer ~~consolidated~~and ~~financial~~Chief ~~statements~~Financial ~~for~~Officer, respectively, informed the ~~periods~~Board ~~ended~~of ~~June~~Directors 30that, ~~2004,~~based ~~September~~upon ~~30,~~their ~~2004~~evaluation ~~and December~~of ~~31,~~the ~~2004~~Company's ~~included~~disclosure incontrols ~~its~~and ~~respective~~procedures ~~Forms~~as ~~10-Q~~of ~~should: (1)~~the noend ~~longer~~of bethe ~~relied~~period ~~upon~~covered ~~because~~by ofits anannual ~~error~~report in(Form 10-K), such ~~financial~~disclosure ~~statements~~controls asand ~~addressed~~procedures inwere ~~Accounting~~not ~~Principles~~effective, ~~Board~~as ~~Opinion~~a ~~No.~~result ~~20,~~of ~~and~~a ~~(2)~~material beweakness ~~restated~~in tointernal ~~reflect~~control ~~the~~over ~~accounting~~financial ~~adjustments~~reporting. ~~necessary~~The tomaterial ~~correct~~weakness ~~the~~related ~~error.~~to ~~Accordingly,~~ the ~~Company~~lack ~~has~~of ~~restated~~appropriate ~~its~~senior ~~financial~~management ~~results~~review ~~for~~over ~~the~~an ~~periods~~inventory ~~described~~valuation ~~above~~calculation and ~~intends~~spreadsheet towhich ~~file~~resulted ~~amendments~~in tothe ~~these~~restatement ~~Forms~~of ~~10-Q~~the asCompany's ~~soon~~previously asfiled ~~practical. The~~unaudited ~~Company~~consolidated ~~and~~financial statements for the ~~Audit~~periods ~~Committee~~ended ~~discussed~~June 30, ~~this~~2004; ~~matter~~September 30, ~~with~~2004; ~~the~~and ~~Company's~~December 31, ~~independent~~2004 ~~registered~~included ~~public~~in ~~accounting~~its ~~firm~~respective Forms 10-Q.

OnThe ~~June~~Company's 30management, ~~2005~~including the ~~Company~~Chief ~~announced~~Executive ~~that~~Officer itand ~~had~~Chief ~~filed~~Financial ~~for~~Officer, conducted an ~~extension~~evaluation of ~~time~~the toeffectiveness ~~file~~of ~~its~~our ~~Annual~~disclosure ~~Report~~controls onand ~~Form~~procedures 10(as defined in Rule 13a-K15(e) ~~with~~of the ~~Securities~~Exchange ~~and~~Act) as of March 31, 2006 pursuant to Rule 13a-15(b) under the Exchange ~~Commission. In~~Act ~~connection~~and ~~with~~has ~~preparation~~concluded ofthat the material weakness in the Company's ~~consolidated~~internal control over financial ~~statements~~reporting ~~for~~involving ~~the~~appropriate ~~fiscal~~senior ~~year~~management ~~ended~~review ~~March~~over ~~31,~~the ~~2005,~~inventory ~~certain~~valuation ~~items~~calculation ~~requiring~~and ~~adjustment~~spreadsheet towas ~~previously~~remediated ~~issued~~at ~~quarterly~~the ~~financial~~end ~~statements~~of ~~for~~the ~~that~~Company's ~~year~~third ~~were~~quarter ~~noted. The~~of ~~Company~~fiscal ~~stated~~2006 ~~that~~and ~~more~~as ~~time~~of ~~was~~March 31, ~~needed~~2006, toand ~~assess~~also ~~the~~concluded ~~adjustment~~that ~~amounts~~our bydisclosure ~~quarter~~controls and toprocedures ~~finalize~~were ~~the~~effective ~~consolidated~~as ~~financial~~of ~~statements~~March 31, 2006.

~~The~~Changes ~~adjustments, which relate to inventory, should have been recorded~~ in ~~earlier~~Internal ~~quarterly~~Control ~~periods~~Over ~~within~~Financial the same fiscal year. The adjustments impacted inventory value, cost of sales, and income tax benefit for each quarter, resulting in a net additional expense of $.02 per share in the Quarter ended June 30, 2004, $.01 per share in the Quarter ended September 30, 2004, and $.01 per share in the Quarter ended December 31, 2004. Management believes that no annual or quarterly financial statements for any period prior thereto, require adjustment.Reporting

~~The~~During ~~misstatements~~the ~~were~~quarter ~~caused~~ended byDecember 31, a2005, ~~computational~~management ~~error~~implemented changes in ~~valuation~~the ofCompany's ainternal ~~component~~control ofover ~~inventory~~financial reporting that have materially affected and ~~related~~are ~~reliance~~likely onto amaterially ~~spreadsheet~~affect, ~~for~~the ~~completion~~Company's ofinternal ~~such~~control ~~valuation~~over financial reporting. ~~The~~ ~~spreadsheet~~New ~~was~~controls ~~affected~~and byprocedures ~~the~~were ~~input~~implemented ofto ~~data~~remediate ~~that~~our ~~resulted~~previously inreported ~~the~~material ~~computation~~weakness ofin ~~incorrect~~internal ~~inventory~~control ~~values~~over financial reporting. ~~Such~~ ~~error~~Remediation ~~was~~actions ~~not~~included ~~detected~~the ~~timely~~development byof ~~Management~~a innew ~~their~~spreadsheet ~~review~~and manual recomputation of the ~~calculations~~new spreadsheet for all interim periods in fiscal 2006. Management ~~has~~will ~~determined~~apply ~~that~~these manual controls over the ~~error~~computation ~~was~~on ~~caused~~a quarterly basis for all future periods and will document appropriate review and written approval by asenior ~~material~~accounting ~~weakness~~management. inIn ~~internal~~addition, ~~control~~management increased the levels of senior management review over interim financial ~~reporting,~~information ~~described~~processed ~~below~~at the subsidiary locations, ~~relating~~in an effort to ~~the~~prevent ~~review~~or ofdetect ~~the~~misstatement of inventory ~~valuation~~or ~~calculation~~other ~~and~~accounts ~~the~~that ~~spreadsheet~~could ~~used~~result in a material misstatement to the ~~calculation~~annual or interim financial statements.

