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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

-------------------------------------

ANNUAL REPORT ON FORM 10-K

(MARK ONE)
/X/[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the year ended December 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from to1997

Commission file number 0-27824

PIA MERCHANDISING SERVICES, INC.

(Exact name of registrant as specified in its charter)
Delaware 33-0684451
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) (I.R.S. Employer Identification No.)

19900 MacArthur Boulevard, SuiteMACARTHUR BLVD, SUITE 900, Irvine, California 92715
(Address of principal executive offices)IRVINE, CA 92612

Registrant's telephone number, including area code: (714) 476-2200

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

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

Common Stock, par value $.01 per share

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

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

The aggregate market value of the Common Stock of the Registrant held by
non-affiliates of the Registrant on March 21, 1997,13, 1998, based on the closing price
of the Common Stock as reported by the Nasdaq National Market on such date, was
approximately $18,063,208.$19,385,868.

The number of shares of the Registrant's Common Stock outstanding as of
March 21, 199713, 1998 was 5,899,5585,392,558 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the Annual Meeting of Stockholders to be held on
June 6, 1997May 12, 1998 are incorporated by reference into Part III hereof.

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PIA MERCHANDISING SERVICES, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 1996

INDEX
Page
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PART I

Item 1. Business 1
Item 2. Properties 17
Item 3. Legal and Administrative Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
PAGE
----

PART I

Item 1. Business 3
Item 2. Properties 15
Item 3. Legal and Administrative Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15

PART II

Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 16
Item 6. Selected Consolidated Financial Data 17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 18
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 20
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 24

PART III

Item 10. Directors and Executive Officers of the Registrant 24
Item 11. Executive Compensation 24
Item 12. Security Ownership of Certain Beneficial Owners and Management 24
Item 13. Certain Relationships and Related Transactions 24
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 24

PART III

Item 10. Directors and Executive Officers of the Registrant 25
Item 11. Executive Compensation 25
Item 12. Security Ownership of Certain Beneficial Owners and Management 25
Item 13. Certain Relationships and Related Transactions 25

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 25

Signatures 26
Signatures 28

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PART I

THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A24A OF THE SECURITIES ACT OF 1933 AND SECTION 21E
OF THE SECURITIES EXCHANGE ACT OF 1934. THESE STATEMENTS ARE IN THE SECOND
PARAGRAPH UNDER "BUSINESS--INDUSTRY OVERVIEW--SHIFT OF MERCHANDISING SERVICES,
TO MANUFACTURERS,"
THE SOLE PARAGRAPH UNDER "BUSINESS--INDUSTRY OVERVIEW--
INCREASEOVERVIEW--INCREASE IN MERCHANDISING
SERVICES REQUIRED IN OTHER RETAIL CHANNELS," THE FIRST
PARAGRAPH UNDER "BUSINESS--BUSINESS STRATEGY," THE SOLE PARAGRAPH UNDER
"BUSINESS--BUSINESS STRATEGY--STRENGTHEN THE COMPANY'S RETAILER RELATIONSHIPS,"
THE SOLE PARAGRAPH UNDER "BUSINESS--BUSINESS STRATEGY--ADAPT DIVISION OPERATING
STRUCTURE TO CHANGING MARKET DEMAND," THE SOLE PARAGRAPH UNDER "BUSINESS--
BUSINESS STRATEGY--SERVE EMERGING DEMAND FOR DEDICATED SERVICES," THE
SOLE PARAGRAPH UNDER "BUSINESS--BUSINESS STRATEGY--INCREASE THE COMPANY'S
UTILIZATION OF INFORMATION TECHNOLOGY," THE FIRST PARAGRAPH UNDER
"BUSINESS--DESCRIPTION OF SERVICES," THE THIRD FIFTH AND SEVENTH PARAGRAPHSPARAGRAPH UNDER
"BUSINESS--CUSTOMERS,"BUSINESS--RELATED SERVICES--TELEMARKETING SERVICES," THE SOLE PARAGRAPH UNDER
"RISK FACTORS--HISTORY OF LOSSES,"BUSINESS--TRADEMARKS," THE SOLEFIRST PARAGRAPH UNDER "RISK FACTORS--LOSS OF SYNDICATED BUSINESS," THE SOLE PARAGRAPH UNDER
"RISK FACTORS--INDUSTRY CONSOLIDATION; CONCENTRATED CLIENT BASE," THE SECOND
PARAGRAPH UNDER "RISK FACTORS--COMPETITION," THE SECOND PARAGRAPH UNDER
"MANAGEMENT'S"BUSINESS--MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--OVERVIEW,OPERATIONS--YEAR
ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996--NET REVENUES,"
AND THE SECONDFIFTH PARAGRAPH UNDER "MANAGEMENT'S"BUSINESS--MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--RESULTSOPERATIONS," THE SIXTH PARAGRAPH UNDER
"BUSINESS--MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS--YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31,
1995.FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--LIQUIDITY AND CAPITAL RESERVES," AND THE SOLE PARAGRAPH
UNDER "BUSINESS--YEAR 2000 SOFTWARE COSTS." ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF
THE RISK FACTORS SET FORTH BELOW UNDER "RISK FACTORS."FACTORS"

SEE THE GLOSSARY AT PAGE 1513 FOR A DESCRIPTION OF CERTAIN TERMS THAT ARE
USED THROUGHOUT THIS ANNUAL REPORT ON FORM 10-K.

ITEM 1. BUSINESS.BUSINESS

GENERAL

PIA Merchandising Services, Inc. ("PIA" or the "Company") is a supplier
of in-store merchandising and sales services in the United States and Canada.
The Company provides these services primarily on behalf of brandedconsumer product
manufacturers and retailers at approximately 20,000 retail grocery stores, 5,000
mass merchandiser stores and 13,000 chain drug and deep discount drug stores.

The Company currently provides three principal types of services: ongoing
fullshared
services, known as syndicatedwhere an associate represents multiple clients; dedicated services,
where associates work for one specific client; and project services, and dedicated
services for specific clients.

Syndicatedwhere
associates perform special in-store activities.

Shared services consist of regularly scheduled, routed merchandising
services provided at the store level for manufacturers, primarily under
one
yearmulti-year contracts. PIA's syndicatedshared service organization performs services for
multiple manufacturers, including, in some cases, for manufacturers whose
products are in the same product category. Syndicatedmanufacturers. Shared services may include checking to insureensure that
client product itemsclient's products authorized for distribution are in stock and on the shelf,
cuttingadding in new products that are approved for distribution but not present on the
shelf, setting category shelves in accordance with approved store schematics,
insuringensuring that shelf tags are in place, checking for the overall salability of
clients' products, and performing new product and promotion selling.

Project services consist primarily of special in-store services
initiated by retailers and manufacturers, such as seasonal, new product,
special promotion and installation activities. These services are typically
used for large scale implementations over 30 to 60 days. The Company also
performs other project services, such as new store sets and existing store
resets, remerchandisings, remodels and category implementations, under
syndicated services contracts or stand-alone project contracts.

Dedicated services consist of merchandising services, generally as
described above, that are performed for a specific retailer or manufacturer by a
dedicated organization, including a management team, working exclusively for
that retailer or manufacturer. These services are provided primarily
under multi-year
contracts.

For both shared service clients and dedicated service clients, the
Company also performs project services. Project services consist primarily of
special in-store services initiated by retailers and manufacturers, such as
seasonal, new product, special promotion, and installation activities. These
services are typically used for large-scale implementations over 30 days. The
Company also performs other project services, such as new store sets and
existing store resets, re-merchandisings, remodels and category implementations,
under shared service contracts or stand-alone project contracts.

As part of its syndicated, projectshared and dedicated services, PIA also collects and
provides to certain clients a variety of merchandising data that is category,
product and store specific.

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PIA, organized in 1943, historically hasinitially provided merchandising services in
grocery retail chains on behalf of manufacturers. Until 1989, the Company
operated exclusively in grocery retail chains in California and Arizona. In
mid-1988, Clinton E. Owens, the Company's current Chairman and Chief Executive
Officer, concludedit was determined that a national merchandising company could
capitalize on developments within the retail grocery industry by providing
merchandising services to a variety of manufacturers supplyingin the industry. In August 1988,
Mr. Owens and Riordan, Lewis & Haden, a private investment firm, completed an
acquisition of the Company. In 1990,
PIA implemented a national expansion strategy to cover the grocery trade, and in 1991 began providing services to
grocery retailers themselves.trade. In
1993, the Company expanded its focus to address additional retail channels,
including mass merchandiser, chain drug and deep discount drug stores. In 1994, PIA
began offering dedicated services to retailers and manufacturers. In 1996,1997, the
Company established a corporate and division infrastructure for its project
services business. The Company currently performs its services primarily on
behalf of approximately 180 brandedconsumer product companies, including S.C. Johnson Wax, Colgate-Palmolive, Lever
Brothers, Ralston Purina, Buena Vista Home Video and Hormel Foods. The
Company's current retailer clients include American Stores, Eckerd Drug Stores,
Wal*Mart, Kmart, Safeway, Vons, Wakefern and Edwards Super Foods.manufacturers.

INDUSTRY OVERVIEW

A number of trends have been impacting the retail industry and are
creating a demand for providers of third party merchandising services such as
the Company.

SHIFT OF MERCHANDISING SERVICES

Historically, merchandising functions were principally performed by
employees of retailers, consumer product manufacturers and food brokers.
Retailers staffed their stores as needed to insureensure in-stock conditions, the
placement of new items on
the shelves, and the maintenance of shelf schematics to
approved standards. Manufacturers typically deployed their own sales personnelpeople in
an effort to insureensure that their products were in distribution on the shelves and
were properly spaced and positioned. However, the primary function of these
salespeoplesales people was to sell the manufacturers' products and promotions, and not to
perform significant in-store services at the shelf level. In addition, food
brokers performed retail merchandising services on behalf of the manufacturer in
conjunction with their sales efforts. Brokers also often performed work at the
shelf level at the request of the retailer and their principal client, the
brokers' principal clients.manufacturer.

The typical grocery store carries approximately 22,000 items. In an
effort to maintain or improve their margins, grocery retailers have broadened
their product offerings and services from traditional grocery, household and
health and beauty care products to include new product categories such as
general merchandise and service departments such as bakery, deli and prepared
fast foods. The Company believes that, as a result, these retailers have shifted
employee hours away from the traditional maintenance of packaged goods in order
to support these new categories and service departments. The Company further
believes that, at the same time, retailers have converted many hours of basic
merchandising work from full-time professionals to part-time labor, whichwho
generally isare less skilled and trained. These trends have caused unsatisfactory
shelf conditions and an increasing number of out-of-stocks,out-of-stock items, resulting in
lost sales. As a result, retailers began to rely
increasinglyare increasing their reliance on
manufacturers and food brokers, among others, to support their in-store needs
such as new store sets and existing store resets, remerchandisings,re-merchandisings, remodels
and category implementations. As manufacturers
were required to provide these retailer-mandated merchandising services, they
initiallyInitially, manufacturer's deployed their sales
professionals to perform suchthese retailer mandated merchandising services.
However, manufacturers found that the deployment of sales professionals to
perform retail merchandising services was expensive and not an effective use of
their resources. As manufacturers' costs to perform these services grew and

shelf integrity declined, manufacturers began to outsource these merchandising
activities to third parties such as the Company.

