UNITED STATES
    SECURITIES AND EXCHANGE COMMISSION
    Washington, D.C. 20549 FORM 10-Q |X|    QUARTERLY
    REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934 FOR THE
    QUARTERLY PERIOD ENDED MAY 1, 2004 OR |_|    TRANSITION
    REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934 Commission
    file number 1-10204 CPI
    Corp.(Exact name of registrant as specified in its charter) Delaware
      
      43-1256674(State
          of Incorporation)
      
      (I.R.S.
          Employer Identification No.)1706
          Washington Ave., St. Louis, Missouri
      
      63103(Address
          of principal executive offices)
      
      (Zip
          Code) Registrants
    telephone number, including area code: (314) 231-1575 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 and [2] has been subject to such filing requirements for the past 90
days.|X|
Yes    |_| NoIndicate by check mark
whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).|X|
Yes    |_| NoAs of June 7, 2004, the
Registrant had 8,139,223 common shares outstanding.    CPI
CORP.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
12 Weeks Ended May 1, 2004 and April 26, 2003
PagePART 1. 
  FINANCIAL INFORMATIONItem 1.
  Financial StatementsInterim Condensed Consolidated Balance Sheets
  May 1, 2004 (Unaudited) and February 7, 2004
  1Interim Condensed Consolidated Statements of
  Operations (Unaudited)
  12 Weeks Ended May 1, 2004 and April 26, 2003
  3Interim Condensed Consolidated Statement of Changes
  in Stockholders Equity
  (Unaudited) 12 Weeks Ended May 1, 2004
  4Interim Condensed Consolidated Statements of Cash
  Flows (Unaudited)
  12 Weeks Ended May 1, 2004 and April 26, 2003
  5Notes to Interim Condensed Consolidated Financial
  Statements (Unaudited)
  7Item 2.
  Managements Discussions and Analysis of Financial
  Condition and Results of Operations
  14Item 3.
  Quantitative and Qualitative Disclosures about
  Market Risk
  23Item 4.
  Disclosure Controls and Procedures
  23PART II. 
  OTHER INFORMATIONItem 4.
  Results of Votes of Security Holders
  24Item 6.
  Exhibits and Reports on Form 8-K
  24Signatures
  25Exhibit Index
  26CPI
CORP.
Interim Condensed Consolidated Balance Sheets  Assets

PART
I.  FINANCIAL INFORMATION

  Item 1   Financial
    Statements

thousands
  
  May 1, 2004
  (Unaudited)
  
  February
  7, 2004ASSETSCurrent assets:Cash and
  cash equivalents
  
  
  $
  45,082
  
  
  
  $
  51,011Accounts
  receivable:Due from
  licensor stores
  
  
  
  8,688
  
  
  
  
  7,447Other
  
  
  
  206
  
  
  
  
  59Inventories
  
  
  
  10,650
  
  
  
  
  11,858Prepaid
  expenses and other current assets
  
  
  
  6,837
  
  
  
  
  7,488Refundable
  income taxes
  
  
  
  5,525
  
  
  
  
  2,166Deferred
  tax assets
  
  
  
  13,558
  
  
  
  
  11,947Total
  current assets
  
  
  
  90,546
  
  
  
  
  91,976Property and equipment:Land
  
  
  
  2,765
  
  
  
  
  2,765Building
  improvements
  
  
  
  26,521
  
  
  
  
  26,520Leasehold
  improvements
  
  
  
  6,696
  
  
  
  
  6,571Photographic,
  sales and manufacturing equipment
  
  
  
  212,025
  
  
  
  
  210,745Total
  
  
  
  248,007
  
  
  
  
  246,601Less
  accumulated depreciation and amortization
  
  
  
  197,364
  
  
  
  
  193,866Property
  and equipment, net
  
  
  
  50,643
  
  
  
  
  52,735Assets of business transferred under contractual
  arrangements:Preferred
  Security
  
  
  
  7,000
  
  
  
  
  7,000Accrued
  dividends on Preferred Security
  
  
  
  205
  
  
  
  
  60Loan
  receivable
  
  
  
  3,263
  
  
  
  
  1,915Assets of supplemental retirement plan:Cash
  surrender value of life insurance policies (net of borrowings of $1,732 and
  $1,548 at May 1, 2004 and February 7, 2004, respectively)
  
  
  
  11,759
  
  
  
  
  11,396Other
  investments
  
  
  
  87
  
  
  
  
  95Other assets, net of amortization of $1,359 at both
  May 1, 2004 and February 7, 2004
  
  
  
  2,163
  
  
  
  
  2,052TOTAL ASSETS
  
  
  $
  165,666
  
  
  
  $
  167,229See
accompanying notes.
1

CPI
CORP.
Interim Condensed Consolidated Balance Sheets  Liabilities and Stockholders
Equity
thousands, except share and per share
  data
  
  May 1, 2004
  (Unaudited)
  
  February 7, 2004LIABILITIESCurrent liabilities:Current
  maturities of long-term debt
  
  
  $
  8,580
  
  
  
  $
  8,580Accounts
  payable
  
  
  
  20,180
  
  
  
  
  15,294Accrued
  employment costs
  
  
  
  14,325
  
  
  
  
  12,297Customer
  deposit liability
  
  
  
  25,455
  
  
  
  
  24,897Sales
  taxes payable
  
  
  
  852
  
  
  
  
  2,524Accrued
  advertising expenses
  
  
  
  2,342
  
  
  
  
  1,803Accrued
  expenses and other liabilities
  
  
  
  3,415
  
  
  
  
  3,024Total
  current liabilities
  
  
  
  75,149
  
  
  
  
  68,419Long-term debt, less current maturities
  
  
  
  25,600
  
  
  
  
  25,589Accrued pension obligations
  
  
  
  10,364
  
  
  
  
  10,364Supplemental retirement plan obligations
  
  
  
  7,273
  
  
  
  
  3,547Customer deposit liability
  
  
  
  4,398
  
  
  
  
  4,769Other liabilities
  
  
  
  753
  
  
  
  
  2,715Total
  liabilities
  
  
  
  123,537
  
  
  
  
  115,403STOCKHOLDERS EQUITYPreferred stock, no par value. 1,000,000 shares
  authorized; no shares outstanding
  
  
  
  
  
  
  
  
  Preferred stock, Series A, no par value, 200,000
  shares authorized; no shares outstanding
  
  
  
  
  
  
  
  
  Common stock, $.40 par value. 50,000,000 shares
  authorized; 18,386,795 and 18,360,238 shares issued at May 1, 2004 and
  February 7, 2004, respectively
  
  
  
  7,355
  
  
  
  
  7,344Additional paid in capital
  
  
  
  52,671
  
  
  
  
  52,272Retained earnings
  
  
  
  220,305
  
  
  
  
  230,394Accumulated other comprehensive loss
  
  
  
  (10,174
  )
  
  
  
  (9,599
  )270,157
  
  
  
  
  280,411Treasury stock - at cost, 10,265,456 and 10,292,503
  shares at May 1, 2004 and February 7, 2004, respectively
  
  
  
  (228,023
  )
  
  
  
  (228,577
  )Unamortized deferred compensation- restricted stock
  
  
  
  (5
  )
  
  
  
  (8
  )Total
  stockholders equity
  
  
  
  42,129
  
  
  
  
  51,826TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
  
  
  $
  165,666
  
  
  
  $
  167,229See
accompanying notes.
2

CPI
CORP.
Interim Condensed Consolidated Statements of Operations(Unaudited)
12 Weeks
  Endedthousands, except share and per
  share data
  