AExcept ~~material~~as ~~weakness~~otherwise is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. In connection with the adjustments and restatements described above, ~~the~~there ~~Company's~~have ~~management~~been ~~has~~no ~~identified~~changes ~~a control deficiency~~ in the Company's internal control over financial reporting asduring ~~of June 30, September 30, and December 31, 2004 and March 31, 2005. The control deficiency is~~ the ~~lack~~most ofrecently ~~appropriate~~completed senior management review of the inventory valuation calculations and spreadsheets used in such calculations. As a result of this control deficiency, the Company misstated inventory and cost of sales, resulting in the restatement of the interim financial statements for fiscal ~~2005~~quarter ~~and~~that ~~audit~~have ~~adjustments~~materially ~~to the annual financial statements. In addition~~affected, ~~this~~or ~~control~~are ~~deficiency~~reasonably ~~could~~likely ~~result in a misstatement of the aforementioned accounts that could result in a material misstatement~~ to ~~the~~materially ~~annual or interim financial statements that would not be prevented or detected. Accordingly~~affect, ~~management has concluded that this control deficiency represents a material weakness in~~ the Company's internal control over financial reporting.

As of the date of this filing, we are addressing the material control weakness in our internal control over financial reporting with respect to the reliance on and use of this spreadsheet. The remediation actions include development of a new spreadsheet and manual recomputation of the new spreadsheet for each of the quarters in each of the three years ended March 31, 2005. Additionally, Management will apply manual controls over the computation of the valuation on a quarterly basis for all future periods, and will document security control over the spreadsheet to ensure that it is not adjusted without appropriate review and written approval by senior accounting management.
Changes in Internal Controls
Management, with the participation of the Company's chief executive and chief financial officers, has concluded that there were no changes in the Company's internal control over financial reporting that occurred during the Company's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
Item 9B.
OTHER INFORMATION.

None.

PART III

Item 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Certain information concerning the directors and executive officers of the Company is hereby incorporated by reference to the captions "Election of Directors" and "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement for the Annual Meeting of Shareholders of the Company, dated June 1722, ~~2005~~2006, filed pursuant to Regulation 14A.

In addition to the executive officers named in the Proxy Statement, the Company employs the following key persons:

Steven E. Baune, President, CPAC Imaging, is 5657 years old. Prior to his being hired as President effective May 28, 2002, he was the CEO of Coats North America, a division of Coats plc. Before Coats, he had a 26-year career in executive management consumer products (film, digital cameras) with Eastman Kodak Company. Mr. Baune holds an MBA in ~~Marketing/Finance from the Rochester (NY) Institute of Technology and a Bachelor of Science in Industrial Engineering from North Dakota State University.~~

Dennis Brinly, Vice President of Sales & Marketing of The Fuller Brush Company, Inc. as of December 2, 2002, is 58 years old. Mr. Brinly brings 20 plus years of proven sales and marketing expertise to Fuller. During his career, he has directed sales and marketing for consumer product brands such as Coleman Powermate®, Poulan/Weed Eater®, and Homelite®. He holds a Master of Science degree from Chicago State University and Bachelor of Science degree from Missouri Valley College.48

~~Douglas~~Marketing/Finance R.from ~~Calvert~~the ~~was~~Rochester ~~named~~(NY) ~~President~~Institute of ~~Cleaning~~Technology ~~Technologies Group on August 11, 2003. Mr. Calvert is 50~~ and ~~began~~a ~~his~~Bachelor ~~career~~of inScience ~~the Institutional and Industrial market~~ in 1977 with S.C. Johnson and Son, Inc. He held increasingly responsible positions in sales, global accounts, and marketing for Johnson Professional North America and Worldwide. Mr. Calvert moved to ZEP Manufacturing Company in 1994 first as Director and then Vice President of Business Development for this $500 million specialty chemical division of Acuity Brands, Inc. Additionally, he held executive sales positions for Kimberly-Clark's Scientific and Industrial ~~business. Mr. Calvert~~Engineering ~~holds a BA in Business Administration~~ from ~~the University of~~ North ~~Carolina,~~Dakota ~~Charlotte.~~State University.

G.Dennis ~~Robert Gey~~Brinly, ~~age~~promoted ~~60, effective January 16, 2003 was appointed~~ to ~~President~~Chief ofMarketing ~~Fuller~~Officer ~~Brands and from April 11, 2002, until this date was President~~ of The Fuller Brush Company, Inc. ~~Before~~ ~~his~~in ~~position~~March ~~with Fuller~~2006, hejoined ~~was~~the ~~president~~company ofas aVice ~~$140~~President ~~million service equipment subsidiary~~ of ~~Pentair,~~Sales ~~Inc. During~~& ~~his~~Marketing ~~19-year~~on ~~career at Pentair~~December 2, he2002 ~~gained extensive experience in mergers~~ and ~~acquisitions,~~is as59 ~~well~~years ~~as operations and business development having managed several companies in a number of industries~~old. Mr. ~~Gey~~Brinly ~~holds~~brings an20 ~~MBA~~plus ~~from~~years ~~Loyola~~of ~~College,~~proven ~~Baltimore,~~sales ~~Maryland,~~ and amarketing ~~Bachelor~~expertise ofto ~~Science~~Fuller. inDuring ~~Business~~his ~~Administration~~career, ~~from~~he ~~Athens~~has ~~College~~directed insales ~~Alabama~~ and ~~currently~~marketing ~~serves~~for onconsumer ~~the~~product ~~Board~~brands ofsuch ~~Directors~~as ofColeman ~~Hawkins~~Powermate®, ~~Inc.~~Poulan/Weed Eater®, ~~Great~~and ~~Bend~~Homelite®. ~~Chamber~~He ofholds ~~Commerce,~~a ~~and~~Master ~~Direct~~of ~~Selling~~Science ~~Association~~degree ~~(DSA),~~from asChicago ~~well~~State asUniversity aand ~~member~~Bachelor onof ~~DSA's~~Science ~~Strategic~~degree ~~and~~from ~~Long-Range~~Missouri ~~Planning~~Valley ~~Committee~~College.