The outsourcing trend to third party merchandisers has resulted in an
increasing number of organizations providing services to manufacturers and
retailers. InCertain retailers and manufacturers have chosen to consolidate in
order to reduce the number of third parties they have to manage, to achieve
consistent execution of their retail merchandising strategies, and to customize
the scope of services performed on their behalf, certain retailers and
manufacturers have chosen to consolidate, and others are considering the
consolidation of, merchandising services with fewer and more dedicated
providers.behalf.

RETAILER CONSOLIDATION

The retail industry is undergoing a consolidation process that is
resulting in fewer, larger retailers. These retailers tend to have a wider
geographic distribution of stores, yet centralized procurement and
decision-making functions at their corporate headquarter.headquarters. The consolidation
trend is evidenced by the acquisition of Eckerds Drug StoresEckerd Drugstores by J.C. Penney
Company, Inc., the acquisition of Thrifty PayLess, Inc. by Rite Aid Corporation,
and the pending acquisition of The Vons Companies, Inc. by Safeway.Safeway, Inc.

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INCREASE IN GROCERY MERCHANDISING SERVICES REQUIRED

As retailer-mandated activities have continued to increase both in
number and type, as well as in the amount of labor required to perform them,
manufacturers have increased their use of third party suppliers. For example,
additional category implementation activities are required to effect retailers'
in-store schematics, which are changing with increasing frequency as the result
of a growing number of new product introductions each year. Further, retailers
are continuing a high level of resets, remerchandisingsre-merchandisings and remodels of entire
stores to respond to an increasing number of changes in product mix and to keep
their stores fresh and updated in a highly competitive environment. PIA
estimates that these activities have doubled in frequency over the last five
years, so that most stores are currently remerchandisedre-merchandised or remodeled every 24
months. In certain areas of the country and with certain retailers, these
activities are conducted annually.

INCREASE IN MERCHANDISING SERVICES REQUIRED IN OTHER RETAIL CHANNELS

Unlike the merchandising services performed for grocery retailers, work
performed by manufacturers in mass merchandiser, chain drug and deep discount
drug storesother retail
formats has historically been much less demanding. In these retail channels,
retailers performed most of their own merchandising work. However, the Company
believes that as these retailers have become more competitive, with
the traditional grocery industry, they are
attempting to maintain their margins by increasingly requesting support from the
manufacturer community to provide merchandising services similar to those
provided to the grocery retailers. Further, these retailers have become
increasingly important to manufacturers, causing these manufacturers to provide
greater retail focus and support to insure that out-of-stock conditions are
reduced, authorized items are available, and general product conditions are
favorable. The manufacturers have become particularly sensitive to the
requirements of seasonal and special promotion activities, which require rapid
and effective in-store support in order to maximize sales results.

INCREASE IN USE OF INFORMATION TECHNOLOGIES

Information technology is playing an increasingly important role in the
retail industry, particularly in light of industry initiatives towards efficient
consumer response ("ECR") and category management. Retailers and manufacturers
have expanded their use of information technology in order to manage product
distribution in stores, item placements on the shelves, and off-shelf displays.
In particular, retailers and manufacturers are increasingly looking for causal
data (e.g., display, pricing and product adjacency information) that is category
and store specific. This information is used by both retailers and manufacturers
to make decisions regarding ECR category management and shelf management issues,
new product and promotion plans, and enables retailers to tailor their stores to
regional demographics.

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BUSINESS STRATEGY

PIA believes that the increasing demand for national solutions to
manufacturers' varied merchandising requirements, together with the
consolidation of the retail industry, has increased the growth of outsourcing in
general. The increase in required merchandising services, and the increased use
of information technology, will foster the growth of those companies that can
provide these solutions, have the flexibility to respond to the changing retail
environment and have the financial resources to provide rapid deployment of
merchandising resources. The Company has developed a strategy that it believes
will address these industry trends. The major components of PIA's strategy are
as follows:

POSITION THE COMPANY AS A NATIONAL, FULL SERVICE RETAIL SOLUTIONS COMPANY

PIA's objective is to strengthen its position as a leading national
supplier of retail solutions by expanding the services that it offers,will offer,
including category management, retail and secondary headquarters selling, data gathering, interpretation and management, and telemarketing, to
both its existing and prospective manufacturer clients and its newer and
prospective retailer clients, and to offer its existing and newer services in
additional retail channels.

STRENGTHEN THE COMPANY'S RETAILER RELATIONSHIPS

PIA believes that by becoming an integral part of the retailers' shelf and
category management planning programs, it will provide added value to retailers
and foster relationships that will result in additional business for the
Company. PIA is implementing this strategy by establishing retailer teams to
focus on the needs of particular retailers, such as the teams currently in place
at Wal*Mart, Kmart and American Stores. The Company also provides key
account managers to retailers, along with the shelf technology which the
retailers use in their category management departments. PIA is also providing
to retailers the use of its software program, Merchandisers Toolbox. See "--
Increase the Company's Utilization of Information Technology" below. The
Company believes that this enhanced relationship will position PIA to attract
new clients, as satisfied retailers are more likely to recommend PIA to
suppliers, and these suppliers are more likely to view PIA favorably due to its
close relationship with retailers.

ADAPT DIVISION OPERATING STRUCTURE TO CHANGING MARKET DEMAND; ENHANCE CLIENT
SERVICE

The Company believes that a more flexible field organization and applied
information technology offer opportunities to simultaneously enhance service to
syndicated clients that are demanding more customized syndicated and special
services programs, while also creating increased operational synergy with the
Company's growing project business. PIA is also committed to providing its
customers with quality service enhancements.

EXPAND THE COMPANY'S CLIENT BASE

In order to expand its client base, the Company is emphasizing new client
business development in areas outside of its traditional focus in the food,
household and health and beauty care categories. For example, PIA has
established relationships with manufacturers in the telecommunications,
information technology and home appliance industries. The Company also intends
to offer its services to prospective clients in additional retail channels,
including home improvement centers, computer/electronic stores, toy stores,
convenience stores and office supply stores. No assurance can be given that the
Company will be able to expand its business into these additional retail
channels.5
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SERVE EMERGING DEMAND FOR DEDICATED SERVICES

PIA believes that certain retailers and manufacturers will increasingly
prefer merchandising service on a dedicated basis, and that the significant size
of such contracts requires substantial financial, recruitment, deployment,
reporting and management capabilities. The Company believes that it is well-well
positioned to serve this emerging need for dedicated services.

INCREASE THE COMPANY'S UTILIZATION OF INFORMATION TECHNOLOGY

PIA believes that itsa commitment to technology will provide it with a long-
termlong-term
competitive advantage. The Company's Stor*Trak II information system is
scheduled to be deployed in the first quarter of 1997 with approximately 600
field merchandisers. Stor*Trak II will replace the Company's existing Stor*Trak
I information system and will enhance PIA's ability to provide causal data that
is category and store specific. Stor*Trak II will enable both PIA and its
manufacturer clients to have timely, actionable information regarding the status
of certain targeted products and stores. The Company believes that thisthe technology it will develop
will present increased opportunities for PIA on project specific requests from
manufacturers. PIA also expects to use this technology to expand its informational
services consulting capabilities. Additionally, the Company will continue to
provide its proprietary software program, Merchandisers Toolbox, to certain
retailers. This program is designed to manage the deployment of manufacturer
supplied labor, to measure their performance against the retailers' in-store
deployment plans and to develop databases that include a "blueprint" of a store
by category. The Company also expects that its key account managers will
continue to use various shelf technology programs which the Company licenses
from A.C. Nielsen, IRI and Intactix. The Company is currently assessing its
technology needs, understanding that its ability to provide casual data that is
category and store specific is an important value added service.

DESCRIPTION OF SERVICES

The Company provides a broad array of merchandising services on a
national, regional and local basis to manufacturers and retailers. PIA believes
that its full-line capability of developing plans at one centralized
headquarters location, executing chain wide, fully integrated national solutions
and implementing rapid, coordinated responses to needs on a real time basis
differentiates the Company from its competitors. The Company also believes that
its centralized decision-making ability, local follow-through, ability to
recruit, train and supervise merchandisers, ability to perform large-scale
initiatives on short notice and strong retailer relationships provide it with a
competitive advantage over local, regional or retailer specific competitors.

The Company provides its merchandising and sales services primarily on
behalf of brandedconsumer product manufacturers at approximately 20,000 retail grocery,
stores, 5,000 mass merchandiser stores and 13,000 chain drug and deep
discount drug stores. PIA currently provides three
principal types of merchandising and sales services: syndicated, project andshared services, dedicated
services. PIA operates its syndicatedservices and project services businesses
through two regional and eight division offices. These offices enable PIA to
interact on a local basis with its manufacturer clients and with retailers.

SYNDICATEDservices.

SHARED SERVICES

SyndicatedShared services consist of regularly scheduled, routed merchandising
services provided at the store level for manufacturers, primarily under one
year contracts.manufacturers. PIA's syndicatedshared service
organization performs services for multiple manufacturers including, in some
cases, manufacturers whose products are in the same product category. SyndicatedShared
services may include checking to insure that client product items authorized for
distribution are in stock and on the shelf, cuttingadding in new products that are
approved for distribution but not present on the shelf, setting category shelves
in accordance with approved store schematics, insuring that shelf tags are in
place, checking for the overall salability of clients' products, and performing
new product and promotion selling. The Company's syndicatedshared services are performed
principally by full-time retail sales merchandisers, retail sales specialists,
key account managers, andalong with district and division managers.manager supervision.

RETAIL SALES MERCHANDISERS.MERCHANDISERS

PIA's retail sales merchandisers ("RSM"s)(RSM) perform regularly scheduled, routedshared service coverage services
at the store level. These services include a review of the retailer's shelves
and the appropriate store (or chain) prepared shelf schematic (a diagram that lists the specific location
and shelf space to be allocated for all items within a section) to insure that all
clients' approved products are available for sale in the store, that such
products have the approved shelf

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placement and number of facings (the horizontal and vertical space occupied by a
package front) on the shelf, and that the approved shelf tag is in position. If
a product is not in distribution, 5
the RSM "cuts in"adds the product to the shelf if it is
available in the store's product storage area. If a product is unavailable, the
RSM prepares a place on the shelf for this product and a shelf tag. The presence
of a shelf tag is critical to a store's ability to reorder an individual
stock keepingstock-keeping unit ("SKU") from the distribution center. The RSM checks for the
presence of and replaces, if necessary, the shelf tags for all client SKUs. The
RSM also reviews all SKUs for product freshness, if appropriate, and for general
salability.

KEY ACCOUNT MANAGERS.MANAGERS

On behalf of its manufacturer clients, PIA selectively deploys key account
managers ("KAM"s)KAMs") inside most of the major retail chains. These KAMs, who are
assigned exclusively to a single retailer, work with the
corporate headquarters'that retailer's
headquarters staff of these retailers in the execution of category management initiatives and in
the development and implementation of shelf schematics. The KAMs provide both
the manufacturer and PIA with a headquarter'sheadquarters' perspective of the retailer and
its primary objectives at the store level. The KAMs work with manufacturer
clients to develop and achieve their merchandising goals, including those
related to product distribution, shelf placement, the number of facings for
particular products, and product adjacencies. The KAMs also work with
manufacturer clients to gain retailer authorization for new products and
approval of new category schematics that are compatible with the retailer's own
category management strategies. PIA generally attempts to position its KAMs
within the retailer's organization in a leadership capacity, both in category
management and vendor deployment activities. The KAM isKAMs are typically placed
within the retailer's shelf technology department and isare equipped with the
specific shelf technology software utilized by the retailer. Within a number of
retailers, the KAMs also operate Merchandisers Toolbox. See "--Information
Technology Services." The KAMs work with the retailer in the development of new
shelf schematics, category layouts and, in some cases, total store space plans.
The Company is also training its KAMs in category management in order to provide
further value to both the Company's manufacturer clients and to the retailer.