  May 1,
  2004
  
  April 26,
  2003Net sales
  
  $
  56,010
  
  $
  56,255Cost and expenses:Cost of
  sales (exclusive of depreciation and amortization shown below)
  
  
  8,059
  
  
  7,823Selling,
  general and administrative expenses
  
  
  48,044
  
  
  48,510Depreciation
  and amortization
  
  
  4,037
  
  
  4,023Other
  charges and impairments
  
  
  9,563
  
  
  69,703
  
  
  60,356Loss from operations
  
  
  (13,693
  )
  
  (4,101
  )Interest expense
  
  
  599
  
  
  769Interest income
  
  
  281
  
  
  374Other income, net
  
  
  46
  
  
  52Loss before income tax benefit
  
  
  (13,965
  )
  
  (4,444
  )Income tax benefit
  
  
  (5,167
  )
  
  (1,714
  )NET LOSS
  
  $
  (8,798
  )
  $
  (2,730
  )Net loss per share - diluted
  
  $
  (1.09
  )
  $
  (0.34
  )Net loss per share - basic
  
  $
  (1.09
  )
  $
  (0.34
  )Dividends per share
  
  $
  0.16
  
  $
  0.14Weighted average number of common and common
  equivalent shares outstanding-diluted
  
  
  8,100,572
  
  
  8,100,779Weighted average number of common and common
  equivalent shares outstanding-basic
  
  
  8,100,572
  
  
  8,100,779See
accompanying notes.
3

CPI
CORP.
Interim Condensed Consolidated Statement of Changes in Stockholders Equity(Unaudited)
Twelve weeks ended May 1, 2004
thousands, except share andper
  share data
  
  Common
  stock
  
  Additional
  paid-in
  capital
  
  Retained
  earnings
  
  Accumulated
  other
  comprehensive
  loss
  
  Treasury
  stock,
  at cost
  
  Deferred
  compensation -
  restricted
  stock
  
  TotalBalance at February 7, 2004
  
  $
  7,344
  
  $
  52,272
  
  $
  230,394
  
  $
  (9,599
  )
  $
  (228,577
  )
  
  $
  (8
  )
  
  $
  51,826Net loss
  
  
  
  
  
  
  
  
  (8,798
  )
  
  
  
  
  
  
  
  
  
  
  
  
  (8,798
  )Total other comprehensive loss
  
  
  
  
  
  
  
  
  
  
  
  (575
  )
  
  
  
  
  
  
  
  
  
  (575
  )Total comprehensive loss
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  (9,373
  )Issuance of common stock for option exercises (26,557 shares)
  
  
  11
  
  
  399
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  410Dividends ($.16 per common share)
  
  
  
  
  
  
  
  
  (1,291
  )
  
  
  
  
  
  
  
  
  
  
  
  
  (1,291
  )Issuance of treasury stock, at cost (27,047 shares)
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  554
  
  
  
  
  
  
  
  554Amortization of deferred compensation - restricted stock
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  3
  
  
  
  3Balance at May 1, 2004
  
  $
  7,355
  
  $
  52,671
  
  $
  220,305
  
  $
  (10,174
  )
  $
  (228,023
  )
  
  $
  (5
  )
  
  $
  42,129See
accompanying notes.
4

CPI
CORP.
Interim Condensed Consolidated Statements of Cash Flows(Unaudited)
12 Weeks Endedthousands
  
  May 1,
  2004
  
  April 26,
  2003Reconciliation of net loss to cash flows provided by
  (used in) operating activities:Net loss
  
  $
  (8,798
  )
  $
  (2,730
  )Adjustments for items not requiring cash:Depreciation
  and amortization
  
  
  4,037
  
  
  4,023Loss on
  disposition of property, plant and equipment
  
  
  69
  
  
  36Deferred
  income taxes
  
  
  (1,633
  )
  
  (694
  )Deferred
  revenues and related costs
  
  
  203
  
  
  1,608Accrued
  interest on preferred security
  
  
  (145
  )
  
  (125
  )Impairment
  loss
  
  
  2,895
  
  
  Other
  
  
  1,362
  
  
  388(Increase) decrease in current assets:Receivables
  and inventories
  
  
  (180
  )
  
  (3,586
  )Refundable
  income taxes
  
  
  (3,359
  )
  
  2,650Prepaid
  expenses and other current assets
  
  
  696
  
  
  2,076Increase (decrease) in current liabilities:Accounts payable, accrued expenses and
  other liabilities
  
  
  6,173
  
  
  (462
  )Cash flows provided by operating activities
  
  $
  1,320
  
  $
  3,184See
accompanying notes.
5

CPI
CORP.
Interim Condensed Consolidated Statements of Cash Flows (continued)(Unaudited)
12 Weeks Endedthousands
  
  May 1,
  2004
  
  April 26,
  2003Cash flows provided by operating activities
  
  $
  1,320
  
  $
  3,184Cash flows provided by (used in) financing activities:Proceeds
  from borrowings against cash surrender value of life insurance
  
  
  184
  
  
  Proceeds
  from issuance of common stock for option exercises
  
  
  410
  
  
  53Cash
  dividends
  
  
  (1,291
  )
  
  (1,126
  )Cash
  flows used in financing activities:
  
  
  (697
  )
  
  (1,073
  )Cash flows provided by (used in) investing
  activities:Additions
  to property and equipment
  
  
  (4,905
  )
  
  (3,119
  )Redemptions
  of preferred security
  
  
  
  
  
  2,500Changes
  in loan receivable:Borrowings
  
  
  (11,869
  )
  
  (15,554
  )Repayments
  
  
  10,521
  
  
  11,720Purchases
  of investment securities in Rabbi Trust
  
  
  (300
  )
  
  (107
  )Proceeds
  from sales of investment securities in Rabbi Trust
  
  
  308
  
  
  348Cash flows
  used in investing activities
  
  
  (6,245
  )
  
  (4,212
  )Effect of exchange rate changes on cash and cash
  equivalents
  
  
  (307
  )
  
  204Net decrease in cash and cash equivalents
  
  
  (5,929
  )
  
  (1,897
  )Cash and cash equivalents at
  beginning of period
  
  
  51,011
  
  
  57,922Cash and cash equivalents at end of
  period
  
  $
  45,082
  
  $
  56,025Supplemental cash flow information:Interest
  paid
  
  $
  
  
  $
  Income
  taxes refunded
  
  $
  (100
  )
  $
  (3,283
  )Supplemental non-cash financing activities:Issuance
  of common stock under the employee profit sharing plan
  
  $
  
  
  $
  606Issuance
  of treasury stock under the employee profit sharing plan
  
  $
  554
  
  $
  See
accompanying notes.
6

CPI CORP.
Notes to Interim Condensed Consolidated Financial Statements(Unaudited)

NOTE 1  DESCRIPTION OF BUSINESS AND INTERIM
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company operates 1,017 professional portrait studios as of May 1,
2004 throughout the United States, Canada and Puerto Rico under license
agreements with Sears, Roebuck and Co. (Sears).  At the end of the first quarter of 2004, the Company operated 24
portrait studios in Mexico through Soriana and its City Club format.  The Company also provided mobile photography
services under the name Everyday Expressions to childcare centers, youth
sports associations and events in 26 markets throughout the United States.  Subsequent to the end of the first quarter,
as described in Note 9 to the Interim Condensed Consolidated Financial
Statements herein, the Companys new Board of Directors made a strategic
decision to exit both the Mexican and mobile photography operations.  In addition, the Company operates
searsphotos.com, an on-line photofinishing service as well as a vehicle for the
Companys customers to archive, share portraits via email and order additional
portraits and products.