~~Jeff~~Brady ~~Ray~~Gros, ~~Vice~~Chief ~~President~~Operating ofOfficer ~~Operations~~ of The Fuller Brush Company, Inc. as of ~~September~~February 2327, ~~2002,~~2006 isand 58Chief ~~years~~Financial ~~old. Mr.~~Officer ~~Ray~~and ~~has~~Vice ~~over~~President 28of ~~years~~Finance of ~~experience~~The ~~demonstrating~~Fuller ~~continuous~~Brush ~~improvements~~Company, inInc. ~~materials~~as of January 1, ~~logistics~~1996, ~~and~~is ~~manufacturing~~40 inyears aold. ~~variety~~Prior ofto ~~industries~~joining ~~including~~Fuller ~~automotive,~~Brush ~~electronics~~in 1990, ~~construction~~Mr. Gros ~~equipment,~~was ~~distribution~~an Audit Manager for Peterson, ~~and~~Peterson ~~pharmaceutical~~& Goss in Wichita, KS. Mr. ~~Ray~~ Gros holds a Bachelor of ~~Science~~Business inAdministration ~~Economics~~degree ~~and~~in ~~Business~~Accounting ~~Administration~~ from ~~Park~~The Wichita State University inand ~~Parkville,~~is ~~Missouri~~a Certified Public Accountant.

Stanley H. Gulbin, age 5253, is President of CPAC Asia Imaging Products Limited, since December 16, 1998. Prior to joining CPAC in 1996, Mr. Gulbin had 17 years experience in the photographic industry, including all aspects of foreign and domestic sales and marketing. After joining CPAC in 1996, his duties were expanded to include international marketing and establishing CPAC's manufacturing facility in Asia and recently China.

Brad A. Hendrickson, age 4143, was appointed President, CPAC Imaging, Americas, effective May 16, 2002. He was previously President of Allied Diagnostic Imaging Resources, Inc. He began his career with CPAC in 1986 and has held several sales and marketing management positions including National Accounts Manager and Vice President of National Sales for Allied. A graduate of the University of Wisconsin with a Bachelor of Science in Economics, Mr. Hendrickson received an MBA from Emory University in Atlanta.

Thomas C. LeBlanc, age 5455, became Executive Vice President, Worldwide Operations and Strategic Planning for CPAC Imaging on February 2, 2004, due to management team realigning. Prior to that Mr. LeBlanc was President of Allied Diagnostic Imaging Resources, Inc. effective May 28, 2002, after joining Allied as Executive Vice President in November 1998. Mr. LeBlanc holds an MBA from Emory University, Atlanta, Georgia, and a Bachelor of Science in Chemical Engineering from the University of Southwestern Louisiana.

Fernando Morthera A., age 4849, was named President of Stanley Home Products effective July 28, 2003. Prior to joining Stanley, Mr. Morthera worked for Avon and for House of Fuller in Mexico (a division of Sara Lee). He has more recently served as Marketing Vice President for Tupperware, Latin America, and Managing Director for Tupperware, Spain, where he was responsible for reversing a declining trend in both sales and profits and steadily increased market penetration of distributors and independent consultants. In October 2000 he was appointed Senior Vice President, Global Marketing, for Beauticontrol, Inc., a direct seller of beauty and nutritional products that had been acquired by Tupperware, successfully opening the Mexican market and building a new field sales organization. Mr. Morthera holds an MBA from The Instituto Tecnologico Autonomo de Mexico (ITAM) in Mexico City and a degree in Industrial Design from Mexico's Anahuac University.

Jeff Ray, Vice President of Operations of The Fuller Brush Company, Inc. as of September 23, 2002, is 59 years old. Mr. Ray has over 28 years of experience demonstrating continuous improvements in materials, logistics, and manufacturing in a variety of industries including automotive, electronics, construction equipment, distribution, and pharmaceutical. Mr. Ray holds a Bachelor of Science in Economics and Business Administration from Park University in Parkville, Missouri.

Item 11. EXECUTIVE COMPENSATION.

Information regarding executive compensation is hereby incorporated by reference to the same caption in the Company's ~~2005~~2006 Proxy Statement for the Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The stock ownership of each person known to CPAC to be the beneficial owner of more than 5% of its Common Stock and the stock ownership of all directors and officers of CPAC as a group are hereby incorporated by reference to the caption "Security Ownership of Certain Beneficial Owners and Management" in the Company's ~~2005~~2006 Proxy Statement for the Annual Meeting of Shareholders to be filed pursuant to Regulation 14A. The beneficial ownership of CPAC Common Stock of all directors of the Company is hereby incorporated by reference to the caption "Security Ownership of Certain Beneficial ~~Owners and Management" in the Company's 2005 Proxy Statement for the Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.~~

Owners and Management" in the Company's 2006 Proxy Statement for the Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Information regarding certain relationships and related transactions is hereby incorporated by reference to the captions "Election of Directors" and "Committee Reports" in the Company's ~~2005~~2006 Proxy Statement for the Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

Item 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES.