PIA
currently employs over 200 KAMs at approximately 85 retailers nationwide.

PROJECT SERVICES

During the fourth quarter of 1996, the Company established a corporate,
centralized project management group, and created operations, client service and
marketing functions dedicated to project work in its eight divisions. The
Company's project services are performed principally by a flex-time force of
approximately 3,000 merchandisers, known as the "Surge force," who work for the
Company on demand. The Surge force, which is also used to supplement the
Company's full-time merchandisers in the performance of syndicated services,
enables the Company to be responsive to client and retailer needs on short
notice. These merchandisers are deployed by PIA's operations managers from the
Company's various division offices, typically to accomplish services on behalf
of PIA's manufacturer clients such as new store sets and existing store resets,
remerchandisings, remodelings and category implementations, as well as a variety
of other services. The Surge force is also deployed to perform special projects
inside retail stores, such as rack construction and installation, and display
construction and maintenance. Members of the Surge force are recruited, trained
and managed by the Company. These merchandisers are entry-level personnel who
also provide the Company with a source of additional full-time RSMs. For ease
of administration, the Company pays the Surge force through a third party
payrolling service.

DEDICATED SERVICES

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The Company believes that it pioneered the concept of dedicated service
in 1994 with a program designed for Thrifty PayLessThrifty-PayLess Drug Stores. The program
covered 995 stores, and PIA was responsible for implementing product selection
changes and resetting all categories to meet Thrifty PayLess'Thrifty-PayLess' category
management plans. In implementing the program, PIA was able to ensure that new
products were placed on the shelf within five days of availability and section
changes were completed within ten days. Thrifty
PayLessThrifty-PayLess was acquired by Rite Aid
in 1996, and the contract was not renewed beyond December, 1996.

The Company expanded the dedicated service concept during 1996 when it
formed a dedicated groupand 1997,
which has grown from 18.3% to provide merchandising34.6% of revenue.

PROJECT SERVICES

Project services consist primarily of special in-store services
initiated by retailers and manufacturers, such as seasonal, new product, special
promotion and installation activities. These services are typically used for
Buena Vista
Home Video. This group works exclusively for Buena Vista at the retailer
level in providing merchandisinglarge-scale implementations over 30 days. The Company also performs other
project services, for Buena Vista's home videosuch as new store sets and related products.

The Company's revenues from the Thrifty PayLessexisting store resets,
remerchandisings, remodels and Buena Vistacategory implementations, under shared service
contracts accounted for 6.6% and 11.7% of net revenues, respectively, for the year ended
December 31, 1996. Revenues from the Thrifty PayLess contract accounted for
13.4% of net revenues for the year ended December 31, 1995.or stand-alone project contracts.

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RELATED SERVICES

INFORMATION TECHNOLOGY SERVICES

Retailers and manufacturers are expanding their use of information
technology in order to better manage product distribution in stores, item
placements on the shelves, new product and promotion plans, and off-shelf
displays. This information is used to make decisions regarding efficient
consumer response,Efficient
Consumer Response, category management and shelf management issues, which
enablesenabling
retailers to tailor stores to the regional demographics of customers. PIA
currently provides information-gathering services for certain of its retailer
and manufacturer clients. Such services include the collection of causal data in
specific store groups, and a variety of other data including the presence of new
items at shelf level, the status of out-of-stocks and distribution voids, and
the number of facings and positioning of product items. This information is currently collected by PIA personnel using
hand-held data entry devices currently collect this information and through the
completion of specific response questionnaires, which are then read by an
electronic scanner and Interactive Voice Response. The Company presents its
results to the client in a standard or custom format specified by the client.
This information is of particular value to the manufacturer that is making
significant advertising and promotion decisions based upon its products' status
at store level. Additionally, both the retailer and the manufacturer need to
understand the level of in-store display activity and point of sale materials
usage in support of specific new item introductions and manufacturer funded
promotion activities.

The Company's ability to provide this type of information to its clients
will be enhanced and expanded with the introduction of Stor*Trak II, which is
scheduled to be deployed in the first fiscal quarter of 1997 with approximately
600 field merchandisers. The use of Stor*Trak II will enable PIA to engage in
two-way communications with its major clients, and to build models of client
sales and marketing information that PIA intends to market to its clients as a
new service. This will allow data regarding shelf and other in-store conditions
to be disseminated to the manufacturers' sales and marketing departments on
virtually a daily or more frequent basis, thus enabling the clients and PIA to
have timely, actionable category and store specific information as to the status
of certain targeted products and stores. No assurance can be given that the
Company will be successful in marketing its information services.

The Company also provides to certain retailers its proprietary software
program, Merchandisers Toolbox, which is designed to control the deployment of
vendor labor and to measure the performance of such vendors against the
retailers' deployment plans for virtually all retailer-mandated services in such
stores. The Company manages this software on behalf of the retailer and provides
scheduling based on a fair share allocation, for new store sets and existing store resets, remerchandisings,
remodels and category implementations. This software also provides reports to
the retailer subsequent to the completion of the project, and details actual
participation against the schedule. These features enhance the retailers'retailer's
ability to complete store initiatives quickly. MerchandisersMerchandiser's Toolbox also
provides total store mapping, which ultimately provides the retailer with a
"blueprint" of all of its stores by category.

RELATED SERVICES

RETAIL AND SECONDARY HEADQUARTERS SELLING SERVICES.SERVICES

The Company deploys retail sales specialists (RSS) to provide product
selling support for certain manufacturers at the retail store and secondary
retailersretailer's headquarters buying offices. These services are performed principally
for manufacturers that choose to outsource their sales function for calls on
wholesaler-supplied individual stores or small chains. Sales services performed
by the retail sales
specialistsRSS's include product sales, selling point of sale promotions, discount
and allowance programs, and shelf merchandising plans.

MARKETING AND SALES SERVICES. PIA provides marketing and sales services to
emerging manufacturers that have limited capabilities to market, sell and
merchandise their own products. The Company consults with these clients in
order to assist them in establishing a marketing program, sales collateral
material program, order entry and processing discipline, and in gaining initial
distribution within retailers. The Company also provides routed merchandising
services to some of these clients.

TELEMARKETING SERVICES.SERVICES

PIA owns 20% of Ameritel, Inc., a company that performs inbound and
outbound telemarketing services, including those on behalf of certain of PIA's
manufacturer clients. Ameritel provides telemarketing sales services for
manufacturers that sell directly into smaller, independent retail stores. The
Company believes that its affiliation with Ameritel provides an additional
merchandising solution for itssome packaged products manufacturerproduct manufacturers and retailer
clients.

SALES AND MARKETING

The Company's sales efforts are structured to develop new business in
national and local markets. At the national level, PIA's corporate business
development team directs its efforts toward the senior management of prospective
clients. At the regional level, sales efforts are principally guided by the two
regional general managers who act as a resource for PIA's
eightseven division offices, in their efforts to attract new business. At the local level, the Company's
sales efforts are handled primarily by division managers.located nationwide.

The Company's client service executives play an important role in PIA's
new business development efforts within its existing manufacturer client base. The
Company currently employs 175 account executives, including corporate
account executives, division account executives and key account managers.
Primarily located in the clients' corporate headquarters, PIA's corporate
account executives play a key role in clients' sales and marketing efforts. The
corporate account executives plan merchandising and product introductions with
the manufacturer so that PIA can achieve the objectives of such

8
9
clients' major new product and promotional initiatives. In addition, the
corporate account executives present PIA's services to the sales and marketing
executives of these clients, and utilize marketing data provided by IRI, A.C.
Nielsen and others in an effort to ascertain additional market opportunities for
such clients at the local level. Division account executives are part of the
Company's geographic division teams and work with the local management of the
Company's clients. The division account executives'executive's primary responsibility is to
work with the client to establish specific, measurable objectives for PIA, and
to market additional services. As part of this process, the division account
executive is responsible for developing retail merchandising solutions for such
objectives.

The Company's KAMs are positioned within approximately 85 retailers throughout
the country, and provide schematic development and category management support
to PIA's clients. Through this relationship, the KAM has become an important
source of new business leads, and has enabled PIA to capitalize on the prospects
being directed to PIA by the retailer.

As part of retailer consolidation, retailers are centralizing most
administrative functions, including operations, procurement and category
management. In response to this centralization and the growing importance of
large retailers, many manufacturers have re-organizedreorganized their selling organizations
around a retailer team concept that focuses on a particular retailer. PIA has
also responded to this emerging trend by establishing client service 8
offices
whichthat are fully staffed to provide the PIA client and the retailer with access to
all of PIA's services. PIA currently has retailer teams in place at Wal*Mart
(Bentonville,(Rogers, Arkansas), Kmart (Detroit)(Detroit, Michigan) and American Stores (Salt Lake
City)City, Utah).

The Company's business development process encompasses a due diligence
period to determine the objectives of the prospective client, the work to be
performed to satisfy those objectives, and the market value of the work to be
performed. PIA employs a formal cost development and proposal process whichthat
determines the cost of each element of work required to achieve the prospective
client's objectives. These costs, together with an analysis of market rates, are
used in the development of a quotation approval form whichthat is presented to the
Company's pricingproposal committee for approval. The pricing must meet PIA's
objectives for profitability which are established as part of the business
planning process. After approval of this quotation by the pricingproposal committee, a
detailed proposal is presented to the prospective client. Following agreement
regarding the elements of service and corresponding rates, a contract is
prepared and executed. See "--Customers."

CUSTOMERS

PIA currently represents approximately 295 manufacturer clients,
including approximately 180 branded product manufacturers and approximately 115
private label manufacturers. Prior to 1993, the Company represented its
manufacturer clients primarily in the retail grocery industry. Beginning in that
year, the Company found that additional opportunities to provide its services
existed throughout the much broader marketplace, including mass merchandiser,
chain drug and deep discount drug stores, as well as in other retail
establishments such as home improvement centers, computer/electronic stores, toy
stores, convenience stores and office supply stores. As a result, the Company
has contracted with a number of manufacturers to provide services in several of
these additional retail markets, and has agreed to provide services to a number
of retailers directly, including American Stores, Eckerd Drug Stores, Wal*Mart, Kmart,
Safeway, Vons, Wakefern and Edwards Super Foods, among others. More recently,
the Company has established relationships with manufacturers in the
telecommunications, information technology and household appliances industries.

