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

All references to earnings per share relate to diluted earnings per common share unless otherwise noted.

EXECUTIVE OVERVIEW

The Company's Operations

CPI Corp. is a long-standing leader, based on sittings, number of locations and related revenues, in the professional portrait photography of young children, individuals and families. From a single studio opened by our predecessor company in 1942, we have grown to 3,013 studios throughout the U.S., Canada, Mexico and Puerto Rico, principally under license agreements with Sears and lease and license agreements with Wal-Mart. The Company has provided professional portrait photography for Sears' customers since 1959 and has been the only Sears portrait studio operator since 1986. CPI is the sole operator of portrait studios in Wal-Mart Stores and Supercenters in the U.S., Canada, Mexico and Puerto Rico. Management has determined the Company operates as a single reporting segment offering similar products and services in all locations.

As of the end of the first quarter in fiscal years 2009 and 2008, the Company's studio counts were:

                                                        May 2, 2009   April 26, 2008
    Within Sears stores:
          United States and Puerto Rico                         884              891
          Canada                                                110              112

    Within Wal-Mart stores:
          United States and Puerto Rico                       1,617            1,702
          Canada                                                259              253
          Mexico                                                113              115

    Locations not within Sears or Wal-Mart stores                30               32

    Total                                                     3,013            3,105

Certain under-performing PMPS studios have been closed since the first quarter of 2008 in order to improve overall financial results.

As of June 10, 2009, all of the Company's studios, with the exception of 84 Sears Portrait Studios in Canada, are digital. The Company plans to deliver steadily increasing growth through harvesting opportunities from its digital platform to create diversified revenue streams, driving productivity and profitability gains, leveraging its manufacturing capacity and efficiency and implementing aggressive, targeted marketing campaigns.

RESULTS OF OPERATIONS

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

 in thousands, except per share data                         12 Weeks Ended
                                                    May 2, 2009       April 26, 2008

 Net sales                                          $     93,467     $        103,367

 Cost and expenses:
   Cost of sales (exclusive of depreciation and
 amortization shown below)                                 6,959               10,533
   Selling, general and administrative expenses           75,153               83,038
   Depreciation and amortization                           6,039                7,494
   Other charges and impairments                             420                1,300
                                                          88,571              102,365

 Income from operations                                    4,896                1,002

 Interest expense                                          1,491                1,521
 Interest income                                             122                  362
 Other income, net                                             9                    6

 Income (loss) before income tax provision
 (benefit)                                                 3,536                 (151 )
 Income tax provision (benefit)                            1,207                  (59 )

 Net income (loss) from continuing operations              2,329                  (92 )
 Net loss from discontinued operations                         -                 (164 )

 NET INCOME (LOSS)                                  $      2,329     $           (256 )

 NET INCOME (LOSS) PER COMMON SHARE

 Net income (loss) per share from continuing
 operations - diluted                               $       0.34     $          (0.01 )
 Net loss per share from discontinued operations
 - diluted                                                     -                (0.03 )
 Net income (loss) per share - diluted              $       0.34     $          (0.04 )

 Net income (loss) per share from continuing
 operations - basic                                 $       0.34     $          (0.01 )
 Net loss per share from discontinued operations
 - basic                                                       -                (0.03 )
 Net income (loss) per share - basic                $       0.34     $          (0.04 )

 Weighted average number of common and common
 equivalent
   shares outstanding - diluted                        6,948,799            6,452,035

 Weighted average number of common and common
 equivalent                                            6,948,799            6,452,035
   shares outstanding - basic

12 weeks ended May 2, 2009 compared to 12 weeks ended April 26, 2008

The Company reported net income of $2.3 million, or $0.34 per diluted share, for the 12-week first quarter ended May 2, 2009, versus a net loss of $256,000, or ($0.04) per diluted share, in the comparable quarter of fiscal 2008. Revenue deferral associated with the timing of Easter negatively affected net income in the first quarter of fiscal 2009 by approximately $1.6 million, or $0.23 per diluted share. The Company believes its first quarter fiscal year 2009 results reflect the successful integration and upgrade of the PictureMe Portrait Studio® studios as well as the impact of cost reductions and productivity improvements implemented throughout the organization.