Information regarding principal accountants fees and services is hereby incorporated by reference to the "Independent Registered Public Accounting Firm's Fees and Services" caption in the Company's ~~2005~~2006 Proxy Statement for the Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

PART IV

Item 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

(a)	The following financial statements of the Company are included as a part of the report:
	1.	Financial Statements:
		Report of Independent Registered Public Accounting Firm
		Consolidated Balance Sheets as of March 31, 2005 and 2004
		Consolidated Balance Sheets as of March 31, 2006 and 2005
		Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended March 31, 2005, 2004, and 2003
		Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended March 31, 2006, 2005, and 2004
		Consolidated Statements of Changes in Shareholders' Equity for the Years Ended March 31, 2005, 2004, and 2003
		Consolidated Statements of Changes in Shareholders' Equity for the Years Ended March 31, 2006, 2005, and 2004
		Consolidated Statements of Cash Flows for the Years Ended March 31, 2005, 2004, and 2003
		Consolidated Statements of Cash Flows for the Years Ended March 31, 2006, 2005, and 2004
		Notes to Consolidated Financial Statements
	2.	Financial Statement Schedules:
		Schedule II, Valuation and Qualifying Accounts and Reserves for the Fiscal Years Ended March 31, 2005, 2004 and 2003
		Schedule II, Valuation and Qualifying Accounts and Reserves for the Fiscal Years Ended March 31, 2006, 2005 and 2004
		Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto.
(b)	Exhibits.
	2.	Plan of acquisition, reorganization, arrangement, liquidation, or succession
	3.	(i) Articles of incorporation
		3.1	Certificate of Incorporation, as amended September 11, 1996, incorporated herein by reference to Form 10-Q, filed for the period ended September 30, 1996, and further amended by Certificate of Amendment dated August 19, 1999, incorporated herein by reference to Form 10-Q, filed for the period ended September 30, 1999
	3.	(ii) By-laws
		3.2	By-laws, as amended, incorporated herein by reference to Form 10-Q, filed for the period ended September 30, 1998, as further amended, effective October 12, 2004, incorporated herein by reference to Form 10-Q filed for the period ended September 30, 2004
	4.	Instruments defining the rights of security holders, including indentures
		4.1	Loan Agreement dated February 9, 1994, and Letter of Commitment dated December 16, 1993, incorporated herein by reference to Form 10-K filed for period ended March 31, 1994, as amended, incorporated herein by reference to Form 10-Q filed for the period ended December 31, 1994, and amended by Letter of Extension and Increase dated October 29, 1996, incorporated herein by reference to Form 10-Q for the period ended September 30, 1996, and further amended by First Amendment to Second Amended and Restated Loan Agreement dated October 31, 1996, incorporated herein by reference to Form 10-Q for the period ended December 31, 1996, and further amended by Agreement dated September 12, 1997, incorporated herein by reference to Form 10-Q for the period ended September 30, 1997, and further amended by Second Amendment to Second Amended and Restated Loan Agreement dated July 10, 1998, incorporated herein by reference to Form 10-Q for the period ended June 30, 1998, and further amended by Agreement dated April 27, 2000, incorporated herein by reference to Form 10-K for the period ended March 31, 2000, and further amended by Third Amendment to Third Amended and Restated Loan Agreement dated August 29, 2002, incorporated herein by reference to Form 10-Q for the period ended September 30, 2002, and further amended by Second Amendment to Restated Loan and Security Agreement and Note dated September 27, 2004, incorporated herein by reference to Form 10-Q for the period ended September 30, 2004
		4.2	Bank Letter dated June 10, 2005 in connection with the Second Amendment to Restated Loan and Security Agreement and Note dated September 27, 2004
	9.	Voting trust agreement
	10.	Material contracts
		10.1	Employment Agreement between Thomas N. Hendrickson and CPAC, Inc. dated September 30, 1995, incorporated herein by reference to Form 10-Q filed for the period ended September 30, 1995, and amended by Extension of Employment Agreement dated July 20, 1998, incorporated herein by reference to Form 10-K filed for the period ended March 31, 1999
		10.2	CPAC, Inc. Executive Long-Term Stock Investment Plan, incorporated herein by reference to Form S-8 Registration Statement filed on October 29, 1994, as amended and incorporated by reference to Form S-8 Registration Statements filed on October 3, 1996 and September 24, 1999