The Interim Condensed Consolidated Balance Sheet as of May 1, 2004, the
related Interim Condensed Consolidated Statements of Operations for the 12
weeks ended May 1, 2004 and April 26, 2003, the Interim Condensed Consolidated
Statement of Changes in Stockholders Equity for the 12 weeks ended May 1, 2004
and the Interim Condensed Consolidated Statements of Cash Flows for the 12
weeks ended May 1, 2004 and April 26, 2003, are unaudited.  The interim condensed consolidated financial
statements reflect all adjustments (consisting only of normal recurring
accruals), which are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods presented. The interim
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the CPI
Corp. 2003 Annual Report on Form 10-K for its fiscal year ended February 7,
2004.  The results of operations for the
interim periods should not be considered indicative of results to be expected
for the full year.
Certain reclassifications have been made to the 2003 financial
statements to conform with the current year presentation.
NOTE 2  CONTINGENCIES
Contingent Lease Obligations
In July 2001, the Company announced the completion of the sale of its
Prints Plus Wall Decor segment, which included the ongoing guarantee of certain
operating real estate leases of Prints Plus. 
As of May 1, 2004, the maximum future obligation to the Company under
these guarantees is $8.8 million before any negotiation with landlords or
subleasing.  Based on scheduled lease
payments, the maximum future obligations will decrease an additional $3.7
million by the end of fiscal 2004, then by $2.9 million in 2005 and
approximately $2.2 million over the next two years. To recognize the risk of
potential default associated with these leases, a $1.0 million reserve was
established in 2001.  The $1.0 million
reserve was established assuming an average of 75 days of lease payments for
each of the 56 leases then guaranteed by the Company.  The 75 day estimate was based upon the Companys historical
experiences in settling lease obligations resulting from early terminations of
leases, taking into account the nature of prime mall space represented by the
guaranteed leases.  The Company has
recognized no losses to date related to their obligations under these guarantees.  At May 1, 2004, the Company had made no
further allowances for defaults under these operating leases as, in the opinion
of management, Prints Plus is meeting the performance standards established
under the operating leases.
7

CPI CORP.
Notes to Interim Condensed Consolidated Financial Statements(Unaudited)
Prints Plus Financial Covenants
In conjunction with the above-mentioned transaction, the Company
received an $11.0 million Preferred Security (Preferred Security) and
provided Prints Plus with a $6.4 million revolving credit facility.  The agreements governing both instruments
contain certain operating and financial covenants.  During the Companys third quarter of 2003 (Prints Plus first
fiscal quarter of 2003), Prints Plus failed to achieve the minimum EBITDA
covenant included in the revolving credit facility, as amended, requiring
Prints Plus to maintain EBITDA for any consecutive four quarters of not less
than $3.0 million. As of November 8, 2003, the Company provided Prints Plus with
a waiver on the violation of this covenant.
Based on Prints Plus revised operating forecast for its fiscal year
ending July 24, 2004, we expect them to continue to fail to achieve the minimum
EBITDA covenant referred to above as well as the fixed charge ratio covenant
throughout the remainder of their fiscal year. 
To address this, the Company has provided Prints Plus with a prospective
waiver of the minimum EBITDA and fixed charge ratio covenants through July 24,
2004 as long as they meet or exceed the projected operating results in their
revised operating forecast.  The
achievement of the revised operating forecast should result in Prints Plus
being able to continue to meet its obligations, including those to the Company,
as they come due.  As of the Companys
first quarter of fiscal 2004 (Prints Plus third fiscal quarter of 2003),
Prints Plus trailing four quarter EBITDA was $1.7 million versus the $2.0
million called for in their revised operating forecast covered by our
prospective waiver.  As of May 1, 2004,
the Company provided Prints Plus with an additional waiver of the covenant
violation.
In assessing the recoverability of its recorded investment in the
Preferred Security and the revolving credit facility, the Company reviews
whether events or changes in circumstances indicate that the carrying value of
the Preferred Security and the amount advanced under the revolving line of
credit may not be recoverable.  This
review includes an analysis of the current operating performance of Prints
Plus, including the amounts of free cash flow being generated providing for
interest and debt service, as well as their compliance with the performance
standards included within the covenants of the Preferred Security and revolving
line of credit.  Based on this review,
no valuation allowance is deemed necessary at May 1, 2004.
Standby Letters of Credit
As of May 1, 2004, the Company had outstanding standby letters of
credit in the principal amount of $6.2 million used in conjunction with the
Companys self insurance programs.
Litigation
The Company is a defendant in various lawsuits arising in the ordinary
course of business.  It is the opinion
of management that the ultimate liability, if any, resulting from such lawsuits
will not materially affect the consolidated financial position or results of
operations of the Company.
8

CPI CORP.
Notes to Interim Condensed Consolidated Financial Statements(Unaudited)
NOTE 3  OTHER CHARGES AND IMPAIRMENTS
Other charges and impairments included the following:
12 Weeks
  Endedthousands
  
  May 1,
  2004
  
  April 26,
  2003Accruals related to
  accelerated vesting of supplemental retirement plan benefits and guaranteed
  bonuses for 2004
  
  
  $
  3,414
  
  
  
  $
  Impairment charges
  
  
  
  3,067
  
  
  
  
  Reserves for severance and
  related costs
  
  
  
  2,036Consent solicitation costs
  
  
  
  846
  
  
  
  
  Non-refundable loan
  commitment fee write-off
  
  
  
  200
  
  
  
  
  Total Other Charges and
  Impairments
  
  
  $
  9,563
  
  
  
  $
  Accelerated
Vesting of Supplemental Retirement Plan Benefits and Guaranteed Bonuses for
2004
In the first quarter of 2004, change of control provisions in executive
employment contracts were triggered as a result of the change in the
composition of the Companys Board of Directors resulting from the completion
of the consent solicitation.  As a
result, the Company accrued $3.3 million related to the accelerated vesting of
executives benefits covered by the Companys supplemental retirement plan and
guaranteed bonuses of $76,000 provided for in employment contracts for those
covered executives whose employment continues with the Company.

Impairment Charges
During the first quarter of 2004, the Companys new Board along with
its new management leadership in the technology function, made a decision to
materially alter the Companys previously planned and recently in-process
technology platform that was to serve as the foundation for the eventual
conversion to full digital technology in the portrait studios.  As a result of this decision, certain
previously capitalized software development costs related to the development of
the previous platform no longer have future utility to the Company and,
accordingly, have been written off.
Reserves for Severance and Related Costs
During the first quarter of 2004, the Company established a reserve for
severance and related costs consisting principally of potential benefits
related to severance pay and supplemental retirement plan costs associated with
the dismissal of certain executives.
Consent Solicitation Costs
In the first quarter of 2004, the Company incurred $846,000 of
professional services costs related to the then-ongoing consent solicitation
contest. These costs included
$154,000 of total consent-related costs incurred by the Knightspoint Group
which the Company has agreed to reimburse.
9

CPI CORP.
Notes to Interim Condensed Consolidated Financial Statements(Unaudited)
Non-refundable Loan Commitment Fee Write-off
In early March 2004, prior to the change of control, the Company
received a lending commitment related to the proposed refinancing of its
then-existing debt structure.  In
exchange for that commitment, the Company paid a $200,000 non-refundable loan
commitment fee.  Subsequent to the
receipt of the commitment and prior to its funding, the consent solicitation
was completed resulting in the installation of a new Board and the lending
commitment expired, necessitating the write-off of the previously capitalized
non-refundable fee.