Net sales totaled $93.5 million and $103.4 million in the first quarter of fiscal 2009 and 2008, respectively.

? Net sales for the first quarter of 2009 decreased $9.9 million, or 9.6%, to $93.5 million from the $103.4 million reported in the first quarter of 2008. Excluding impacts of revenue deferral associated with the timing of Easter ($3.7 million), foreign exchange translation ($2.8 million), revenue deferral related to positive response to the Company's loyalty programs ($2.3 million) and store closures ($1.9 million), comparable same-store sales increased $820,000, or 0.8%.

Net sales from the Company's PictureMe Portrait Studio® brand ("PMPS"), on a comparable same-store basis, excluding revenue deferral adjustments associated with the timing of Easter and the Company's loyalty program, foreign currency translation, store closures and other items, totaling $6.6 million, increased $6.6 million, or 13.7%, in the first quarter of 2009 to $54.7 million from $48.1 million reported in the first quarter of 2008. PMPS sales performance for the first quarter was the result of an approximate 32.8% increase in average sale per customer sitting, offset in part by an approximate 14.5% decline in the number of sittings. The Company attributes its increase in average sale per customer sitting primarily to customers' positive response to the new offerings made possible by the recently completed digital conversion and the implementation of new sales and performance management processes. The Company believes the sittings decline reflects the difficult economic environment, which has especially pressured customer demand in lower income categories.

Net sales from the Company's Sears Portrait Studio brand ("SPS"), on a comparable same-store basis, excluding revenue deferral adjustments associated with the timing of Easter and the Company's loyalty program, foreign currency translation, store closures and other items, totaling $4.1 million, decreased $5.7 million, or 11.0%, to $46.3 million in the first quarter of 2009 from the $52.0 million reported in the first quarter of 2008. SPS sales performance for the first quarter was the result of declines in the number of sittings and sales per sitting of approximately 9.5% and 1.6%, respectively. The Company believes the decline in SPS brand sales reflects the difficult economic environment and, especially, the related reduction in same-day, walk-in business. The decline was mitigated substantially by improved execution of the Company's customer outreach and loyalty programs.

Costs and expenses were $88.6 million in the first quarter of 2009, compared with $102.4 million in the comparable prior year period.

? Cost of sales, excluding depreciation and amortization expense, was $7.0 million in the first quarter of 2009 compared with $10.5 million in the comparable prior year period. The decrease in cost of sales, excluding depreciation and amortization expense, is principally attributable to lower overall manufacturing production levels, improved product mix, increased manufacturing productivity, eliminated film and related shipping costs stemming from the PMPS digital conversion, and decreased overhead costs resulting from the integration of the PMPS operations.

? Selling, general and administrative ("SG&A") expenses were $75.2 million for the first quarter of 2009, compared with $82.9 million in the first quarter of 2008. The decrease in SG&A expenses primarily relates to the elimination of duplicative costs in connection with the PMPS integration; fiscal year 2008 nonrecurring costs associated with the PMPS digital conversion; lower studio employment costs due to scheduling improvements and selected operating hour reductions; reduced employee insurance costs related to changes in plan design and lower enrollment; and favorable foreign exchange rate translation. These decreases were offset in part by increases in marketing expense due to additional promotional programs for the Easter holiday; higher average hourly studio rates; and increased sales incentives in connection with new studio and field initiatives.

? Depreciation and amortization decreased to $6.0 million in the first quarter of 2009 from $7.5 million in the first quarter of 2008. The decrease in depreciation and amortization is primarily attributable to certain assets, acquired in connection with the 2007 acquisition of PCA, becoming fully depreciated subsequent to the prior-year first quarter. This decrease is offset in part by an increase in depreciation attributable to the equipment purchased for the PMPS digital conversion throughout fiscal year 2008.