The following is a current list of the Company's top 20 manufacturer and
retailer clients for which the Company provides services on a regional or
national basis, listed in chronological order by year service began:

YEAR
SERVICE
CLIENT BEGAN
-------------------------------------- --------
Hershey Chocolate Co. . . . . . . . . . . . . 1966
Hormel Foods. . . . . . . . . . . . . . . . . 1970
Ralston Purina. . . . . . . . . . . . . . . . 1982
Consumer Health Care. . . . . . . . . . . . . 1984
S.C. Johnson Wax. . . . . . . . . . . . . . . 1985
Benckiser . . . . . . . . . . . . . . . . . . 1988
Colgate-Palmolive . . . . . . . . . . . . . . 1988
Gillette. . . . . . . . . . . . . . . . . . . 1990
Kellogg . . . . . . . . . . . . . . . . . . . 1990
Safeway . . . . . . . . . . . . . . . . . . . 1992
Helene Curtis . . . . . . . . . . . . . . . . 1993
Kimberly Clark. . . . . . . . . . . . . . . . 1993
Lever Brothers. . . . . . . . . . . . . . . . 1994
Kmart . . . . . . . . . . . . . . . . . . . . 1994
Efficient Market Services, Inc. . . . . . . . 1994
Coors Brewing Company . . . . . . . . . . . . 1994
Eveready. . . . . . . . . . . . . . . . . . . 1995
Gourmet Specialties . . . . . . . . . . . . . 1995
Buena Vista Home Video. . . . . . . . . . . . 1996
Eckerd Drug Stores. . . . . . . . . . . . . . 1997

During the years ended December 31, 1994, 1995 and 1996, none of the Company's
manufacturer or retailer clients accounted for greater than 10% of the Company's
net revenues, other than Thrifty PayLess, which accounted for approximately 13%
of net revenues for the year ended December 31, 1995, and Buena Vista Home Video
and S.C. Johnson which accounted for 11.7% and 10.3% of net revenues,
respectively, for the year ended December 31, 1996.

Most major packaged goods manufacturers sell numerous types of products and
brands. Often, the Company does not represent all of the products or brands of
a particular manufacturer, but rather only selected products. In addition, the
Company does not always represent manufacturers in all geographic regions of the
country. As a result, the Company believes that opportunities exist within the
Company's current client base to increase its business by expanding the number
of brands serviced and the geographic coverage provided for these clients.

The Company has traditionally sold its syndicated services to manufacturers
in a bundled format for a monthly flat fee or, in some cases, for a commission.
The Company's commission based contracts generally provide for a monthly draw
against commission earnings, which are based on a percentage of the client's net
sales to designated retailers, and for periodic reconciliation of commissions
earned against the monthly draw. Some of these contracts also provide for a
guaranteed minimum compensation to the Company. Substantially all of the
Company's current contracts for syndicated services provide for one of these two
types of arrangements. Such

contracts generally provide for one year terms and are terminable at the end of
such term by either party upon 60 days prior written notice.

As a result of growing retailer-mandated services, the Company bears the
risk of increased labor costs under its existing fixed-price contracts.
Accordingly, PIA has been engaged in an effort to revise its existing contracts
upon their renewal to implement provisions that charge for retailer-mandated
services separately from traditional merchandising and shelf maintenance tasks.
In addition, the Company has developed a standard contract that provides this
activity-based approach to pricing for the Company's more recent customers.
This contract form identifies the retailer-mandated activities PIA will perform
on behalf of its clients and establishes limits on those activities during the
contract period. The client can purchase activities beyond the established
limits for additional compensation. Although the Company has been successful in
revising certain of its contracts to include the activity-based approach to
pricing, no assurance can be given that PIA will be successful in renewing its
remaining contracts on this basis. This approach to pricing and the related
contract terms are expected to prevent the Company from performing activities
that were not contemplated, and is intended to stabilize the Company's margins
under individual contracts.

The Company typically performs projects under short-term contracts of
between 30 and 60 days. PIA's dedicated services are primarily performed under
multi-year contracts.

A number of the Company's largest syndicated services clients have products
that compete in the same category. The Company believes that it has
successfully met the retail objectives of these clients, and expects that its
ability to manage multiple products within a single category will continue.
However, due to the competitive nature of certain categories, the Company has
granted to some clients the right to approve the Company's ability to represent
another client with products in the same category. The Company believes that
these arrangements will not impact its long-term ability to represent other
clients in these categories.directly.

COMPETITION

The third partythird-party merchandising industry is highly competitive and is
comprised of an increasing number of merchandising companies with either
specific retailer, retail channel or geographic coverage, as well as food
brokers. These companies tend to compete with the Company primarily in the
retail grocery channel, and some of them may have a greater presence in certain
of the retailers in whose stores the Company performs its services. The Company
also competes with several companies that are national in scope, such as
Powerforce, Spar/Marketing Force, Pimms and Alpha One. These companies compete
with PIA principally in the mass merchandiser, chain drug and deep discount drug
retail channels. The Company believes that the principal competitive factors
within its industry include breadth and quality of client services, cost and the
ability to execute specific client priorities rapidly and consistently over a
wide geography.

9
10

TRADEMARKS

PIA-Registered Trademark-PIA(R) is a registered trademark of the Company. In addition, the
Company has applied for a copyright on its Merchandisers Toolbox software.
Although the Company believes that its trademarks may have value, the Company
believes that its services are sold primarily on the basis of breadth and
quality of service, cost, and the ability to execute specific client priorities
rapidly and consistently over a wide geography. See "--Industry Overview" and
"--Competition."

EMPLOYEES

AtAs of December 31, 1996,1997, the Company employed approximately 1,4401,637
full-time employees, of whom approximately 6564 worked in executive,
administrative and clerical capacities at the Company's corporate headquarters,
and approximately
1,3751,583 of whom worked in division offices nationwide. In addition, the
Company employed 543 part-time employees. Approximately 225212 of the Company's
employees are covered by contracts with labor unions. The Company considers its
relations with its employees and its employees' unions to be good. The Company
also uses the services of up to 3,000 flex-time

11
flextime personnel who are payrolled
through a company that is not affiliated with PIA.

See "Description of Services--Project Services."10
11

RISK FACTORS

THE FOLLOWING RISK FACTORS SHOULD BE CAREFULLY REVIEWED IN ADDITION TO THE
OTHER INFORMATION CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K.The following risk factors should be carefully reviewed in addition to
the other information contained in this annual report on Form 10-K

HISTORY OF LOSSES

During the years ended December 31, 1992 and 1993, the Company incurred
significant losses and experienced substantial negative cash flow. The Company
had net losses of $3.2 million and $2.6 million for the years ended December 31,
1992 and 1993, respectively. These losses resulted primarily from additional
field service costs to provide routedshared service coverage in grocery stores for
relatively few clients in newly-openednewly opened regions during the Company's continuing
national expansion in 1992 and 1993, and from the write-off of $1.7 million in
goodwill in 1992. In addition, the Company recently announced that it expects to incurhas incurred losses in each quarter
during 1997, resulting in a total net loss for the first fiscal quarter of 1997, and that it expects 1997 operating
results to be substantially less than the prior year.$15.1 million. There can be no
assurance that the Company will not sustain further losses. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview."

LOSS OF SYNDICATEDSHARED SERVICE BUSINESS

PIA's business mix has changed significantly over the last year, and is
expected to continue to change during 19971998, in response to client needs, and the
evolving third party merchandising industry. Due in part to industry
consolidation, and increased competition, and service performance issues, the
Company has lost a substantial amount of syndicated servicesshared service business over the last
12 months, and has not sold any sizeable new syndicatedshared business to compensate for
this loss. This
business hasthese losses. Shared services have historically required a significant fixed
management and personnel infrastructure. Accordingly, theThe continued loss of syndicatedshared service
business without offsetting gains, has a material adverse effect onwill negatively affect the Company's
resultsCompany`s financial performance if it cannot
decrease its cost of operations.delivery of this service.

INDUSTRY CONSOLIDATION; CONCENTRATED CLIENT BASE

The retail industry isand manufacturing industries are undergoing a consolidation
processprocesses that is resultingresult in fewer larger retailers.retailers and suppliers. The Company's
success is dependent in part upon its ability to maintain its existing clients
and to obtain new clients. As a result of industry consolidation, the Company
has lost certain clients, and this trend could continue to have a negative
effect on the Company's client base and results of operations. The Company's ten
largest clients generated approximately 59%, 56%57% and 57%69% of the Company's net
revenues for the years ended December 31, 1994, 19951996 and 1996,1997, respectively. During
these periods, none of the Company's manufacturer or retailerretail clients accounted
for greater than 10% of net revenues, other than Thrifty PayLess, which accounted for approximately 13%
of net revenues for the year ended December 31, 1995, and Buena Vista Home Video and S.C.
Johnson which accounted for 11.7% and 10.3% of net revenues, respectively, for
the year ended December 31, 1996.1996, and Buena Vista Home Video and Eckerd Drug
Stores, which accounted for 16.0% and 13.6% of net revenues respectively, for
the year ended December 31, 1997. The majority of the Company's contracts with
its clients for syndicatedshared services have one-yearmulti-year terms. PIA believes that the
uncollectibility of amounts due from any of its large clients, the loss of one or more of such clients, a significant
reduction in business from such clients, or the inability to attract new
clients, wouldcould have a material adverse effect on the Company's results of
operations.

COMPETITION

The third party merchandising industry is highly competitive and is
comprised of an increasing number of merchandising companies with either
specific retailer, retail channel or geographic coverage, and food brokers.
These competitors tend to compete with the Company primarily in the retail
grocery channel, and some of them may have a greater presence in certain of the
retailers in whose stores the Company performs its services. The Company also
competes with several companies that are national in scope, such as Powerforce,
Spar/Marketing Force, Pimms and Alpha One. These companies compete with PIA
principally in the mass merchandiser, chain drug and deep discount drug retail
channels.

The Company believes that the principal competitive factors within its
industry include quality of service, cost and the ability to execute specific
client priorities rapidly and consistently over a wide geography. If any of the
Company's major competitors were to seek to gain or retain market share by
reducing its prices, the Company could experience downward pressure on the
prices that it charges for certain elements of its services. The Company has
been forced periodically to adjust its prices to retain certain business. There
can be no assurance that these competitors will not reduce their prices, or that
in the future the Company will not face greater competition from other national
or regional merchandising companies or food brokers.

INCREASE IN SERVICES REQUIRED UNDER FIXED PRICE CONTRACTS

Manufacturers who sell their products through retail grocery stores
generally are required by the retailer to provide labor support inside these
stores for a variety of purposes, including new store sets and existing store
resets, remerchandisings, remodels and category implementations. The Company
has historically contracted with its manufacturer clients to provide these
services, among others, for a monthly flat fee or, in some cases, for a
commission. Substantially all of the Company's current contracts provide for
one of these two types of arrangements. As requests for retailer-mandated
services and new product introductions by manufacturers have increased over the
past several years, the Company's labor expense has increased without any
related increase in its revenue. Consequently, the Company has reevaluated its
approach to contracting with its clients, and has revised certain of its
existing contracts upon their renewal to implement provisions that charge for
retailer-mandated services separately from traditional merchandising and shelf
maintenance tasks. No assurance can be given that the Company will be
successful in renewing the remaining contracts on this basis.

UNCERTAINTY OF COMMISSION INCOME

Approximately 17.2%14.3% of the Company's net revenues for the year ended
December 31, 1996 was1997 were earned under commission-based contracts. These contracts
provide for commissions based on a percentage of the client's net sales of
certain of its products to designated retailers. Under certain of these
contracts, the Company generally receives a draw on a monthly or quarterly
basis, which is then applied against commissions earned. Adjustments are made on
a monthly or quarterly basis upon receipt of reconciliations between commissions
earned from the client and the draws previously received. The reconciliations
typically result in commissions owed to the Company in excess of previous draws;
however, the Company cannot predict with accuracy the level of its clients'
commission-based sales. Accordingly, the amount of commissions in excess of or
less than the draws previously received will fluctuate and can significantly
affect the Company's operating results in any quarter.