NOTE 4  STOCKHOLDERS EQUITY
Comprehensive Income and Accumulated Other Comprehensive Loss
The
following table shows the computation of comprehensive income:
12 Weeks Endedthousands
  
  May 1,
  2004Net loss
  
  
  $
  (8,798
  )Other comprehensive loss:Foreign currency translation adjustments
  
  
  
  (575
  )Total accumulated other
  comprehensive loss
  
  
  
  (575
  )Total comprehensive loss
  
  
  $
  (9,373
  )The following table displays
the components of accumulated other comprehensive loss as of May 1, 2004 and
February 7, 2004.
thousands
  
  May 1, 2004
  
  February 7, 2004Foreign currency
  translation adjustments
  
  
  $
  2,780
  
  
  
  $
  2,205Minimum pension liability,
  net of taxes
  
  
  
  7,394
  
  
  
  
  7,394Accumulated other
  comprehensive loss
  
  
  $
  10,174
  
  
  
  $
  9,59910

CPI CORP.
Notes to Interim Condensed Consolidated Financial Statements(Unaudited)

NOTE 5  STOCK-BASED COMPENSATION PLANS

At May 1, 2004, the Company had various stock-based employee
compensation plans which are described more fully in Note 7 of the Notes to
Consolidated Financial Statements in the Companys 2003 Annual Report on Form
10-K.  The Company accounts for those
plans in accordance with APB No. 25, Accounting For Stock Issued to
Employees, and related Interpretations. 
No stock-based employee compensation cost was reflected in net income,
as no options granted under those plans had an exercise price less than the
market value of the underlying common stock on the date of grant.  The following table illustrates the effect
on net loss and loss per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, Accounting for Stock-Based
Compensation.

12 Weeks
  Endedthousands, except per share data
  
  May 1, 2004
  
  April 26, 2003Net loss - as reported
  
  
  $
  (8,798
  )
  
  
  $
  (2,730
  )Less: Total stock-based
  employee compensation expense determined under fair value based method for
  all awards, net of related taxes
  
  
  
  (33
  )
  
  
  
  (17
  )Net loss - pro forma
  
  
  $
  (8,831
  )
  
  
  $
  (2,747
  )Loss per common share -
  basicAs reported
  
  
  $
  (1.09
  )
  
  
  $
  (0.34
  )Pro forma
  
  
  $
  (1.09
  )
  
  
  $
  (0.34
  )Loss per common share -
  dilutedAs reported
  
  
  $
  (1.09
  )
  
  
  $
  (0.34
  )Pro forma
  
  
  $
  (1.09
  )
  
  
  $
  (0.34
  )NOTE
6  RECENTLY ISSUED ACCOUNTING STANDARDS
There
were no accounting standards issued during the first quarter of 2004 which will
impact the Companys consolidated financial statements.

NOTE 7  EMPLOYEE BENEFIT PLANS
The Company maintains a qualified, noncontributory pension plan that
covers all full-time United States employees meeting certain age and service
requirements.  The plan provides pension
benefits based on an employees length of service and the average compensation
earned from the later of the hire date or January 1, 1998 to the retirement
date. The Companys funding policy is to contribute annually at least the
minimum amount required by government funding standards, but not more than is
tax deductible.  Plan assets consist
primarily of marketable equity securities funds, guaranteed interest contracts,
cash equivalents, immediate participation guarantee contracts and government
bonds.
11

CPI CORP.
Notes to Interim Condensed Consolidated Financial Statements(Unaudited)
The Company also maintains a noncontributory defined benefit plan
providing supplemental retirement benefits for certain current and former
executives.  The cost of providing these
benefits is accrued over the remaining expected service lives of the active
plan participants.  The supplemental
retirement plan is unfunded and as such does not have a specific investment
policy or long-term rate of return assumptions.  However, certain assets will be used to finance these future
obligations, and consist of cash surrender value of corporate-owned life
insurance policies and other investments in a Rabbi Trust.
The
following table sets forth the components of net periodic benefit cost for the
defined benefit plans:
12 Weeks
  EndedPension
  Plan
  
  Supplemental
  Retirement Planthousands
  
  May 1, 2004
  
  May 1, 2004Components of net periodic
  benefit cost:Service cost
  
  
  $
  353
  
  
  
  $
  36Interest cost
  
  
  
  624
  
  
  
  
  85Expected return on plan assets
  
  
  
  (677
  )
  
  
  
  Amortization of prior service cost
  
  
  
  10
  
  
  
  
  Amortization of net loss
  
  
  
  319
  
  
  
  
  Accelerated vesting
  
  
  
  
  
  
  
  
  3,338Settlement expense
  
  
  
  
  
  
  
  
  86Curtailment expense
  
  
  
  
  
  
  
  
  230Net periodic benefit cost
  
  
  $
  629
  
  
  
  $
  3,775NOTE
8  CHANGE OF CONTROL
On November 6, 2003, Knightspoint Partners I, L.P. and other entities
participating with them (Knightspoint Group) filed with the SEC preliminary
consent materials relating to the Knightspoint Groups commencement of a
solicitation of the Companys stockholders. 
The purpose of the consent solicitation was to, among other things,
remove seven of the nine members of the Companys Board of Directors, decrease
the size of the Board to eight directors and elect six Knightspoint Group
nominees to the Board.  On January 23,
2004, the Knightspoint Group filed with the SEC definitive consent solicitation
materials.  The Company also filed
definitive proxy materials with the SEC on February 20, 2004 relating to its
opposition to the Knightspoint Groups consent solicitation.  On March 18, 2004, the Knightspoint Group
delivered to the Company written consents. 
On March 24, 2004, an independent inspector certified that the consents
delivered by Knightspoint Group represented a majority of the Companys
outstanding common stock consenting to the election of the Knightspoint Groups
nominees as directors of the Company, the removal of seven of the nine members
of the sitting Board and the adoption of the Knightspoint Groups proposals
included in such consents.

12

CPI CORP.
Notes to Interim Condensed Consolidated Financial Statements(Unaudited)
The material change in the composition of the Board resulting from the
Knightspoint Groups successful consent solicitation triggered change of
control provisions in various employment and stock option agreements between
the Company and certain of its executives and employees.  As described in Note 3 of the Notes to
Interim Condensed Consolidated Financial Statement included herein, in the
first quarter of 2004 the Company accrued $3.3 million related to the
accelerated vesting of executives benefits covered by the Companys
supplemental retirement plan and guaranteed bonuses of $76,000 provided for in
employment contracts for those covered executives whose employment continues
with the Company.
NOTE 9  SUBSEQUENT EVENTS
Subsequent to the end of the first quarter, the Companys new Board of
Directors made a strategic decision to exit both the Mexican and mobile
photography operations.  This decision
was made to allow the Company to enhance focus on the core Sears Portrait
Studios business as well as to eliminate the ongoing operating dilution
associated with these businesses.
The Company plans to execute its exit plans during the second quarter
of 2004 at which time it will record the charges and impairments necessary to effectuate
the exits.  Currently, the Company
expects to record pre-tax exit costs in the second quarter of 2004 ranging from
$2.4 million to $3.2 million related to the Mexican operation and from $1.4
million to $1.8 million related to the mobile photography operations.