		10.3	CPAC, Inc. 1996 Nonemployee Directors Stock Option Plan, incorporated herein by reference to Form S-8 Registration Statement filed October 3, 1996, as amended and incorporated by reference to Form S-8 Registration Statements filed on November 5, 1997, November 24, 1998, September 24, 1999, September 29, 2000, September 7, 2001, November 8, 2002, November 17, 2003 and November 23, 2004
		10.4	Deferred Compensation Arrangement between Thomas N. Hendrickson and CPAC, Inc. dated October 13, 1992, incorporated herein by reference to Form 10-Q filed for the period ended December 31, 1992, and amended by Amendment to Deferred Compensation Arrangement dated July 20, 1998, incorporated herein by reference to Form 10-K filed for the period ended March 31, 1999, and further amended by Amendment to Deferred Compensation Arrangement dated October 25, 2001, incorporated herein by reference to Form 10-Q filed for the period ended September 30, 2001, and further amended by Third Amendment to Deferred Compensation Arrangement dated December 22, 2004, incorporated herein by reference to Form 8-K filed on December 22, 2004
		10.5	CPAC, Inc. Nonqualified Deferred Compensation Plan dated December 30, 1999, incorporated herein by reference to Form 10-Q filed for the period ended December 31, 1999, and amended by CPAC, Inc. Nonqualified Deferred Compensation Plan dated December 22, 2004, incorporated herein by reference to Form 8-K filed on December 22, 2004
		10.6	Severance Compensation Agreement between Thomas J. Weldgen and CPAC, Inc. dated December 22, 2004, incorporated herein by reference to Form 8-K filed on December 22, 2004
	11.	Statement regarding computation of per share earnings
	12.	Statement regarding computation of ratios
	13.	Annual report to security holders, Form 10-Q or quarterly report to security holders
	14.	Code of ethics
	16.	Letter regarding change of certifying accountant
	18.	Letter regarding change in accounting principles
	21.	Subsidiaries of the registrant
		21.1	Subsidiaries of the registrant
	22.	Published report regarding matters submitted to vote of security holders
	23.	Consent of experts and counsel
		23.1	Consent of PricewaterhouseCoopers LLP Independent Registered Public Accounting Firm
	24.	Power of attorney
	31.	Rule 13a-14(a)/15d-14(a) Certifications
		31.1	Rule 13a-14(a)/15d-14(a) Certification of CPAC, Inc.'s Chief Executive Officer
		31.2	Rule 13a-14(a)/15d-14(a) Certification of CPAC, Inc.'s Chief Executive Officer
	32.	Section 1350 Certifications
	99.	Additional exhibits
(c)	Financial Statement Schedules.
	Schedule II
CPAC, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE FISCAL YEARS ENDED MARCH 31, 2005, 2004 AND 2003
					Additions
				Balance at Beginning of Period	Charged to Expenses	Charged to Other Accounts	Deductions		Balance at End of Period
2005:
Allowance for doubtful accounts				$ 1,542,000	$ 351,000	0	$ (336,000	)	$ 1,557,000
Inventory reserve				1,350,000	134,000	0	(314,000	)	1,170,000
Restructuring reserves				141,000	0	0	(141,000	)	0
Deferred tax assets valuation allowance				0	3,215,000	0	0		3,215,000
2004:
Allowance for doubtful accounts				$ 1,450,000	$ 351,000	0	$ (259,000	)	$ 1,542,000
Inventory reserve				1,163,000	457,000	0	(270,000	)	1,350,000
Restructuring reserves				0	1,275,000	0	(1,134,000	)	141,000
2003:
Allowance for doubtful accounts				$ 868,000	$ 778,000	0	$ (196,000	)	$ 1,450,000
Inventory reserve				1,172,000	253,000	0	(262,000	)	1,163,000

4.	Instruments defining the rights of security holders, including indentures
	4.1	Loan Agreement dated February 9, 1994, and Letter of Commitment dated December 16, 1993, incorporated herein by reference to Form 10-K filed for period ended March 31, 1994, as amended, incorporated herein by reference to Form 10-Q filed for the period ended December 31, 1994, and amended by Letter of Extension and Increase dated October 29, 1996, incorporated herein by reference to Form 10-Q for the period ended September 30, 1996, and further amended by First Amendment to Second Amended and Restated Loan Agreement dated October 31, 1996, incorporated herein by reference to Form 10-Q for the period ended December 31, 1996, and further amended by Agreement dated September 12, 1997, incorporated herein by reference to Form 10-Q for the period ended September 30, 1997, and further amended by Second Amendment to Second Amended and Restated Loan Agreement dated July 10, 1998, incorporated herein by reference to Form 10-Q for the period ended June 30, 1998, and further amended by Agreement dated April 27, 2000, incorporated herein by reference to Form 10-K for the period ended March 31, 2000, and further amended by Third Amendment to Third Amended and Restated Loan Agreement dated August 29, 2002, incorporated herein by reference to Form 10-Q for the period ended September 30, 2002, and further amended by Second Amendment to Restated Loan and Security Agreement and Note dated September 27, 2004, incorporated herein by reference to Form 10-Q for the period ended September 30, 2004, and further amended by Third Amendment to Restated Loan and Security Agreement and Waiver dated August 23, 2005, incorporated herein by reference to Form 10-Q for the period ended September 30, 2005, and further amended by Fourth Amendment to Restated Loan and Security Agreement and Waiver filed as Exhibit 4.1 to Form 10-K for the period ended March 31, 2006
	4.2	Bank Letter dated June 10, 2005 in connection with the Second Amendment to Restated Loan and Security Agreement and Note dated September 27, 2004, incorporated herein by reference to Form 10-K filed for the period ended March 31, 2005
9.	Voting trust agreement
10.	Material contracts
	10.1	Employment Agreement between Thomas N. Hendrickson and CPAC, Inc. dated September 30, 1995, incorporated herein by reference to Form 10-Q filed for the period ended September 30, 1995, and amended by Extension of Employment Agreement dated July 20, 1998, incorporated herein by reference to Form 10-K filed for the period ended March 31, 1999
	10.2	CPAC, Inc. Executive Long-Term Stock Investment Plan, incorporated herein by reference to Form S-8 Registration Statement filed on October 29, 1994, as amended and incorporated by reference to Form S-8 Registration Statements filed on October 3, 1996 and September 24, 1999
	10.3	CPAC, Inc. 1996 Nonemployee Directors Stock Option Plan, incorporated herein by reference to Form S-8 Registration Statement filed October 3, 1996, as amended and incorporated by reference to Form S-8 Registration Statements filed on November 5, 1997, November 24, 1998, September 24, 1999, September 29, 2000, September 7, 2001, November 8, 2002, November 17, 2003 and November 23, 2004
	10.4	Deferred Compensation Arrangement between Thomas N. Hendrickson and CPAC, Inc. dated October 13, 1992, incorporated herein by reference to Form 10-Q filed for the period ended December 31, 1992, and amended by Amendment to Deferred Compensation Arrangement dated July 20, 1998, incorporated herein by reference to Form 10-K filed for the period ended March 31, 1999, and further amended by Amendment to Deferred Compensation Arrangement dated October 25, 2001, incorporated herein by reference to Form 10-Q filed for the period ended September 30, 2001, and further amended by Third Amendment to Deferred Compensation Arrangement dated December 22, 2004, incorporated herein by reference to Form 8-K filed on December 22, 2004
	10.5	CPAC, Inc. Nonqualified Deferred Compensation Plan dated December 30, 1999, incorporated herein by reference to Form 10-Q filed for the period ended December 31, 1999, and amended by CPAC, Inc. Nonqualified Deferred Compensation Plan dated December 22, 2004, incorporated herein by reference to Form 8-K filed on December 22, 2004
	10.6	Severance Compensation Agreement between Thomas J. Weldgen and CPAC, Inc. dated December 22, 2004, incorporated herein by reference to Form 8-K filed on December 22, 2004
11.	Statement regarding computation of per share earnings
12.	Statement regarding computation of ratios
13.	Annual report to security holders, Form 10-Q or quarterly report to security holders
14.	Code of ethics
16.	Letter regarding change of certifying accountant
18.	Letter regarding change in accounting principles
21.	Subsidiaries of the registrant
	21.1	Subsidiaries of the registrant
22.	Published report regarding matters submitted to vote of security holders