DEPENDENCE ON SENIOR MANAGEMENT

The Company is dependent upon the services of its officers and the key
management personnel involved in its field organization. The loss of the
services of one or more of these individuals could have a material adverse
effect on the Company. The Company carries term life insurance on Clinton E.
Owens, the Company's Chairman and Chief Executive Officer.

1311
12

CONTROL BY CERTAIN STOCKHOLDERS

Riordan, Lewis & Haden, a private investment firm, beneficially owns
approximately 28%30.2% of the Company's outstanding Common Stock, and the Company's
directors and officers, in the aggregate, beneficially own approximately 18%15.3%
of the Company's outstanding Common Stock (excluding the shares owned by
Riordan, Lewis & Haden which are deemed to be beneficially owned by Mr. Haden)Haden
and Mr. Lewis). As a result, such persons, if they act together, generally will
be able to elect all directors, exercise control over the business, policies and
affairs of the Company and will have the power to approve or disapprove most
actions requiring stockholder approval, including amendments to the Company's
charter and by-laws,By-laws, certain mergers or similar transactions, sales of all or
substantially all of the Company's assets, and the power to prevent or cause a
change in control of the Company. In the future, this situation could make the
acquisition of control of the Company and the removal of existing management
more difficult.

RESTRICTIONS ON DIVIDENDS

The Company has never paid dividends on its capital stock, and currently
intends to retain any earnings or other cash resources to finance future growth.
The Company's credit agreement also prohibits the payment of cash dividends on
the Common Stock.

EFFECT OF CERTAIN CHARTER PROVISIONS; ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF
INCORPORATION, BY-LAWS AND DELAWARE LAW

The Company's Board of Directors has the authority to issue up to
3,000,000 shares of Preferred Stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. In addition, the Company is subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law, which will
prohibit the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. The application of
Section 203 also could have the effect of delaying or preventing a change of
control of the Company. Further, certain provisions of the Company's Certificate
of Incorporation (e.g., the inability of stockholders of the Company to act by
written consent) and By-laws (e.g., the requirement that the holders of shares
entitled to cast no less than 30% of the votes at a special meeting of
stockholders may call such a special meeting) and of Delaware law could delay or
make more difficult a merger, tender offer or proxy contest involving the
Company, which could adversely affect the market price of the Company's Common
Stock.

1412
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GLOSSARY

THE FOLLOWING GLOSSARY INCLUDES DEFINITIONS OF CERTAIN GENERAL INDUSTRY
TERMS AS WELL AS TERMS RELATING SPECIFICALLY TO THE COMPANY.The following glossary includes definitions of certain general industry
terms as well as terms relating specifically to the company.

CATEGORY - A segment or sub-segment of a department within a retail
outlet. For example, the health and beauty care department consists of several
categories such as oral care and shampoo; and the shampoo section is divided
into sub-categories such as salon formulas and dandruff control.

CATEGORY MANAGEMENT - A process for managing a retailer's or a
manufacturer's business that recognizes categories as strategic business units
for the purpose of planning sales and profit objectives.

CAUSAL DATA - Data that defines the factors within a retail outlet that
impact sales. These factors usually include display, pricing and product
adjacency information.

CHAIN DRUG STORE - A retail drug outlet that has conventional
non-discounted pricing structure, and a wider variety of product selection than
is found in a deep discount drug store.

CUT-IN - The process of adding a new item to a section within a retail
outlet. A cut-in often requires the implementation of a schematic.

DEEP DISCOUNT DRUG STORE - A retail drug outlet that offers everyday
discounted pricing, typically the result of volume purchases. The store offers a
more limited variety of items and sizes than is found in a chain drug store.

EFFICIENT CONSUMER RESPONSE (ECR) - A grocery industry strategy in which
retailers and manufacturers incorporate the principles of efficient
replenishment with effective assortment and promotion of products.

FACING - The horizontal and vertical space occupied by a package front
when displayed on a store shelf.

KEY ACCOUNT MANAGER (KAM) - A KAM is assigned exclusively to a single
retailer and works with that retailer's corporate headquarters staff in the
execution of category management initiatives and in the development and
implementation of shelf schematics.

MASS MERCHANDISER - The segment of retailers that offers
multi-departments in a single location, each of which is typically quite large
(at least 75,000 square feet). Examples include Kmart and Wal*Mart.

NEW STORE SET - The initial merchandising of a new retail outlet that
was either built or acquired.

OUT-OF-STOCK - A situation that exists when a product normally carried
by a retailer is temporarily unavailable. This means that shelf allocation
exists, but inventory has been depleted.

REMERCHANDISINGRE-MERCHANDISING - A retail unit that is enhanced by the relocation of
sections, aisles and/or departments, and usually involves the total store.

REMODEL - A retail unit that is enhanced by enlargement and/or redesign.
Structural changes most often result in departments and/or services being added
or deleted, which requires the relocation of most products and sections within
the store.

RESET - Relocation of products within a given category or section of a
retail store. A reset typically involves removal of all products from the
retailer's shelves, restocking of products and reallocation of space.

RETAIL AND SECONDARY HEADQUARTERS SELLING - Refers to the selling of
products and/or taking of orders in chains which do not operate their own
warehouses and in stores having the authority to purchase and/or approve orders.

RETAIL SALES MERCHANDISERMERCHANDISERS (RSM) - An RSM is a full-time associate who
performs regularly scheduled,
routedshared service coverage services at the store level.

The RSM's primary responsibility is
the retail distribution of the client's products in accordance with the
retailer's schematics or agreed upon merchandising objectives.

RETAIL SALES SPECIALIST (RSS) - A retail sales specialist provides
product selling support for certain manufacturers at the retail store and
secondary retailers headquarters buying offices.

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14

RETAILER - An operator of retail stores or groups of retail stores that
are also referred to as chains.

ROUTED - A group of stores to which Company personnel are required to visit
on a regularly scheduled, recurring basis.

SCHEMATIC - A diagram that lists the specific location and shelf space
to be allocated for all items within a section. The schematic also contains data
relating to merchandising such as width, depth of shelving, shelf elevations and
height of gondola.

SHARED SERVICES - A group of associates who perform specific functions
for multiple clients on each store visit.

STOCK KEEPING UNIT (SKU) - A unit of product having its own unique
size/weight and product description.

VOID - A situation that exists when a product is not carried by a
retailer and there is no allocated space or reorder tag present.

----------------

COMPANIES NAMED IN THIS ANNUAL REPORT ON FORM 10-K

The following companies, among others, are mentioned in this Prospectus:
A.C. Nielsen Company ("A.C. Nielsen"); Alpha One; American Stores Co.
("American Stores"); Joh. A. BenckiserGmbH ("Benckiser"); Buena Vista Home
Video, Inc. ("Buena Vista Home Video" and "Buena Vista"); Colgate-Palmolive
Company ("Colgate-Palmolive"); Consumer Health Care; Coors Brewing Company;
Eckerd Corporation ("Eckerd Drug Stores"); Edwards Super Foods; Efficient
Market Services, Inc.; Eveready; The Gillette Company ("Gillette"); Gourmet
Specialties; Helene Curtis Industries, Inc. ("Helene Curtis"); Hershey Foods
Corp. ("Hershey Chocolate Co."); Geo A. Hormel & Company ("Hormel Foods");
Intactix International, Inc. ("Intactix"); IRI International Corp. ("IRI");
J.C. Penney Company, Inc. ("J.C. Penney"); Kellogg Company ("Kellogg");
Kimberly-Clark; Kmart Corporation ("Kmart"); Lever Brothers Co. ("Lever
Brothers"); Pimms; Powerforce ("Powerforce"); Ralston Purina Company
("Ralston Purina"); Rite Aid Corp. ("Rite Aid"); Safeway Inc. ("Safeway");
S.C. Johnson Wax ("S.C. Johnson Wax" or "S.C. Johnson"); Spar/Marketing
Force, Inc. ("Spar/Marketing Force"); Target; Thrifty PayLess, Inc. ("Thrifty
PayLess"); The Vons Companies, Inc. ("Vons"); Wakefern; and Wal*Mart Stores,
Inc. ("Wal*Mart").

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ITEM 2. PROPERTIES.

The Company maintains its corporate headquarters in approximately 26,00027,000
square feet of leased office space located in Irvine, California, under a lease
with a term expiring in February 2000.

The Company leases certain office and storage facilities for its
divisions and subsidiaries under operating leases, which expire at various dates
during the next five years. Most of these leases require the Company to pay
minimum rents, subject to periodic adjustments, plus other charges including
utilities, real estate taxes and common area maintenance.

The following is a list of the locations where the Company maintains
leased facilities for its division offices and subsidiaries:

Scottsdale, Arizona Chesterfield Missouri
Bentonville,Rogers, Arkansas Edison, New Jersey
Costa Mesa,Irvine, California Albuquerque, New Mexico
Irvine,Pleasanton, California Charlotte, North Carolina
Pleasanton, CaliforniaEnglewood, Colorado Blue Ash, Ohio
Englewood, ColoradoRidgefield, Connecticut Wilsonville, Oregon
Ridgefield, Connecticut Mars,Clearwater, Florida Cranberry Township, Pennsylvania
Norcross, Georgia
Tampa, Florida Carrollton, Texas
Norcross, Georgia Houston, Texas
Oakwood Terrace, Illinois Houston, TexasBountiful, Utah
Overland Park, Kansas Bountiful, Utah Natick, Massachusetts
Richmond, Virginia
Woburn, Massachusetts Bellevue, Washington
Southfield, Michigan
Bellevue, Washington

Although the Company believes that its existing facilities are adequate
for its current business, new facilities willmay be added should the need arise in
the future. Certain facilities above may be closed or subleased as the Company
streamlines its operations. The financial impact of closing or subleasing a
location is not significant.

ITEM 3. LEGAL AND ADMINISTRATIVE PROCEEDINGS.

In the ordinary course of its business,On February 25, 1998, the Company may be involvedand its Canadian subsidiary were
served with two Statements of Claim in legal proceedings from time to time. Asthe Ontario court (General Division) of
the dateProvince of Ontario, Canada, filed by Merchandising Consultants Associates
("MCA") asserting claims for alleged breach of Confidentiality Agreements dated
October 19, 1996 and July 17, 1997. Both of these lawsuits assert that the
Company and its subsidiary improperly used confidential information provided by
MCA as part of the Company's due diligence concerning its proposed acquisition
of MCA, including alleged clientele, contracts, financial statements and
business opportunities of MCA. In addition, MCA contends that the Company
breached and allegedly reneged upon the terms for acquisition of MCA contained
in a Letter of Intent between the parties dated July 17, 1997, which by its
express terms was non-binding. The Statements of Claim seek damages totaling
$10.2 million

The Company denies all wrongdoing and intends to aggressively defend
itself in this action. It is not possible to predict the outcome of this Annual Report on
Form 10-K, the Company is not a party to any material pending legal proceedings.action
at this time.

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

None.

1715
16

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.

PRICE RANGE OF COMMON STOCK

The following table sets forth the reported high and low sales prices of
the Common Stock for the quarters indicated as reported on the Nasdaq National
Market. The Common Stock commenced trading on March 1, 1996 at a price per
share of $14.00. The Common Stock is traded on the Nasdaq National Market under the
symbol "PIAM".