? In the first quarter of 2009 and 2008, the Company recognized $420,000 and $1.5 million, respectively, in other charges and impairments primarily associated with certain PMPS integration charges, including severance and lab closure costs. The prior-year charges also include certain fees incurred in connection with the settlement of the previous Sears license agreement.

Interest expense was constant at $1.5 million in both the first quarter of 2009 and 2008. This was the result of a decrease in lower average borrowings and interest rates in relation to the Credit Agreement, offset equally by an increase in the interest rate swap value.

Interest income was $122,000 in the first quarter of 2009 compared to $362,000 in the first quarter of 2008. This decrease is primarily attributable to lower average invested balances in 2009 as compared to 2008, the result of higher capital spending throughout 2008 related to the digital conversion of PMPS.

Income tax expense from continuing operations was $1.2 million in the first quarter of 2009 compared to a benefit of $59,000 in the first quarter of 2008. The resulting effective tax rates were 34.1% in 2009 and 38.8% in 2008. The decrease in the effective tax rate in 2009 is primarily attributable to a projected decrease in anticipated profitability as a result of current economic conditions, a projected increase in job tax credits and a decrease in Canadian tax rates.

Net losses from discontinued operations were $0 and $164,000 in the first quarters of 2009 and 2008, respectively. During the fourth quarter of 2008, the Company decided to discontinue its Portrait Gallery and E-Church operations in order to eliminate the unprofitable operations.

LIQUIDITY AND CAPITAL RESOURCES

The following table presents a summary of the Company's cash flows for the first
quarter of 2009 and 2008:


     in thousands                                        12 Weeks Ended
                                                May 2, 2009       April 26, 2008
     Net cash provided by (used in):
       Operating activities (1)                $       5,988     $         (2,994 )
       Financing activities                           (2,346 )             (1,489 )
       Investing activities                             (522 )            (11,300 )
     Effect of exchange rate changes on cash              54                  (62 )
     Net increase (decrease) in cash           $       3,174     $        (15,845 )

(1) Includes cash flows used in discontinued operations of $0 and $146,000 in the first quarter of 2009 and 2008, respectively.

Net Cash Provided By (Used In) Operating Activities

Net cash provided by operating activities was $6.0 million during the first quarter of 2009 compared to net cash used of $3.0 million in the comparable period of 2008. Cash flows in the first quarter of 2009 increased from first quarter 2008 levels primarily due to net operating income and the timing of payments related to changes in the various balance sheet accounts totaling approximately $9.0 million and $1.3 million related to a reduction in worker's compensation premiums and claims paid. These increases were offset in part by additional cash used related to advertising of approximately $1.3 million for the Easter holiday.

Net Cash Used In Financing Activities

The increase in cash used in financing activities in the first quarter of 2009 is primarily attributable to the payment of $943,000 in fees paid to creditors incurred in connection with the Amendment to the Credit Agreement in the first quarter of 2009.

Effective April 16, 2009, the Company entered into the Amendment to its Credit Agreement to change the interest rate structure and the amortization schedule and to replace preexisting minimum EBITDA and interest coverage covenants with a fixed charge ratio test (as defined, EBITDA minus capital expenditures to fixed charges) and tighten the leverage ratio test (as defined, Funded Debt to EBITDA). These changes were made to allow for greater flexibility in the event that the economic climate worsens and has an impact on the Company's earnings. Further details related to the Amendment are included in the CPI Corp. 2008 Annual Report on Form 10-K for its fiscal year ended February 7, 2009.

The Company incurred $943,000 in fees paid to creditors associated with this Amendment, which is being amortized over the remainder of the life of the loan in addition to fees that are currently being amortized.

At May 2, 2009, the Company had $105.4 million outstanding under its existing Credit Agreement. The Company was in compliance with all the covenants under its Credit Agreement as of May 2, 2009.

In June 2009, the Company determined it will make a voluntary prepayment of an additional $5.0 million of outstanding principal of the debt in the second quarter of 2009. Such amount is classified as noncurrent in the Consolidated Balance Sheet as of May 2, 2009.