	23.	Consent of experts and counsel
		23.1	Consent of PricewaterhouseCoopers LLP Independent Registered Public Accounting Firm
	24.	Power of attorney
	31.	Rule 13a-14(a)/15d-14(a) Certifications
		31.1	Rule 13a-14(a)/15d-14(a) Certification of CPAC, Inc.'s Chief Executive Officer
		31.2	Rule 13a-14(a)/15d-14(a) Certification of CPAC, Inc.'s Chief Executive Officer
	32.	Section 1350 Certifications
	99.	Additional exhibits
(c)	Financial Statement Schedules .
	Schedule II

CPAC, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE FISCAL YEARS ENDED MARCH 31, 2006, 2005 AND 2004
		Additions
	Balance at Beginning of Period	Charged to Expenses	Charged to Other Accounts	Deductions		Balance at End of Period
2006:
Allowance for doubtful accounts	$ 1,557,000	$ 184,000	0	$ (178,000	)	$ 1,563,000
Inventory reserve	1,170,000	30,000	0	(163,000	)	1,037,000
Deferred tax assets valuation allowance	3,335,000	1,526,000	0			4,861,000
2005:
Allowance for doubtful accounts	$ 1,542,000	$ 351,000	0	$ (336,000	)	$ 1,557,000
Inventory reserve	1,350,000	134,000	0	(314,000	)	1,170,000
Restructuring reserves	141,000	0	0	(141,000	)	0
Deferred tax assets valuation allowance	0	3,215,000	120,000	0		3,335,000
2004:
Allowance for doubtful accounts	$ 1,450,000	$ 351,000	0	$ (259,000	)	$ 1,542,000
Inventory reserve	1,163,000	457,000	0	(270,000	)	1,350,000
Restructuring reserves	0	1,275,000	0	(1,134,000	)	141,000

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.

		CPAC, INC. (Registrant)
Date July 8, 2005	By	/s/ Thomas N. Hendrickson Thomas N. Hendrickson, President
Date June 28, 2006	By	/s/ Thomas N. Hendrickson Thomas N. Hendrickson, President

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 and on the dates indicated.

Date July 8, 2005	By	/s/ Thomas N. Hendrickson Thomas N. Hendrickson, President, Chief Executive Officer, Treasurer, and Director
Date June 28, 2006	By	/s/ Thomas N. Hendrickson Thomas N. Hendrickson, President, Chief Executive Officer, Treasurer, and Director
Date July 8, 2005	By	/s/ Thomas J. Weldgen Thomas J. Weldgen, Vice President Finance and Chief Financial Officer, and Director
Date June 28, 2006	By	/s/ Thomas J. Weldgen Thomas J. Weldgen, Vice President Finance and Chief Financial Officer, Acting Chief Executive Officer, and Director
Date July 8, 2005	By	/s/ Robert Oppenheimer Robert Oppenheimer, Director
Date June 28, 2006	By	/s/ Robert Oppenheimer Robert Oppenheimer, Director
Date July 8, 2005	By	/s/ Jerold L. Zimmerman, Ph.D. Jerold L. Zimmerman, Ph.D., Director
Date June 28, 2006	By	/s/ Jerold L. Zimmerman Jerold L. Zimmerman, Ph.D., Director
Date July 8, 2005	By	/s/ Stephen J. Carl, Esq. Stephen J. Carl, Esq., Director
Date June 28, 2006	By	/s/ Stephen J. Carl Stephen J. Carl, Esq., Director
Date July 8, 2005	By	/s/ José J. Coronas José J. Coronas, Director
Date June 28, 2006	By	/s/ José J. Coronas José J. Coronas, Director
Date July 8, 2005	By	/s/ John R. Prann, Jr. John R. Prann, Jr., Director
Date June 28, 2006	By	/s/ William M. Carpenter William M. Carpenter, Director
Date July 8, 2005	By	/s/ William M. Carpenter William M. Carpenter, Director
Date June 28, 2006	By	/s/ Wendy F. Clay Wendy F. Clay, Vice President, Administration
Date July 8, 2005	By	/s/ Wendy F. Clay Wendy F. Clay, Vice President, Administration
Date June 28, 2006	By	/s/ James W. Pembroke James W. Pembroke, Corporate Secretary and Chief Accounting Officer
Date July 8, 2005	By	/s/ James W. Pembroke James W. Pembroke, Corporate Secretary and Chief Accounting Officer