1996 High Low
------------------------ ------- -------
1996 1997
----------------- -----------------
High Low High Low
----------------- -----------------

First Quarter $19.250 $14.000 $11.000 $5.125
Second Quarter 28.375 11.250 7.125 5.375
Third Quarter (from
March 1, 1996) . . . . . $19.250 $14.000
Second Quarter . . . . . 28.375 11.250
Third Quarter. . . . . . 15.250 10.875 8.250 5.125
Fourth Quarter . . . . . 13.125 8.750 9.000 4.875

As of March 21, 1997,13, 1998, there were approximately 741,029 holders of record
of the Company's Common Stock.

The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends on its Common Stock in the
foreseeable future. The Company currently intends to retain future earnings to
finance its operations and fund the growth of its business. Any payment of
future dividends will be at the discretion of the Board of Directors of the
Company and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, level of indebtedness, contractual
restrictions in respect to the payment of dividends and other factors that the
Company's Board of Directors deems relevant.

16
17

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.

The following selected consolidated financial data sets forth, for the
periods and the dates indicated, summary consolidated financial data of the
Company derived from the historical consolidated financial statements of the
Company and its subsidiaries. The selected consolidated statements of operations
data presented below with respect to the three years ended December 31, 1994, 1995 and 1996,1997,
and the consolidated balance sheet data at December 31, 19951996 and 19961997 are
derived from, and are qualified by reference to, the audited consolidated
financial statements included elsewhere in this Form 10-K. The consolidated
statements of operations data for the years ended December 31, 19921993, and 1993,1994,
and the consolidated balance sheet data at December 31, 1992, 1993, 1994, and 1994,1995,
are derived from the audited consolidated financial statements of the Company
not included herein. The financial data presented below are qualified by
reference to the consolidated financial statements included elsewhere in this
Annual Report on Form 10-K and should be read in conjunction with such financial
statements and related notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

YEAR ENDED DECEMBERYear Ended December 31,
1992-----------------------------------------------------------------
1993 1994 1995 1996 -------- -------- -------- --------- ----------1997
=================================================================
(in thousands, except per share data)

STATEMENTSSTATEMENT OF OPERATIONS DATA:
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . $36,089 $56,155 $80,449 $104,791 $119,940 $128,208
Operating expenses:
Field serviceservices costs . . . . . . . . . . . . . . . . . . . . . 29,259 47,318 61,876 81,320 94,841 119,830
Selling expenses. . . . . . . . . . . . . . . . . . . . . . . 3,792expenses 6,571 9,028 10,339 11,133 10,482
General and administrative expenses . . . . . . . . . . . . . 3,395 3,910 5,800 6,810 8,0678,081 10,234
Restructure and other charges -- -- -- -- 5,420
Depreciation and amortization . . . . . . . . . . . . . . . . 519 271 339 497 609
-------- -------- -------- --------- ----------595 997
-----------------------------------------------------------------
Total operating expenses . . . . . . . . . . . . . . . . . 36,965 58,070 77,043 98,966 114,650 -------- -------- -------- --------- ----------146,963
-----------------------------------------------------------------
Operating income (loss). . . . . . . . . . . . . . . . . . . . . (876) (1,915) 3,406 5,825 5,290 (18,755)
Interest expense (income),(expense) income, net . . . . . . . . . . . . . . . . . 593 640 725 465 (823)(640) (725) (465) 823 799
Equity in earnings in affiliate. . . . . . . . . . . . . . . . . (72)
Write-off of excess of cost over fair value of net
assets acquired(1). . . . . . . . . . . . . . . . . . . . . . 1,704affiliate -- -- -- --
-------- -------- -------- --------- ----------72 96
-----------------------------------------------------------------
Income (loss) before provision
(benefit) for income taxes. . . . . . . . . (3,173)taxes (2,555) 2,681 5,360 6,185 Provision for income taxes . . . . . . . . . . . . . . . . . . . --(17,860)
Income tax provision (benefit) -- 101 1,829 2,426 -------- -------- -------- --------- ----------(2,761)
-----------------------------------------------------------------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . $(3,173) $(2,555) $ 2,580 $ 3,531 $ 3,759 -------- -------- -------- --------- ----------$(15,099)
=================================================================
Net income (loss) per common and common equivalent
share(2). . . . . . . . . . . . . . . . . . . . . . . . . . .share - basic(1) $ (1.25) $ (0.91) $ 0.67(0.92) $ 0.88 $ 0.63
-------- -------- -------- --------- ----------
-------- -------- -------- --------- ----------1.13 $ 0.70 (2.72)
-----------------------------------------------------------------
Weighted average common and common equivalent shares(2). . . . . 2,548 2,820 3,930 4,016shares - basic(1) 2,785 2,923 3,117 5,370 5,551
=================================================================
Net income (loss) per share - diluted(1) $ (0.92) $ 0.68 $ 0.89 $ 0.63 $ (2.72)
----------------------------------------------------------------
Weighted average shares - diluted(1) 2,785 3,895 3,981 5,990 5,551
================================================================

DECEMBERDecember 31,
---------------------------------------------------------
1992--------------------------------------------------------------
1993 1994 1995 1996 -------- -------- -------- --------- ----------1997
==============================================================
(in thousands, except per share data)

Balance Sheet Data:BALANCE SHEET DATA:
Working capital. . . . . . . . . . . . . . . . . . . . . . . . . $773 $3,673 $3,642 $7,131Capital $ 3,673 $ 3,642 $ 7,131 $32,737 $15,938
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . 6,532 9,181 10,224 16,086 47,672 36,467
Current portion of long-term debt. . . . . . . . . . . . . . . . 2,359debt 535 277 0 0-- -- --
Long-term debt, . . . . . . . . . . . . . . . . . . . . . . . . . 4,734net of current portion 6,390 3,274 3,400 0-- --
Total stockholders' equity (deficit) . . . . . . . . . . . . . . (2,650) (1,063) 2,481 5,988 36,718 18,678

- ----------------------------------------
(1) The excess of cost over fair value of net assets acquired originated in
August 1988 in conjunction with the acquisition of the Company. In
December 1992, all unamortized amounts related to this transaction were
expensed because the Company determined that they were no longer
recoverable. The Company made this determination based upon its prior and
projected operating performance.
(2) See Note 1 of Notes to Consolidated Financial Statements for a description
of the shares used in calculating netNet income (loss) per share.

19share has been restated for all periods presented
in accordance with the adoption of SFAS No.128 Earnings

17
18

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

OVERVIEWOPERATIONS

PIA was organized in 1943 and operated exclusively in California and
Arizona in grocery stores through 1989. In mid-1988, Clinton E. Owens, the
Company's current Chairman and Chief Executive Officer, concluded that a
national merchandising company could capitalize on developments within the
retail grocery industry by providingprovides merchandising services to a varietymanufacturers and retailers
principally in grocery, mass merchandiser and chain and discount drug stores.
For the years ended December 31, 1996, and 1997, the Company generated
approximately 88% and 74% of manufacturers supplyingits net revenues from manufacturer clients and 12%
and 26% from retailer clients, respectively.

During the industry. In August 1988, Mr. Owens and Riordan,
Lewis & Haden, a private investment firm, completed an acquisitionfive years ended December 31, 1997, none of the Company. See "Business--Industry Overview." In 1990, the Company began an
expansion strategy to provide syndicated services on a national basis. During
its national expansion phase, which was completed in 1993, PIA incurred
significant start-up costs which resulted in losses in 1990, 1992 and 1993,
and break-even performance in 1991. Over this same time period,Company's
manufacturer or retailer clients accounted for greater than 10% of the Company's
net revenues, increased from $12.9 million in 1990other than Thrifty-Payless, which accounted for approximately 13%
of net revenues for the year ended December 31, 1995, and Buena Vista Home
Entertainment and S.C. Johnson which accounted for 11.7% and 10.3% of net
revenues, respectively, for the year ended December 31, 1996 and Buena Vista
Home Entertainment and Eckerd Drug Stores which accounted for approximately
16.0% and 13.6% respectively, of net revenues for the year ended December 31,
1997.

The Company's profitability has continued to $56.2 million
in 1993. In 1993, PIA began offeringbe adversely affected by
the loss of shared service clients. Shared services consist of regularly
scheduled, routed merchandising services provided at the store level for
manufacturers, primarily under multi-year contracts. Due in other retail
channels, including mass merchandiser, chainpart to industry
consolidation, increased competition, and deep discount drug stores.
In 1994,performance, the Company began offering dedicated services to retailerslost a number
of shared service clients in the last half of 1996 and manufacturers. In 1996, thecontinuing in 1997. The
Company established a corporate and division
infrastructure for its project services business.

During 1996, the Company's profitability was affected by a shift in its
business from syndicated services to projects and dedicated services. The
Company's syndicated services business has historically required a significant fixed management and personnel
infrastructure. Dueinfrastructure to support shared services. Accordingly, the loss of shared
services business, without offsetting gains, has a material adverse effect on
the Company's results of operations. These losses have been offset with
additional project revenue from shared clients and from an increase in part to
industry consolidationdedicated
clients. In 1996 and increased competition, the Company lost a number
of syndicated services1997, shared client's accounted for $98.0 and $83.8 million
in net revenue and dedicated clients during 1996, causing a decreaseaccount for $21.9 and $44.4 in the
profitability of that business in the last two quarters of the year. PIA has
not sold any sizeable new syndicated business to compensate for this loss.net revenue,
respectively. The Company believes that revenues in 19971998 from syndicated servicesshared service
clients will continue to decline as a result of the wind-down of the lost
business.

Because ofThe Company has significantly increased its dedicated client services
business with two major drug chain customers. However, due to the fixedstart up
nature of the services, the 1997 margins were lower than margins earned for
similar services in prior years. The net revenues associated costs, the losswith dedicated
clients increased, as a percentage of syndicated
business has a material adverse effect on PIA's results of operations.

Over the last three years, the Company has experienced a significant
increase in the demand for project services. PIA's project revenues have grown
from $20.1 million in 1994 to $38.2 million in 1996. This increase has required
an investment in management infrastructure and systems to support this business.

The Company's dedicated services business is also growing rapidly.
During 1996,overall net revenues, from dedicated services accounted for 18.3% of total
revenues, as comparedin 1996
to 12.9% in 1995. The Company expects this percentage
to increase34.6 % in 1997. In the dedicated services business, PIA provides each
manufacturer or retailer client with an organization, including a management
team, that works exclusively for that client.

ForDue to the years ended December 31, 1994, 1995change in business mix, and 1996,resulting negative impact on
margins, the Company generated
approximately 94%, 86%re-aligned its cost structure, and, 88%in the third quarter of
1997 recorded a charge of $5.4 million for restructuring and other costs
associated with the realignment of the management structure and organization.
The Company continues to review its organizational structure and the fixed and
variable costs associated with delivery of its net revenues from manufacturer clients,services. It is anticipated that
further organizational changes will take place over the next 12 months, as the
Company puts structure, programs and approximately 6%, 14%processes in place to reduce its fixed
overhead. The Company believes these programs and 12% from retailer clients, respectively. Revenues
generated from retailer clients for 1993continuing improvements will
result in improved performance in the field, a lower cost delivery structure and
prior years were not material. The
mix ofwill return the Company's business between manufacturer and retailer clients
historically has not had a material impact on the Company's cash flows or
results of operations.

20Company to profitability.