Furthermore, consistent with the plans to further reduce corporate
overhead costs, and, in certain instances, to effectuate additional executive
leadership changes, the Company effected second quarter headquarters staff
reductions impacting two additional executives and 35 employees that will
result in severance accruals being recorded in the second quarter estimated to
range from $800,000 to $900,000.
13

Item
2.     Managements Discussion and Analysis of
Financial Condition and Results of Operations
Managements Discussion and Analysis of Financial Condition and Results
of Operations is designed to provide the reader of the financial statements
with a narrative on the Companys results of operations, financial position and
liquidity, significant accounting policies and critical estimates, and the
future impact of accounting standards that have been issued but are not yet
effective.   Managements Discussion and
Analysis is presented in the following sections:  Executive Overview; Results of Operations; Liquidity and Capital
Resources; and Accounting Pronouncements and Policies.  It is useful to read Managements Discussion
and Analysis in conjunction with the interim condensed consolidated financial statements
and related notes thereto contained elsewhere in this document.
EXECUTIVE OVERVIEW
The Companys Operations
CPI Corp. is a long-standing leader, based on sittings and related
revenues, in the professional portrait photography of young children and
families.  From the single studio opened
by its predecessor company in 1942, we have grown to 1,017 studios throughout
the United States, Canada and Puerto Rico under license agreements with
Sears.  We have provided professional
portrait photography for Sears customers since 1959 and have been the
exclusive Sears portrait studio operator since 1986.
As of the end of the first quarter in fiscal 2004 and 2003, May 1, 2004
and April 26, 2003, respectively, the Companys Sears Portrait Studio counts
were:

May 1, 2004
  
  April 26, 2003United States and Puerto
  Rico:Within full-line Sears stores
  
  
  854
  
  
  
  857Locations not within Sears stores
  
  
  45
  
  
  
  45Canada
  
  
  118
  
  
  
  120Total
  
  
  1,017
  
  
  
  1,022In early 2003,
the Company commenced operations of a Mexican portrait studio business and a
mobile photography operation.  As of the
end of the first quarter of 2004, the Company operated 24 portrait studios in
Mexico through Soriana and its City Club format.  The Company also provided mobile photography services under the name
Everyday Expressions to childcare centers, youth sports associations and
events in 26 markets throughout the United States.  During the first quarter of 2004, the Mexican and mobile
operations reported revenues of $558,000 and $527,000 and losses, net of
associated tax benefits, of $316,000 and $822,000, respectively.
Subsequent to the end of the first quarter, the Companys new Board of
Directors made a strategic decision to exit both the Mexican and mobile
photography operations.  This decision
was made to allow the Company to enhance focus on the core Sears Portrait
Studios business as well as to eliminate the ongoing operating dilution
associated with these businesses.  The
Company plans to execute its exit plans during the second quarter of 2004 at
which time it will record the charges and impairments necessary to effectuate
the exits.  Currently, the Company
expects to record pre-tax exit costs in the second quarter of 2004 ranging from
$2.4 million to $3.2 million related to the Mexican operation and from $1.4
million to $1.8 million related to the mobile photography operations.

14

RESULTS OF
OPERATIONS
A summary of consolidated results of operations and key statistics were
as follows:
12 Weeks
  Endedthousands, except per share data and
  average sales per customer sitting
  
  May 1,
  2004
  
  April 26,
  2003Net sales
  
  
  $
  56,010
  
  
  
  $
  56,255Cost and
  expenses:Cost of sales
  
  
  
  8,059
  
  
  
  
  7,823(exclusive of depreciation and amortization shown below)Cost of sales as a percentage of net sales
  
  
  
  14.4
  %
  
  
  
  13.9
  %Gross margin as a percentage of net sales
  
  
  
  85.6
  %
  
  
  
  86.1
  %Selling, general and administrative expenses
  
  
  
  48,044
  
  
  
  
  48,510Selling, general and administrative expenses as a
  percentage of sales
  
  
  
  85.8
  %
  
  
  
  86.2
  %Depreciation and amortization
  
  
  
  4,037
  
  
  
  
  4,023Other charges and impairments
  
  
  
  9,563
  
  
  
  
  69,703
  
  
  
  
  60,356Loss from operations
  
  
  
  (13,693
  )
  
  
  
  (4,101
  )Interest expense
  
  
  
  599
  
  
  
  
  769Interest income
  
  
  
  281
  
  
  
  
  374Other income, net
  
  
  
  46
  
  
  
  
  52Loss before income tax
  benefit
  
  
  
  (13,965
  )
  
  
  
  (4,444
  )Income tax benefit
  
  
  
  (5,167
  )
  
  
  
  (1,714
  )NET LOSS
  
  
  
  (8,798
  )
  
  
  
  (2,730
  )Net loss
  per share - diluted
  
  
  $
  (1.09
  )
  
  
  $
  (0.34
  )The Company
reported a net loss for the 12-week first quarter ended May 1, 2004 of $8.8
million, or $1.09 per diluted share, compared to a net loss of $2.7 million, or
$0.34 per diluted share for the comparable quarter of fiscal 2003.  The overall results of the first quarter of
2004 were significantly impacted by the timing of Easter in 2004 versus 2003
and by the recording of other charges and impairments totaling $9.6 million,
$6.0 million on an after-tax basis or $.74 per diluted share.  The other charges and impairments consist
principally of additional costs incurred by the Company in the first quarter of
2004 related to the then-ongoing consent solicitation contest, accruals
triggered by various change of control provisions included in certain executive
employment contracts and accruals, reserves and charges resulting from
personnel and strategic direction decisions made by the Companys new Board of
Directors.
15

Net sales totaled $56.0 million and $56.3 million in the first quarter
of fiscal 2004 and 2003, respectively.

  Consolidated
  net sales for the first quarter of 2004 decreased $245,000 or less than 1.0%
  to $56.0 million from the $56.3 million reported in the first quarter of
  2003 as declines in Sears Portrait Studio sales of $1.3 million were
  substantially offset by increases in sales in the Companys Mexican and
  Mobile photography operations of $1.0 million.  As discussed more fully in the following paragraphs, the timing
  of Easter in 2004 versus 2003 had a significant impact on the comparability
  of reported first quarter sales in both years.
  During the
  first quarter of 2004, the Companys Sears Portrait Studios reported a 2.5%
  decrease in sittings from 885,000 to 863,000 and a 0.6% decrease in average
  sale per customer sitting from $63.16 to $62.81.  The timing of Easter, a seasonally important time for
  portraiture sales, had a significant impact on the timing of recognition of
  sales revenues between the Companys first and second fiscal quarters.  Most of the Companys Easter-related sales
  in 2004, an earlier Easter, were recognized as revenues, in accordance with
  the Companys revenue recognition policies, in the first fiscal quarter while
  such sales in 2003, a later Easter, were principally recognized in the second
  fiscal quarter.  The comparability
  impact related to the timing of Easter is illustrated by reference to the
  following year-to-date sales update.
  On a
  year-to-date basis through May 29, 2004, sales in the Companys Sears
  Portrait Studios are down approximately 10.6% from the comparable period in
  2003.  The net change in deferred revenues,
  based principally on the timing of deliveries of portraits to the customer,
  has the impact of increasing or decreasing reported sales revenues.  Excluding the effects of the net changes
  in deferred revenues, the Companys year-to-date sales through May 29, 2004
  declined approximately 13.5% compared to the comparable period of the prior
  year which is reflective of the trends being experienced in our studios.  There are a number of initiatives being
  considered for the second half of the year designed to reverse the negative
  sales trends experienced in the first half-to-date.  These initiatives include, among others, a studio hardware
  upgrade, a full digital test in a meaningful number of studios, pricing/offer
  changes, additional marketing support and increased studio coverage hours.
  The Company
  believes that the continuing decline in first quarter sittings is
  attributable to several external and internal factors.  Among the external factors are the impacts
  of continuing competitive pressures, including the opening of new competitor
  locations and severe price discounting. 
  In addition, the rate at which customers continue to adopt amateur
  digital photography technologies has accelerated which may be impacting the
  frequency of studio visits.  Internal
  factors potentially negatively impacting sittings include the Companys
  decision, beginning in the second half of 2003, to reduce studio employment
  costs through lower allocations of hours toward coverage and
  training/retention, which is currently being reassessed, as well as potential
  effects from reduced advertising spending in the fourth quarter of 2003.  In addition, it is likely that some
  customers visiting our studios are receiving a less than optimal experience
  as a result of certain technology and support challenges caused by our aging
  studio infrastructure which also is currently under review as part of the new
  Boards review of options to transition the studios to full digital
  technology.
  The net
  decrease in average sale per customer sitting results from the positive
  impact of a continuing mix shift toward the higher value custom offer being
  more than offset by increased discounting in response to competitive pricing
  pressures and the elimination of sitting fees on certain offers targeted at
  new customer acquisition.  The new
  Board and management are also reviewing alternative pricing strategies.16