EXHIBIT INDEX

Exhibit				~~Page~~	Page
3.	(i) Articles of incorporation
	3.1		Certificate of Incorporation, as amended September 11, 1996, incorporated herein by reference to Form 10-Q, filed for the period ended September 30, 1996, and further amended by Certificate of Amendment dated August 19, 1999, incorporated herein by reference to Form 10-Q, filed for the period ended September 30, 1999	~~N/A~~Certificate of Incorporation, as amended September 11, 1996, incorporated herein by reference to Form 10-Q, filed for the period ended September 30, 1996, and further amended by Certificate of Amendment dated August 19, 1999, incorporated herein by reference to Form 10-Q, filed for the period ended September 30, 1999	N/A
3.	(ii) By-laws
	3.2		By-laws, as amended, incorporated herein by reference to Form 10-Q, filed for the period ended September 30, 1998, as further amended, effective October 12, 2004, incorporated herein by reference to Form 10-Q filed for the period ended September 30, 2004	~~N/A~~By-laws, as amended, incorporated herein by reference to Form 10-Q, filed for the period ended September 30, 1998, as further amended, effective October 12, 2004, incorporated herein by reference to Form 10-Q filed for the period ended September 30, 2004	N/A
4.	Instruments defining the rights of security holders, including indentures
	4.1		Loan Agreement dated February 9, 1994, and Letter of Commitment dated December 16, 1993, incorporated herein by reference to Form 10-K filed for period ended March 31, 1994, as amended, incorporated herein by reference to Form 10-Q filed for the period ended December 31, 1994, and amended by Letter of Extension and Increase dated October 29, 1996, incorporated herein by reference to Form 10-Q for the period ended September 30, 1996, and further amended by First Amendment to Second Amended and Restated Loan Agreement dated October 31, 1996, incorporated herein by reference to Form 10-Q for the period ended December 31, 1996, and further amended by Agreement dated September 12, 1997, incorporated herein by reference to Form 10-Q for the period ended September 30, 1997, and further amended by Second Amendment to Second Amended and Restated Loan Agreement dated July 10, 1998, incorporated herein by reference to Form 10-Q for the period ended June 30, 1998, and further amended by Agreement dated April 27, 2000, incorporated herein by reference to Form 10-K for the period ended March 31, 2000, and further amended by Third Amendment to Third Amended and Restated Loan Agreement dated August 29, 2002, incorporated herein by reference to Form 10-Q for the period ended September 30, 2002, and further amended by Second Amendment to Restated Loan and Security Agreement and Note dated September 27, 2004, incorporated herein by reference to Form 10-Q for the period ended September 30, 2004	~~N/A~~Loan Agreement dated February 9, 1994, and Letter of Commitment dated December 16, 1993, incorporated herein by reference to Form 10-K filed for period ended March 31, 1994, as amended, incorporated herein by reference to Form 10-Q filed for the period ended December 31, 1994, and amended by Letter of Extension and Increase dated October 29, 1996, incorporated herein by reference to Form 10-Q for the period ended September 30, 1996, and further amended by First Amendment to Second Amended and Restated Loan Agreement dated October 31, 1996, incorporated herein by reference to Form 10-Q for the period ended December 31, 1996, and further amended by Agreement dated September 12, 1997, incorporated herein by reference to Form 10-Q for the period ended September 30, 1997, and further amended by Second Amendment to Second Amended and Restated Loan Agreement dated July 10, 1998, incorporated herein by reference to Form 10-Q for the period ended June 30, 1998, and further amended by Agreement dated April 27, 2000, incorporated herein by reference to Form 10-K for the period ended March 31, 2000, and further amended by Third Amendment to Third Amended and Restated Loan Agreement dated August 29, 2002, incorporated herein by reference to Form 10-Q for the period ended September 30, 2002, and further amended by Second Amendment to Restated Loan and Security Agreement and Note dated September 27, 2004, incorporated herein by reference to Form 10-Q for the period ended September 30, 2004, and further amended by Third Amendment to Restated Loan and Security Agreement and Waiver dated August 23, 2005, incorporated herein by reference to Form 10-Q for the period ended September 30, 2005, and further amended by Fourth Amendment to Restated Loan and Security Agreement and Waiver filed as Exhibit 4.1 to Form 10-K for the period ended March 31, 2006	55
	4.2		~~Bank Letter dated June 10, 2005 in connection with the Second Amendment to Restated Loan and Security Agreement and Note dated September 27, 2004~~	55Bank Letter dated June 10, 2005 in connection with the Second Amendment to Restated Loan and Security Agreement and Note dated September 27, 2004, incorporated herein by reference to Form 10-K filed for the period ended March 31, 2005	N/A
10.	Material contracts
	10.1		Employment Agreement between Thomas N. Hendrickson and CPAC, Inc. dated September 30, 1995, incorporated herein by reference to Form 10-Q filed for the period ended September 30, 1995, and amended by Extension of Employment Agreement dated July 20, 1998, incorporated herein by reference to Form 10-K filed for the period ended March 31, 1999	Employment Agreement between Thomas N/A. Hendrickson and CPAC, Inc. dated September 30, 1995, incorporated herein by reference to Form 10-Q filed for the period ended September 30, 1995, and amended by Extension of Employment Agreement dated July 20, 1998, incorporated herein by reference to Form 10-K filed for the period ended March 31, 1999	N/A
	10.2		CPAC, Inc. Executive Long-Term Stock Investment Plan, incorporated herein by reference to Form S-8 Registration Statement filed on October 29, 1994, as amended and incorporated by reference to Form S-8 Registration Statements filed on October 3, 1996 and September 24, 1999	~~N/A~~CPAC, Inc. Executive Long-Term Stock Investment Plan, incorporated herein by reference to Form S-8 Registration Statement filed on October 29, 1994, as amended and incorporated by reference to Form S-8 Registration Statements filed on October 3, 1996 and September 24, 1999	N/A
	10.3		CPAC, Inc. 1996 Nonemployee Directors Stock Option Plan, incorporated herein by reference to Form S-8 Registration Statement filed October 3, 1996, as amended and incorporated by reference to Form S-8 Registration Statements filed on November 5, 1997, November 24, 1998, September 24, 1999, September 29, 2000, September 7, 2001, November 8, 2002, November 17, 2003 and November 23, 2004	~~N/A~~CPAC, Inc. 1996 Nonemployee Directors Stock Option Plan, incorporated herein by reference to Form S-8 Registration Statement filed October 3, 1996, as amended and incorporated by reference to Form S-8 Registration Statements filed on November 5, 1997, November 24, 1998, September 24, 1999, September 29, 2000, September 7, 2001, November 8, 2002, November 17, 2003 and November 23, 2004	N/A
	10.4		Deferred Compensation Arrangement between Thomas N. Hendrickson and CPAC, Inc. dated October 13, 1992, incorporated herein by reference to Form 10-Q filed for the period ended December 31, 1992, and amended by Amendment to Deferred Compensation Arrangement dated July 20, 1998, incorporated herein by reference to Form 10-K filed for the period ended March 31, 1999, and further amended by Amendment to Deferred Compensation Arrangement dated October 25, 2001, incorporated herein by reference to Form 10-Q filed for the period ended September 30, 2001, and further amended by Third Amendment to Deferred Compensation Arrangement dated December 22, 2004, incorporated herein by reference to Form 8-K filed on December 22, 2004	Deferred Compensation Arrangement between Thomas N/A. Hendrickson and CPAC, Inc. dated October 13, 1992, incorporated herein by reference to Form 10-Q filed for the period ended December 31, 1992, and amended by Amendment to Deferred Compensation Arrangement dated July 20, 1998, incorporated herein by reference to Form 10-K filed for the period ended March 31, 1999, and further amended by Amendment to Deferred Compensation Arrangement dated October 25, 2001, incorporated herein by reference to Form 10-Q filed for the period ended September 30, 2001, and further amended by Third Amendment to Deferred Compensation Arrangement dated December 22, 2004, incorporated herein by reference to Form 8-K filed on December 22, 2004	N/A
	10.5		CPAC, Inc. Nonqualified Deferred Compensation Plan dated December 30, 1999, incorporated herein by reference to Form 10-Q filed for the period ended December 31, 1999, and amended by CPAC, Inc. Nonqualified Deferred Compensation Plan dated December 22, 2004, incorporated herein by reference to Form 8-K filed on December 22, 2004	~~N/A~~CPAC, Inc. Nonqualified Deferred Compensation Plan dated December 30, 1999, incorporated herein by reference to Form 10-Q filed for the period ended December 31, 1999, and amended by CPAC, Inc. Nonqualified Deferred Compensation Plan dated December 22, 2004, incorporated herein by reference to Form 8-K filed on December 22, 2004	N/A
	10.6		~~Severance Compensation Agreement between Thomas J. Weldgen and CPAC, Inc. dated December 22, 2004, incorporated herein by reference to Form 8-K filed on December 22, 2004~~	~~N/A~~Severance Compensation Agreement between Thomas J. Weldgen and CPAC, Inc. dated December 22, 2004, incorporated herein by reference to Form 8-K filed on December 22, 2004	N/A
14.	Code of ethics			~~N/A~~	N/A
21.	Subsidiaries of the registrant
	21.1		~~Subsidiaries of the registrant~~	57Subsidiaries of the registrant	66
23.	Consent of experts and counsel
	23.1		~~Consent of PricewaterhouseCoopers LLP Independent Registered Public Accounting Firm~~	~~N/A~~Consent of PricewaterhouseCoopers LLP Independent Registered Public Accounting Firm	67
31.		Rule 13a-14(a)/15d-14(a) Certifications
	31.1		~~Rule 13a-14(a)/15d-14(a) Certification of CPAC, Inc.'s Chief Executive Officer~~	58Rule 13a-14(a)/15d-14(a) Certification of CPAC, Inc.'s Chief Executive Officer	68
	31.2		~~Rule 13a-14(a)/15d-14(a) Certification of CPAC, Inc.'s Chief Financial Officer~~	59Rule 13a-14(a)/15d-14(a) Certification of CPAC, Inc.'s Chief Financial Officer	69
32.	Section 1350 Certifications	~~Section 1350 Certifications~~			6070