Net Cash Used In Investing Activities

Net cash used in investing activities was $522,000 during the first quarter of 2009 as compared to $11.3 million during the first quarter of 2008. This decrease was primarily attributable to a decrease in capital expenditures of $10.4 million in the first quarter of 2009 compared to the prior year comparable period since the digital conversion is now completed.

Off-Balance Sheet Arrangements

Other than standby letters of credit primarily used to support the Company's various large deductible insurance programs and the ongoing guarantee of certain operating real estate leases of Prints Plus, both of which are more fully discussed in the following Commitments and Contingencies section, the Company has no additional off-balance sheet arrangements.

Commitments and Contingencies

Standby Letters of Credit

As of May 2, 2009, the Company had standby letters of credit outstanding in the principal amount of $20.5 million primarily used in conjunction with the Company's various large deductible insurance programs.

Settlement Commitment

The Company is obligated to remit Sears additional payments as stipulated in the settlement of the previous license agreement. As such, $1.5 million was due to Sears on April 30, 2009, and paid on May 7, 2009, and an additional $150,000 is due on December 31st in each 6 successive years, commencing December 31, 2009. These amounts have been accrued in the Interim Consolidated Balance Sheet as of May 2, 2009.

Contingent Lease Obligations

In July 2001, the Company announced the completion of the sale of its Wall Décor segment, Prints Plus, which included the ongoing guarantee of certain operating real estate leases of Prints Plus. As of May 2, 2009, the maximum future obligation to the Company under its guarantee of remaining leases is approximately $1.0 million before consideration of replacement tenant income. To recognize the risk associated with these leases based upon the Company's past experience with renegotiating lease obligations and the management's evaluation of remaining lease liabilities, the Company has recorded lease obligation reserves totaling approximately $710,000 at May 2, 2009. Based on the status of remaining leases, the Company believes that the $710,000 reserve is adequate to cover the potential losses to be realized under the Company's remaining operating lease guarantees.

Liquidity

Cash flows from operations, cash and cash equivalents and the seasonal borrowing capacity under the revolving portion of the Company's Credit Agreement, represent expected sources of funds in 2009 to meet the Company's obligations and commitments, including debt service, annual dividends to shareholders, planned capital expenditures, which are estimated not to exceed $5.0 million for fiscal 2009, and normal operating needs.

ACCOUNTING PRONOUNCEMENTS AND POLICIES

Adoption of New Accounting Standards

In April 2009, the Financial Accounting Standards Board ("FASB") issued three related Staff Positions (FSP) intended to provide additional application guidance and enhanced disclosures regarding fair value measurements and impairments of securities: (i) FSP Statement of Financial Accounting Standards ("SFAS") No. 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly," ("FSP SFAS No. 157-4"), (ii) FSP SFAS No. 107-1 and Accounting Principles Board Opinion ("APB") No. 28-1, "Interim Disclosures about Fair Value of Financial Instruments," ("FSP SFAS No. 107-1 and APB No. 28-1") and (iii) FSP SFAS No. 115-2 and FSP SFAS No. 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments," ("FSP SFAS No. 115-2 and
FSP SFAS No. 124-2").

FSP SFAS No. 157-4 provides guidelines for making fair value measurements more consistent with the principles presented in SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"). FSP SFAS No. 157-4 relates to determining fair values when the volume and level of activity for an asset or liability have significantly decreased. This position reaffirms SFAS No. 157, stating the objective of fair value measurement is to reflect the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (as opposed to a distressed or forced transaction) between market participants at the date of the financial statements under current market conditions.

FSP SFAS No. 107-1 and APB No. 28-1 relate to fair value disclosure for any financial instrument not currently reflected on the balance sheet at fair value. Prior to this position, fair values for such assets and liabilities were only disclosed annually. This position requires these disclosures on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value.

FSP SFAS No. 115-2 and FSP SFAS No. 124-2 related to other-than-temporary impairments is intended to bring greater consistency to the timing of impairment recognition and provide greater clarity to investors about the credit and noncredit components of impaired debt securities that are not expected to be sold. The measure of impairment in comprehensive income remains fair value. This position also requires increased and timelier disclosures sought by investors regarding expected cash flows, credit losses and an aging of securities with unrealized losses.