Costs and expenses were $69.7 million in the first quarter of
2004, compared with $60.4 million in comparable prior year period.


  Cost of
  sales, excluding depreciation and amortization expense, as a percentage of
  net sales was 14.4% in the first quarter of 2004, compared to 13.9% in the
  comparable quarter in 2003. 
  Correspondingly, gross margin rates were 85.6% and 86.1% in the first
  quarter of 2004 and 2003, respectively. 
  The increase in cost of sales, as a percentage of sales, from the
  first quarter of 2003 to the first quarter of 2004 was primarily a result of
  increased markdowns on merchandise sales of frames and accessories in an
  effort to reduce inventory levels in the field.
  Selling,
  general and administrative expenses were $48.0 million and $48.5 million for
  first quarter of 2004 and 2003, respectively.  As a percentage of sales, these expenses were 85.8% in 2004 and
  86.2% in 2003.Selling,
  general and administrative expenses decreased $500,000 in the first quarter
  of 2004 compared to 2003.  This
  decrease resulted primarily from $1.6 million in additional costs in the
  first quarter of 2004 associated with the Companys mobile photography and
  its Mexican studio operations being more than offset by other decreases in
  selling, general and administrative expenses of $2.1 million.  The other decreases are primarily
  attributable to a reduction in studio employment costs of $1.6 million as
  well as overall net decreases in various other categories of expenses
  resulting from the Companys cost reductions initiatives.
  Depreciation
  and amortization was $4.0 million in the first quarter of 2004, unchanged
  from the comparable quarter of 2003.
  Other
  charges and impairments reflect costs incurred from strategic actions
  implemented by the Company to restructure its operations, costs that are
  unpredictable and atypical of the Companys operations and additional charges
  due to asset impairments.  In the
  first quarter of 2004, the Company recognized $9.6 million in other charges
  and impairments consisting principally of additional costs incurred by the
  Company related to the then-ongoing consent solicitation contest, accruals
  triggered by various change of control provisions included in certain
  executive employment contract and accruals, reserves and charges resulting
  from personnel and strategic direction decisions made by the Companys new
  Board of Directors.  Other charges and
  impairments recorded in the first quarter of 2004 are as follows:thousandsAccruals related to
  accelerated vesting of supplementalretirement plan benefits and guaranteed bonuses for 2004
  
  $
  3,414Impairment charges
  
  
  3,067Reserves for severance and
  related costs
  
  
  2,036Consent solicitation costs
  
  
  846Non-refundable loan
  commitment fee write-off
  
  
  200Total Other Charges and
  Impairments
  
  $
  9,56317


  Accelerated
  Vesting of Supplemental Retirement Plan Benefits and Guaranteed Bonuses for
  2004In the first
  quarter of 2004, change of control provisions in executive employment
  contracts were triggered as a result of the change in the composition of the
  Companys Board of Directors resulting from the completion of the consent
  solicitation.  As a result, the
  Company accrued $3.3 million related to the accelerated vesting of
  executives benefits covered by the Companys supplemental retirement plan
  and guaranteed bonuses of $76,000 provided for in employment contracts for
  those covered executives whose employment continues with the Company.
  Impairment
  ChargesDuring the
  first quarter of 2004, the Companys new Board along with its new management
  leadership in the technology function, made a decision to materially alter
  the Companys previously planned and recently in-process technology platform
  that was to serve as the foundation for the eventual conversion to full
  digital technology in the portrait studios. 
  As a result of this decision, certain previously capitalized software
  development costs related to the development of the previous platform no
  longer have future utility to the Company and, accordingly, have been written
  off.
  Reserves for Severance and Related CostsDuring the
  first quarter of 2004, the Company established a reserve for severance and
  related costs consisting principally of potential benefits related to
  severance pay and supplemental retirement plan costs associated with the
  dismissal of certain executives.
  Consent
  Solicitation CostsIn the first
  quarter of 2004, the Company incurred $846,000 of professional services costs
  related to the then-ongoing consent solicitation contest.  These costs include $154,000 of total
  consent-related costs incurred by the Knightspoint Group which the Company
  has agreed to reimburse.
  Non-refundable
  Loan Commitment Fee Write-offIn early
  March 2004, prior to the change of control, the Company received a lending
  commitment related to the proposed refinancing of its then-existing debt
  structure.  In exchange for that
  commitment, the Company paid a $200,000 non-refundable loan commitment
  fee.  Subsequent to the receipt of the
  commitment and prior to its funding, the consent solicitation was completed
  resulting in the installation of a new Board and the lending commitment expired,
  necessitating the write-off of the previously capitalized non-refundable fee.
  Interest
  expense was $599,000 in the first quarter of 2004 compared to $769,000 in the
  comparable period of the prior year. 
  The reduction in interest expense is primarily a result of scheduled
  annual principal payments totaling $8.6 million made in June 2003 reducing
  the outstanding balance of the Senior Notes.
  Interest
  income was $281,000 in the first quarter of 2004 compared to $374,000 in the
  first quarter of 2003.  The decrease
  in interest income is due to declines in interest rates, the shortening of
  maturities in certain investments and lower average invested cash balances.
  Income tax
  benefits were $5.2 million and $1.7 million in the first quarter of 2004 and
  2003, respectively.  These benefits
  resulted in effective tax rates of 37.0% in 2004 and 39.0% in 2003.  The lower effective income tax rate in the
  first quarter of 2004 was attributable to the lower marginal rate expected
  for the year.18

LIQUIDITY AND
CAPITAL RESOURCES

The following table presents a summary of our cash flows for the first
quarters of 2004 and 2003.