	For the Years Ended
	March 31, 2004		March 31, 2003
Condensed Statement of Operations:
Net revenue	$ 17,747,000		$ 24,075,000
Cost of sales	13,975,000		18,446,000
Operating expenses	4,586,000		5,403,000
Operating income (loss)	(814,000	)	226,000
Interest expense	398,000		516,000
Tax provision (benefit)	--		(108,000	)
Net income (loss)	$ (1,212,000	)	$ (182,000	)
Condensed Balance Sheet:
Current assets	$ 9,112,000		$ 7,044,000
Non-current assets	4,743,000		4,234,000
	$ 13,855,000		$ 11,278,000
Current liabilities	$ 12,338,000		$ 8,909,000
Non-current liabilities	531,000		447,000
Shareholders' equity	986,000		1,922,000
	$ 13,855,000		$ 11,278,000

	For the Year Ended March 31, 2003
Reported CPAC, Inc. net loss	$ (4,060,232	)
Equity in loss of TURA	(179,584	)
Adjusted CPAC, Inc. net loss	$ (4,239,816	)
Basic earnings per share before change in reporting entity:
Reported CPAC, Inc. basic earnings per common share	$ (0.80	)
Equity in loss of TURA	(0.04	)
Adjusted CPAC, Inc. basic earnings per common share	$ (0.84	)
Diluted earnings per share before change in reporting entity:
Reported CPAC, Inc. diluted earnings per common share	$ (0.80	)
Equity in loss of TURA	(0.04	)
Adjusted CPAC, Inc. diluted earnings per common share	$ (0.84	)
Reported CPAC, Inc. comprehensive loss	$ (3,088,396	)
Equity in loss of TURA	(179,584	)
Other comprehensive income of TURA	56,496
Adjusted CPAC, Inc. comprehensive loss	$ (3,211,484	)

Filing Compare · CPAC INC