18
RESULTS OF OPERATIONS19

The following table sets forth certain financial data as a percentage of net
revenues for the periods indicated:

Year Ended December 31,
-------------------------
1994 1995 1996
------ ------ ------
Year Ended December 31,
---------------------------------
1995 1996 1997
=================================

Net revenues . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Operating expenses:
Field services costs 77.6 79.1 93.5
Selling expenses 9.9 9.3 8.2
General and administrative expenses 6.5 6.7 8.0
Restructure and other charges 0.0 0.0 4.2
Depreciation and amortization 0.5 0.5 0.8
---------------------------------
Total operating expenses 94.5 95.6 114.7
---------------------------------
Operating income (loss) 5.5 4.4 (14.7)
Interest (expenses) income, net (0.4) 0.7 0.6
Equity in earnings in affiliate 0.0 0.1 0.1
---------------------------------
Income (loss) before provision (benefit)
for income taxes 5.1 5.2 (14.0)
Provision (benefit) for income taxes 1.7 2.0 (2.2)
---------------------------------
Net income (loss) 3.4% 3.2% (11.8)%
=================================

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

NET REVENUES

For 1997, net revenues were $128.2 million, compared to $119.9 million in 1996,
a 6.9% increase. The Company's dedicated client net revenues have grown from
$21.9 million in 1996 to $44.4 million in 1997, a 102.7% increase. This increase
in dedicated client net revenues resulted from the addition of two major new
clients. Management expects that net revenues from dedicated clients will
continue to increase as a percentage of the overall net revenues earned. Shared
client net revenues decreased from $98.0 million in 1996 to $83.8 million in
1997 a decrease of $14.2 million or 14.5%. In 1997 the traditional shared
services which consist of regularly scheduled, routed merchandising decreased
from $68.4 million in 1996 to $44.9 million in 1997 a decrease of $23.5 million
or 34.4%, while project revenues for shared service clients increased to $9.3
million or 31.4%

The following table sets forth net revenues by client type as a percentage of
net revenues for the periods indicated:

Year Ended December 31,
-----------------------------------------------------------------------
1996 1997 Change
=======================================================================
(dollars in millions)
Amount % Amount % Amount %
-----------------------------------------------------------------------

Shared client net revenues $ 98.0 81.7% $ 83.8 65.4% $(14.2) -14.5%

Dedicated client net revenues 21.9 18.3% 44.4 34.6% 22.5 102.7%
-----------------------------------------------------------------------

Net revenues $119.9 100.0% $128.2 100.0% $ 8.3 6.9%
=======================================================================

OPERATING EXPENSES

In 1997, field service costs increased $25.0 million, or 26.3%, to
$119.8 million, as compared to $94.8 million in 1996. As a percentage of net
revenues, field service costs were 79.1% of net revenues in 1996 versus 93.5% of
net revenues in 1997. Field service costs . . . . . . . . . . . . . 77.0 77.6 79.1are comprised principally of field
labor and related costs and overhead expenses required to provide services to
both dedicated and shared service clients. The increase in field service costs
is due primarily

19
20
to labor costs required to provide the necessary level of business support for
dedicated clients. In addition, the Company did not adequately decrease shared
client service labor and overhead costs as the net revenue from this client base
decreased.

Selling expenses . . . . . . . . . . . . . . 11.2 9.9 9.3were $10.5 million in 1997, compared to $11.1 million
in the prior year. As a percentage of net revenues, selling expenses were 8.2%
in 1997, compared to 9.3% in 1996. This decrease in costs, both in absolute
amount and as a percentage of net revenues, is a result of lower staffing and
travel costs.

General and administrative expenses . . . . . 7.2 6.5 6.7increased 25.9% in 1997 to $10.2
million, compared to $8.1 million in 1996. The increase in general and
administrative expenses was due to increases in expenses that were required to
support overall business growth, including a larger dedicated client base. The
major increases included executive salaries and salary related expenses of $0.3
million, recruiting, employment and training of $0.2 million, and consulting,
legal and office lease expense of $0.6 million. In addition, increased costs
were experienced due to termination costs.

During 1997, the Company experienced declining gross margins, and
resultant operating losses, due to service performance issues and the loss of
several shared clients. This decline in margins has resulted in insufficient
margin dollars to cover the overhead structure which had developed at the field
level and in the general corporate area. In the quarter ended September 30,
1997, the Company began to address these conditions by restructuring its
operations, focusing on a more disciplined and functional operational structure,
and redirecting it's technology strategies, resulting in a $5.4 million charge
for restructuring and other charges. The restructure charges consist of $1.3
million of identified severance and lease costs in various management and
administrative functions and $2.0 million in write-downs and accruals associated
with the redirection of the Company's technology strategies. Other charges
consist primarily of $1.3 million of reserves and write-offs related to
unprofitable contracts and $0.6 million of costs associated with changes in the
Company's service delivery model.

Depreciation and amortization . . . . . . . . 0.4 0.5 0.5
------ ------ ------
Total operating expenses . . . . . . . . . 95.8 94.5 95.6
------ ------ ------
Operatingwere $1.0 million in 1997
compared to $0.6 million in 1996, an increase of $0.4 million, as a result of
depreciation and amortization on computer hardware and software development
costs for shelf technology and for general business purposes.

OTHER INCOME

Interest income . . . . . . . . . . . . . . . . 4.2 5.5 4.4
Interest (expense)decreased slightly in 1997 compared to 1996, due to
lower cash balances available for investment in 1997. Other income included
interest income on the net . . . . . . . . . (0.9) (0.4) 0.6proceeds from the Company's initial public offering
which took place in March, 1996.

Equity in earnings in affiliate. . . . . . . . . 0.1
------ ------ ------affiliate represents the Company's share of the
earnings of Ameritel, Inc., a full service telemarketing company. During 1996,
the Company exercised its option to increase its ownership of Ameritel to 20%
and is now required for financial reporting purposes to recognize its equity
interest in Ameritel's earnings.

BENEFIT FROM INCOME TAXES

Income before provisiontax benefit was approximately $2.8 million in 1997, compared to
income tax expense of $2.4 million in 1996, representing an effective rate of
(15.5%) and 39.2%, respectively. The 1997 tax benefit rate differed from the
expected federal tax rate of 35% due to a valuation allowance of $3.6 million on
the Company's deferred tax asset, caused by a net operating loss carry forward
created in 1997.

NET LOSS

The Company incurred a net loss of approximately $15.1 million in 1997,
or $2.72 per diluted share, compared to net income of approximately $3.8
million, or $0.63 per diluted share, in 1996. The net loss for income taxes . . . . 3.3 5.1 5.1
Provision1997 included the
net impact, after related tax benefit, of restructure and other charges of $4.6
million, or $0.83 per diluted share. The loss incurred in the current year is
primarily a result of margin reductions due to reductions in shared service
clients and start up expenses on dedicated client services, inefficiencies in
field labor execution, poor

20
21

pricing decisions for income taxes . . . . . . . . . . . (0.1) (1.7) (2.0)
------ ------ ------
Net income . . . . . . . . . . . . . . . . . . . 3.2 3.4 3.1
------ ------ ------some client contracts, higher business unit overhead costs
and the recognition of restructure charges and other non-recurring charges.

NEW FINANCIAL MODEL

The Company has developed a new financial model with which its business
can be analyzed to assist in the understanding of the operating results and
impact of various cost functions within the organization. This model follows
more standard metrics and allows the Company to analyze and manage at the
business unit level. The following table illustrates this financial model for
the year ended December 31, 1997. Comparative information for the same period
last year is not yet available.

Year Ended
December 31, 1997
---------------------
Amount %
---------------------

Net revenues $128.2 100.0%

Direct business unit field expense 98.7 77.0
---------------------
Gross margin 29.5 23.0

Overhead and allocated field expense 26.6 20.7
---------------------
Business unit margin 2.9 2.3

Selling, general and administrative expenses 15.3 11.9
Restructure and non-recurring charges 5.4 4.2
---------------------
Total selling, general and administrative expenses 20.7 16.1

Earnings (Loss) before interest, taxes, depreciation
and amortization (EBITDA) $(17.8) (13.8%)
=====================

Management expects to continue to review the business results on the
basis of the comparable financial statement format contained in this Form 10-K
until such time as comparisons can be made utilizing the new financial model.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

NET REVENUES

Net revenues increased $15.1 million, or 14.4%, to $119.9 million in 1996
from $104.8 million in 1995. The increase in net revenues was the result of
revenues from a new client of $14.0 million, which contributed 92.7% to the
increase, and a net increase from other clients of $1.1 million, which
contributed 7.3% of the increase. This net increase is comprised of increased
revenues of $12.1 million from existing clients, partially offset by a decline
in revenue of $11.0 million due to client losses.

The net revenue increase in 1996 is a result of an increase in project
business of $14.6 million, representing a 61.8% increase in project revenues
over 1995, and from an increase in dedicated services of $8.3 million,
representing a 61.4% increase in dedicated services over 1995. These increases
were offset by a decrease of $7.8 million, or 11.5%, in revenues from syndicatedshared
services over 1995.

FIELD SERVICE COSTSOPERATING EXPENSES

Field service costs increased $13.5 million, or 16.4%, to $94.8 million in
1996, compared to $81.3 million in 1995. Field service costs are comprised
principally of field labor and related costs and expenses required to provide

21
22

routed coverage, project activities, key account management and related
technology costs, as well as the field overhead required to support the
activities of these groups of employees.associates. The increase in field service costs is
principally due to increases in associated revenue. As a percentage of net
revenues, field service costs increased to 79.1% in 1996 from 77.6% in 1995
primarily due to the negative leverage caused by the loss of syndicatedshared services
business; increased labor costs associated with a delayed signing of a large new
client in the second quarter of the year; salary increases in the ordinary
course of business; and increased travel costs associated with the larger work
force.

SELLING EXPENSESSelling expenses increased $0.8 million, or 7.7%, to $11.1 million in 1996
from $10.3 million in 1995. Selling expenses increased primarily as a result of
higher payroll costs due to increased staffing and travel costs. As a percentage
of net revenues, selling expenses decreased to 9.3% in 1996 from 9.9% in 1995 as
spending continued to increase at a slower rate than revenue.

GENERAL AND ADMINISTRATIVE EXPENSESGeneral and administrative expenses increased $1.3 million, or 18.5%, to
$8.1 million in 1996 from $6.8 million in 1995. General and administrative
expenses increased primarily as a result of higher payroll costs due to
increased staffing in recruitment and training and management information
services that was required to support overall business growth, as well as salary
increases in the ordinary course of business. As a percentage of net revenues,
general and administrative expenses increased to 6.7% in 1996 from 6.5% in 1995.

DEPRECIATION AND AMORTIZATION EXPENSESDepreciation and amortization expenses increased approximately $0.1 million
to $0.6 million in 1996 from $0.6 million
compared to $0.5 million in 1995. The increase was principally
the1995 as a result of depreciation on computer
hardware and software upgrades both for shelf technology and for general
business purposes.

INTERESTOTHER INCOME

Interest income was $0.8 million in 1996, compared to interest expense of
$0.5 in 1995. The income resulted from investments of the proceeds of the
Company's initial public offering on March 1, 1996, and payoff of borrowings of
$3.4 million.

EARNINGS IN INVESTMENTEquity in earnings in affiliate represents the Company's share of the
earnings of Ameritel, Inc. During 1996, the Company exercised its option to
increase its ownership of Ameritel and is now required to recognize its equity
in its earnings.