12 Weeks
  Endedthousands
  
  May 1,
  2004
  
  April 26,
  2003Net cash provided by (used
  in):Operating activities
  
  
  $
  1,320
  
  
  
  $
  3,184Investing activities
  
  
  
  (6,245
  )
  
  
  
  (4,212
  )Financing activities
  
  
  
  (697
  )
  
  
  
  (1,073
  )Effect of exchange rate
  changes on cash
  
  
  
  (307
  )
  
  
  
  204Net decrease in cash
  
  
  $
  (5,929
  )
  
  
  $
  (1,897
  )Net
Cash Provided By Operating Activities
Net cash provided by operating activities was $1.3 million during the
first quarter of 2004 compared to $3.2 million in the first quarter of
2003.  The decrease in cash provided in
2004 compared to 2003 resulted primarily from increased net losses partially
offset by impairment charges not requiring cash and increases in accounts
payable and accrued expenses resulting from accrued purchase commitments for
computer hardware, peripherals and software development and accruals triggered
by the change of control and strategic and leadership changes, none of which
were funded during the first quarter. 
In addition, operating cash flows for the first quarter of 2004 were
also impacted by net changes in current assets from 2003, principally
receivables from Sears and refundable income taxes.  The receivable from Sears increased in 2003 due to changes in our
credit card processing agreement with them. 
Refundable income taxes increased in 2004 as a result of the first
quarter loss and the receipt in the first quarter of 2003 of an income tax
refund totaling $4.4 million.

Net Cash Used In Investing Activities
Net cash used in investing activities during the first quarter of 2004
was $6.2 million compared to $4.2 in the first quarter of 2003.  The increase in cash used for investing
activities is primarily related to increased capital expenditures resulting
from a $2.1 million accrued purchase commitment recorded in our balance sheet
at May 1, 2004 for computer equipment, peripherals and software development
that were purchased in the first quarter of 2004 to replace aging systems in
our studios and will be paid for in the second quarter of 2004 and a decrease
of $2.5 million in net borrowings by Prints Plus under our revolving line of
credit to them offset by no voluntary redemptions in 2004 by Prints Plus on the
Preferred Security compared to $2.5 million of such redemptions in the first
quarter of 2003.
Net Cash Used In Financing Activities
Net cash used in financing activities was $697,000 in the first quarter
of 2004 compared to $1.1 million in the comparable prior year period.  The decrease in net cash used in the first
quarter of 2004 was primarily related to the increase in proceeds from
borrowings against cash surrender value of life insurance of $184,000 and an
increase in proceeds from the issuance of common stock for option exercises of
$357,000, partially offset by a $165,000 increase in cash dividends resulting
from the Board of Directors June 3, 2003 decision to increase the annual
dividend rate paid on the Companys common stock from $.56 per share to $.64
per share effective with the third quarter 2003 dividend payment.
19

As discussed in the Companys Annual Report on Form 10-K for its fiscal
year ended February 7, 2004, the Company has a $60.0 million Senior Note
Agreement and $15 million Revolving Credit Facility.  Effective May 1, 2004, the Company amended its Revolving Credit
Facility to adjust the minimum consolidated fixed charge coverage ratio and the
maximum consolidated adjusted liabilities to consolidated EBITDA
covenants.  In the May 2004 amendment,
the Company also agreed to reduce the line to $6.2 million since the Company
has current minimal operating borrowing needs other than to support $6.2
million in outstanding letters of credit as of May 1, 2004.  As of May 1, 2004, the Company was in
compliance with all covenants under both the amended Revolving Credit Facility
and the Senior Note Agreement.
Off-Balance Sheet Arrangements
Other than stand-by letters of credit to support our various
self-insurance programs and the ongoing guarantee of certain operating real
estate leases of Prints Plus, both of which are more fully discussed in the
following Contingencies section, the Company has no additional off-balance
sheet arrangements.
Contingencies
In July 2001, the Company announced the completion of the sale of its
Prints Plus Wall Decor segment, which included the ongoing guarantee of certain
operating real estate leases of Prints Plus. 
As of May 1, 2004, the maximum
future obligation to the Company under these guarantees is $8.8 million before
any negotiation with landlords or subleasing. 
Based on scheduled lease payments, the maximum future obligations will
decrease an additional $3.7 million by the end of fiscal 2004, then by $2.9
million in 2005 and approximately $2.2 million over the next two years. To
recognize the risk of potential default associated with these leases, a $1.0
million reserve was established in 2001. 
The $1.0 million reserve was established assuming an average of
75 days of lease payments for each of the 56 leases then guaranteed by the
Company.  The 75 day estimate was based
upon the Companys historical experiences in settling lease obligations
resulting from early terminations of leases, taking into account the nature of
prime mall space represented by the guaranteed leases.  The Company has recognized no losses to date
related to their obligations under these guarantees.  At May 1, 2004, the Company
had made no further allowances for defaults under these operating leases as, in
the opinion of management, Prints Plus is meeting the performance standards
established under the operating leases.
In conjunction with the above-mentioned
transaction, the Company received an $11.0 million Preferred Security
(Preferred Security) and provided Prints Plus with a $6.4 million revolving
credit facility.  The agreements
governing both instruments contain certain operating and financial
covenants.  During the Companys third quarter
of 2003 (Prints Plus first fiscal quarter of 2003), Prints Plus failed to
achieve the minimum EBITDA covenant included in the revolving credit facility,
as amended, requiring Prints Plus to maintain EBITDA for any consecutive four
quarters of not less than $3.0 million. As of November 8, 2003, the Company
provided Prints Plus with a waiver on the violation of this covenant.

Based on Prints Plus revised operating forecast for its fiscal year
ending July 24, 2004, we expect them to continue to fail to achieve the minimum
EBITDA covenant referred to above as well as the fixed charge ratio covenant
throughout the remainder of their fiscal year. 
To address this, the Company has provided Prints Plus with a prospective
waiver of the minimum EBITDA and fixed charge ratio covenants through July 24,
2004 as long as they meet or exceed the projected operating results in their
revised operating forecast.  The
achievement of the revised operating forecast should result in Prints Plus
being able to continue to meet its obligations, including those to the Company,
as they come due.  As of the Companys
first quarter of fiscal 2004 (Prints Plus third fiscal quarter of 2003),
Prints Plus trailing four quarter EBITDA was $1.7 million versus the $2.0
million called for in their revised operating forecast covered by our
prospective waiver.  As of May 1, 2004,
the Company provided Prints Plus with an additional waiver of the covenant
violation.
20

In assessing the recoverability of its
recorded investment in the Preferred Security and the revolving credit
facility, the Company reviews whether events or changes in circumstances
indicate that the carrying value of the Preferred Security and the amount
advanced under the revolving line of credit may not be recoverable.  This review includes an analysis of the
current operating performance of Prints Plus, including the amounts of free
cash flow being generated providing for interest and debt service, as well as
their compliance with the performance standards included within the covenants
of the Preferred Security and revolving line of credit.  Based on this review, no valuation allowance
is deemed necessary at May 1, 2004.
The Company uses stand-by letters of credit to support its various
self-insurance programs.  Letters of
credit are issued under CPI Corp.s revolving credit facility, generally having
a one-year maturity and are renewed annually. 
As of May 1, 2004, the Company had outstanding standby letters of credit
in the principal amount of $6.2 million.