These positions are effective for interim and fiscal years ending after June 15, 2009. The Company is currently evaluating the impact of adoption of these standards.

In December 2008, the FASB issued FSP SFAS No. 132R-1, "Employers' Disclosure about Postretirement Benefit Plan Assets," ("FSP SFAS No. 132R-1"), an amendment of SFAS No. 132 (revised 2003), "Employers' Disclosure about Pensions and Other Postretirement Benefits," ("SFAS No. 132R"). FSP SFAS No. 132R-1 requires more detailed disclosures regarding defined benefit pension plan assets including investment policies and strategies, major categories of plan assets, valuation techniques used to measure the fair value of plan assets and significant concentrations of risk within plan assets. This position is effective for fiscal years ending after December 15, 2009. Upon initial application, the provisions of this position are not required for earlier periods that are presented for comparative purposes. The Company is currently evaluating the disclosure requirements of this new position.

In June 2008, the FASB issued Staff Position No. EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities," ("FSP EITF No. 03-6-1"). FSP EITF No. 03-6-1 states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are considered participating securities and shall be included in the computation of Earnings per Share pursuant to the two-class method under SFAS No. 128, "Earnings per Share." The Company adopted this position on February 8, 2009, and the effect was not material to the Company's financial statements.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS No. 161"), an amendment to SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS No. 133"). The statement requires enhanced disclosures that expand the disclosure requirements in SFAS No. 133 about an entity's derivative instruments and hedging activities. It will require more robust qualitative disclosures and expanded quantitative disclosures. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of SFAS No. 161 did not have a material effect on the Company's financial statements.

In December 2007, the FASB issued SFAS No. 141R, "Business Combinations," ("SFAS No. 141R"). This statement requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, and requires additional disclosures by the acquirer. Under this statement, all business combinations will be accounted for by applying the acquisition method. SFAS No. 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of SFAS No. 141R did not have a material effect on the Company's financial statements.

Application of Critical Accounting Policies

The application of certain of the accounting policies utilized by the Company requires significant judgments or a complex estimation process that can affect the results of operations and financial position of the Company, as well as the related footnote disclosures. The Company bases its estimates on historical experience and other assumptions that it believes are reasonable. If actual amounts are ultimately different from previous estimates, the revisions are included in the Company's results of operations for the period in which the actual amounts become known. The Company's significant accounting policies are discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 2008 Annual Report on Form 10-K, and below.

Long-Lived Asset Recoverability

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," long-lived assets, primarily property and equipment, are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. The SFAS No. 144 impairment test is a two-step process. If the carrying value of asset exceeds the expected future cash flows (undiscounted and without interest) from the asset, impairment is indicated. The impairment loss recognized is the excess of the carrying value of the asset over its fair value less cost to sell. As of May 2, 2009, no impairment was indicated.

Recoverability of Goodwill and Acquired Intangible Assets

The Company accounts for goodwill under SFAS No. 142, "Goodwill and Other Intangible Assets," which requires the Company to test goodwill for impairment on an annual basis, and between annual tests whenever events or changes in circumstances indicate the carrying amount may not be recoverable. SFAS No. 142 prescribes a two-phase process for impairment testing of goodwill. The first phase is a screen for impairment, which compares the reporting units', estimated fair value to their carrying values. If the carrying value exceeds the estimated fair value in the first phase, the second phase is performed in which the Company's goodwill is written down to its implied fair value, which the Company would determine based upon a number of factors, including operating results, business plans and anticipated future cash flows.

The Company performs its annual impairment test at the end of its second quarter, or more frequently if circumstances indicate the potential for impairment. As of May 2, 2009, the end of the Company's 2009 first quarter, the Company considered possible impairment triggering events, including its market capitalization relative to the carrying value of its net assets, as well as other relevant factors, and concluded that no goodwill impairment was indicated at that date, and therefore, no impairment test was necessary in the first quarter. The Company will complete its annual impairment test at the end of its second quarter, which ends July 25, 2009. If the Company were required to . . .