Liquidity
Cash flows from operations and cash and cash equivalents on hand
represent our expected sources of funds in 2004 to meet our obligations and
commitments, including debt service, annual dividends to shareholders, planned
capital expenditures and normal operating needs.
Despite the trend of declining cash flows from operations and the
continuing challenging and competitive sales environment, we expect to generate
sufficient cash flow from operations in 2004, when coupled with cash on hand,
to meet the Companys obligations and commitments.
However, as referred to in the Executive Overview section of
Managements Discussion and Analysis in the Companys 2003 Annual Report on
Form 10-K for its fiscal year ended February 7, 2004, our new Board is
evaluating the possibility of effecting a significant return of capital.  To effectuate such a return of capital would
require either debt covenant relief from our existing Senior Note holders or a
refinancing of the Senior Notes and an increase in our existing revolving credit
facility to handle potential seasonal cash flow needs.  Based on our discussions to date, our Senior
Note holders have advised us that they are unwilling to grant the debt covenant
relief necessary to effectuate a significant return of capital.  We have initiated preliminary discussions
with several banks regarding a potential refinancing of our existing debt
structure to determine the availability of adequate funding sources on terms
acceptable to the Company.
ACCOUNTING
PRONOUNCEMENTS AND POLICIES
Adoption of New Accounting Standards
There
were no accounting standards issued during the first quarter of 2004 which will
impact the Companys consolidated financial statements.
Application of Critical Accounting Policies

The Companys significant accounting policies
are discussed in the Notes to the Consolidated Financial Statements that are
included in the Companys 2003 Annual Report on Form 10-K that is filed with
the Securities and Exchange Commission. 
In most cases, the accounting policies utilized by the Company are the
only ones permissible under U.S. Generally Accepted Accounting Principles for
businesses in our industry.  However,
the application of certain of these policies 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

21

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
accounting policies and estimates that can have a significant impact on the
operating results, financial position and footnote disclosures of the Company
are described in the Management Discussion and Analysis of Financial Condition
and Results of Operations in the Companys 2003 Annual Report on Form 10-K.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
INFORMATION
The statements contained in this report, and in particular in the Managements Discussion and Analysis of
Financial Condition and Results of Operations
section that are not historical facts are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, and involve
risks and uncertainties.  Management
wishes to caution the reader that these forward-looking statements, such as the
Companys outlook for portrait studios, future cash requirements, compliance
with debt covenants, valuation allowances, and capital expenditures, are only
predictions or expectations; actual events or results may differ materially as
a result of risks facing the Company. 
Such risks include, but are not limited to:  customer demand for the Companys products and services, the
overall level of economic activity in the Companys major markets, competitors
actions, manufacturing interruptions, dependence on certain suppliers, changes
in the Companys relationship with Sears and the condition and strategic
planning of Sears, fluctuations in operating results, the condition of Prints
Plus Inc., the attraction and retention of qualified personnel and other risks
as may be described in the Companys filings with the Securities and Exchange
Commission, including its Form 10-K for the year ended February 7, 2004.
22

Item 3. 
Quantitative and Qualitative Disclosures About Market Risk
Market risks relating to the Companys operations result primarily from
changes in interest rates and changes in foreign exchange rates.  The Companys debt obligations have
primarily fixed interest rates; therefore, the Companys exposure to changes in
interest rates is minimal. The Companys exposure to changes in foreign
exchange rates relates to its Canadian and Mexican operations and is also
minimal, as these operations constitute 11.3% of the Companys total assets at
May 1, 2004 and 7.6% of the Companys total sales for the 12 weeks then ended.
Item 4. 
Disclosure Controls and Procedures
An evaluation of the Companys disclosure controls and procedures (as
defined in Section 13(a)-14(c) of the Securities Exchange Act of 1934 (the
Act) was carried out under the supervision and with the participation of the
Companys Chief Executive Officer, Chief Financial Officer and several other
members of the Companys senior management as of the end of the period
reported. The Companys Chief Executive Officer and Chief Financial Officer
concluded that the Companys disclosure controls and procedures as currently in
effect are effective in ensuring that the information required to be disclosed
by the Company in the reports it files or submits under the Act is (i)
accumulated and communicated to the Companys management (including the Chief
Executive Officer and Chief Financial Officer) in a timely manner, and (ii)
recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms.
In the quarter ended May 1, 2004, the Company did not make any
significant changes in, nor take any corrective actions regarding, its internal
controls or other factors that could significantly affect these controls.  In addition, since the date of this
evaluation to the filing date of this Quarterly Report, there have been no
significant changes in the Companys internal controls or in other factors that
could significantly affect internal controls, including any corrective actions
with regard to significant deficiencies and material weaknesses.
23

PART II.  
OTHER INFORMATION
Item 4. Results of Votes of Security Holders
See Part I. Item 4. Results of Votes of Security Holders in the
Companys 2003 Annual Report on Form 10-K for its fiscal year ended February 7,
2004 for the results of the consent solicitation completed in the first quarter
of 2004.
Item 6. 
Exhibits and Reports on Form 8-K

a.
  ExhibitsAn Exhibit
  Index has been filed as part of this Report on Page E-1.b.
  Reports on
  Form 8-K.
  
  On February
  11, 2004, CPI Corp. filed an 8-K Current Report on the issuance of a press
  release dated February 9, 2004 offering dissident group proportional
  representation on its Board of Directors.
  
  On February
  13, 2004, CPI Corp. filed an 8-K Current Report on the issuance of a press
  release dated February 13, 2004 announcing that written consents from
  stockholders were delivered to the Company.
  
  On March 4,
  2004, CPI Corp. filed an 8-K Current Report on the issuance of a press
  release dated March 3, 2004 announcing the return of $30 million in capital
  to stockholders.
  
  On March 25,
  2004, CPI Corp. filed an 8-K Current Report on the issuance of a press
  release dated March 24, 2004 announcing the consents of CPI Corp.
  shareholders were certified by an independent inspector and that the majority
  of the Board of Directors had been replaced.
  
  On April 8,
  2004, CPI Corp. filed an 8-K Current Report on the issuance of a press
  release dated March 24, 2004 announcing changes in control of registrant.
  
  On April 21,
  2004, CPI Corp. filed an 8-K Current Report on the issuance of a press
  release dated April 15, 2004 reporting fourth quarter and fiscal 2003
  results.
  
  On April 22,
  2004, CPI Corp. filed an 8-K Current Report on the issuance of a press
  release dated April 20, 2004 announcing that James R. Clifford resigned from
  its Board of Directors.
  
  On April 27,
  2004, CPI Corp filed an 8-K Current Report on the issuance of a press release
  dated April 26, 2004 announcing that J. David Pierson had been removed from
  the positions of Chairman of the Board, Chief Executive Officer and President
  of the Company.24

CPI CORP.

SIGNATURES

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

CPI Corp.(Registrant)By:
  /s/ Gary W. DouglassGary W. DouglassExecutive Vice President, Finance and Chief Financial Officer
  (Principal Financial Officer)Dated: June 10, 2004By:
  /s/ Kimberly A. LaBelleKimberly A. LaBelleVice President, Corporate
  Controller
  (Principal Accounting Officer)Dated:  June 10, 200425

CPI CORP.

E-1
EXHIBIT INDEX

Exhibit No.3.10
  
  Amendments to Bylaws of
  the Company10.83
  
  Sixth Amendment to Sears
  License Agreement (Off Mall)11.1
  
  Computation of Per Share
  Earnings - Diluted - for the 12 weeks ended May 1, 2004 and April 26, 200311.2
  
  Computation of Per Share
  Earnings - Basic - for the 12 weeks ended May 1, 2004 and April 26, 200331.1
  
  Certification Pursuant to
  Rule 13a-14(a) Under the Securities and Exchange Act of 1934 by the Chief
  Executive Officer31.2
  
  Certification Pursuant to
  Rule 13a-14(a) Under the Securities and Exchange Act of 1934 by the Chief
  Financial Officer32.0
  
  Certification Pursuant to
  18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002 by Chief Executive Officer and Chief Financial
  Officer26