INCOME TAXES

Income taxes were approximately $2.4 million in 1996 and $1.8 million in
1995, representing an effective rate of 39.2% and 34.1%, respectively. These tax
rates differed from an expected combined federalFederal and state tax rate of 40% due
principally to a $0.6 million reduction in the valuation allowance caused by the
utilization of net operating loss carryforwardscarry forwards in 1995. As of December 31,
1995, all of the net operating loss carryover had been utilized.

NET INCOME

Net income increased approximately $0.2 million, or 6.5%, to
approximately $3.8 million in 1996, from approximately $3.5 million in 1995,
primarily as a result of the increase in net revenues discussed above, offset by
the increase in operating expenses related to the increase in net revenues.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

NET REVENUES increased $24.4 million, or 30.4%, to $104.8 million in
1995 from $80.4 million in 1994. The increase in net revenues was the result
of revenues from a new client of $9.3 million, which contributed 38.1% of the
increase, and a net increase from other clients of $15.1 million, which
contributed 61.9% of the increase. Revenues from existing clients increased
$25.6 million from 1994, partially offset by a decline in revenue
of $10.1 million due to client losses.

The net revenue increase in 1995 is a result of an increase in project
business of $3.6 million, or 20.0%, from 1994; from an increase in dedicated
services of $8.5 million, or 67.9%, from 1994; and an increase of $12.3
million, or 22.2%, in revenues from syndicated services from 1994.

FIELD SERVICE COSTS increased $19.4 million, or 31.4%, to $81.3 million
in 1995 compared to $61.9 million in 1994. Field service costs are comprised
principally of field labor and related costs and expenses required to provide
routed coverage, project activities, key account management and related
technology costs, as well as the field overhead required to support the
activities of these groups of employees. The increase in field service costs
was primarily the result of increased operating costs associated with the
growth in net revenues. As a percentage of net revenues, field service costs
increased to 77.6% in 1995 from 77.0% in 1994. The increase in 1995 resulted
from the effect of increased retailer-mandated services, including new store
sets, store remerchandisings and remodels and category resets, without any
related increase in the Company's revenues under its fixed-price contracts.
Also contributing to the higher percentage in 1995 was the Company's
investment in personnel servicing Wal*Mart, Kmart and Thrifty PayLess in
advance of revenue growth.

SELLING EXPENSES increased $1.3 million, or 14.5%, to $10.3 million in 1995
from $9.0 million in 1994. Selling expenses increased primarily as a result of
higher payroll costs due to increased staffing and travel costs. As a
percentage of net revenues, selling expenses decreased to 9.9% in 1995 from
11.2% in 1994 as spending increased at a slower rate than revenue.

GENERAL AND ADMINISTRATIVE EXPENSES increased $1.0 million, or 17.4%, to
$6.8 million in 1995 from $5.8 million in 1994. General and administrative
expenses increased primarily as a result of higher payroll costs due to
increased staffing in category management, accounting and management information
services that was required to support overall business growth, as well as salary
increases in the ordinary course of business. As a percentage of net revenues,
general and administrative expenses decreased to 6.5% in 1995 from 7.2% in 1994
as spending increased at a slower rate than revenue.

DEPRECIATION AND AMORTIZATION EXPENSES increased approximately $0.2 million
to $0.5 million in 1995 from $0.3 million in 1994. The increase was principally
the result of depreciation on recent purchases of computer hardware and software
upgrades both for shelf technology and for general business purposes.

INTEREST EXPENSE declined approximately $0.2 million to $0.5 million in
1995 from $0.7 million in 1994. The reduction was principally the result of
reduced line of credit and subordinated debt borrowings throughout 1995 which
were made possible by positive cash flow from operations.

INCOME TAXES were $1.8 million in 1995 and approximately $0.1 million in
1994, representing an effective rate of 34.1% and 3.8%, respectively. These tax
rates differed from an expected combined federal and state tax rate of 40% due
principally to a $0.6 million reduction in the valuation allowance caused by the
utilization of net operating loss carryforwards. As of December 31, 1995,
substantially all of the net operating loss carryover had been utilized, which
will cause the effective tax rate to increase in the future.

NET INCOME increased approximately $0.9 million, or 36.9%, to approximately
$3.5 million in 1995, from approximately $2.6 million in 1994, primarily as a
result of the increase in net revenues discussed above, partially offset by the
increase in operating expenses related to the increase in net revenues.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary capital need has been to fund the working capital
requirements created by its growth in net revenues.

On March 1, 1996, the Company completed an initial public offering of
its Common Stock, raising $26.5 million. Prior to this offering, the Company's
primary sources of financing were senior borrowings from a bank under a
revolving line of credit and subordinated borrowings from two stockholders. During 1996,As
of December 31, 1997, the Company had $1.6used the proceeds from the offering to
repay bank debt of $3.4 million, to repurchase 507,000 shares of the Company's
stock for approximately $3.0 million and to fund the Company's operating losses
in negative1997.

22
23

During the year ended December 31,1997, the Company had a net decrease in cash
flowof $6.5 million, resulting from operations, principally due to an
increaseits operating losses and common stock repurchase
program, offset partially by a reduction in accounts receivable of $10.5 million, partially offset by
increases in other current liabilities. The increase in accounts receivable
partially resulted from a delay in the completion of a major contract and
several large billings to customers for dedicated services at year end.
During 1996, the Company used $3.4 million to repay its bank debt and $2.5
million primarily for the development of Stor*Trak II and capital
expenditures.

In 1995, the Company had negative cash flow from operations of $0.3
million, due primarily to the growth in net revenues and to a $2.5 million
account receivable from one retailer client for a non-recurring project.
This receivable was collected in January 1996. The Company used $0.7 million
in 1995 primarily for capital expenditures. Subordinated debt was repaid in
1995 with new bank borrowings.

In 1994, the Company had positive cash flow from operations of $4.4
million, principally as a result of net income and increases in other current
liabilities. The Company used $0.9 million in 1994 for capital expenditures
and $2.6 million primarily for principal payments on long-term debt. The
Company's working capital as of December 31, 1994, 1995 and 1996 was $3.6
million, $7.1 million and $32.7 million, respectively.

In January 1997, the Company entered into a new credit agreement with a
bank, which provides for an unsecured line of credit in the maximum amount of
$7,000,000. Borrowings under the line of credit bear interest at the bank's
reference rate, unless the Company elects the specified offshore rate. The
credit agreement contains various covenants which, among other things,
require compliance with certain financial tests such as working capital,
tangible net worth, leverage and profitability. In addition, the credit
agreement imposes certain restrictions on the Company, including limitations
on the incurrence of additional indebtedness, the payment of dividends, and
the ability to make acquisitions. No borrowings are currently outstanding
under this facility.$5.7 million.

In March 1997, the Company's Board of Directors approved a stock
repurchase program under which the Company iswas authorized to repurchase up to
1,000,000 shares of Common Stock from time to time in the open market, depending
on market conditions. This program was funded by proceeds from the initial
public offering. As of July 14, 1997, the Company repurchased an aggregate of
507,000 shares of its Common Stock for an aggregate price of approximately $3.0
million. No further repurchases are currently planned.

Cash and cash equivalents totaled $13.0 million at December 31, 1997,
compared with $19.5 million at December 31,1996. At December 31, 1997 and
December 31, 1996, the Company had working capital of $15.9 million and $32.7
million, respectively, and current ratios of 1.95 and 4.08, respectively.

Net cash used in operating activities in 1997 was $2.8 million, compared
with $1.7 million in 1996. This use of cash for operating activities in 1997
resulted primarily from net operating losses, offset partially by a decrease in
accounts receivable of $5.7 million. This was offset by an income tax receivable
for $2.9 million outstanding in 1997 and an increase in accounts payable of $2.7
million related to pending payments to a third party payroll company. The
Company also had a restructuring charge in the third quarter of $5.4 million.
Net cash used in investing activities for 1997 was $0.8 million for additions to
internally developed software, compared to $2.5 million for 1996. Net cash used
in financing activities for 1997 was $2.9 million, compared to net cash provided
by financing activities of $23.5 million in 1996. In 1997, the Company
repurchased 507,000 shares of its common stock for approximately $3.0 million.
In 1996, the Company received net proceeds from the issuance of common stock of
$26.5 million and repaid long-term debt of $3.4 million.

The above activity resulted in a decrease in cash and cash equivalents
of $6.5 million for the year ended December 31, 1997.

The Company's current liquidity is provided by cash and cash equivalents
and the timely collection of its receivables. The Company primarily provides
services to major clients with limited credit risk (See "Risks" Lower). However,
the uncollectibility of amounts due from any of its large clients, a significant
reduction in business from such clients, or the inability to attract new clients
would have a material adverse effect on the Company's cash resources, and its
ongoing ability to fund operations. The Company currently has no committed
credit facility available for working capital needs. The Company is currently
negotiating with a major financial institution for a secured credit facility,
however, there is not assurance that a commitment for a credit facility will be
funded byobtained. Based on the Company's 1998 Business Plan and its cost reduction
program, management believes that cash and cash equivalents and the timely
collection of its receivable will be sufficient to provide for ongoing working
capital.capital needs and generally fund the ongoing operations of the business during
1998.

YEAR 2000 SOFTWARE COSTS

The Company believeshas conducted a review of its computer systems to identify
those areas that its working capital and available line of
credit are sufficient to fund its operations for the next 12 months.

INFLATION

Inflation has not had a material impact on operating results, and the
Company does not expect it to have much impact in the future. There can be no
assurance, however, that PIA's business will notcould be affected by inflation.the "Year 2000" issues and is developing
an implementation plan to resolve these issues. The Company presently believes,
with modifications to existing software and conversions to new software, the
Year 2000 problem will not pose significant operational problems and is not
anticipated to be material to the Company's financial position or results of
operations in any given year.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

See Item 14 of this Annual Report on Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

23
24

PART III

ITEM 10. DIRECTORSITEMS 10, 11, 12 AND EXECUTIVE OFFICERS OF THE REGISTRANT.13.

The information required in these items 10, 11, 12 and 13 of this Form
10-K is incorporated by this item will be contained inreference to those portions of the Company's 1998 Proxy
Statement for its Annual Meeting of Stockholders to be held on June 6,
1997, which will be filed with the Securities and Exchange Commission within 120
days after December 31, 1996. Suchcontains such information

is incorporated herein by
reference.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this item will be contained in the Company's
Proxy Statement for its Annual Meeting of Stockholders to be held on June 6,
1997, which will be filed with the Securities and Exchange Commission within 120
days after December 31, 1996. Such information is incorporated herein by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a) 1. INDEX TO FINANCIAL STATEMENTS FILED AS PART OF THIS REPORT:

Independent Auditors' Report. . . . . . . . . . . . . . . . . . .Auditors Report F-1

Consolidated Balance Sheets as of December 31, 19961997 and 1995. . .1996 F-2

Consolidated Statements of IncomeOperations for the Years Ended December 31,
1997, 1996, 1995, and 1994. . . . . . . . . . . . . . . . . . . . .1995 F-4

Consolidated Statements of Stockholders'Stockholders Equity for the Years Ended
December 31, 1997, 1996 1995 and 1994. . . . . . . . . . . . . .1995 F-5

Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 1995, and 1994 . . . . . . . . . . . . . . . .1995 F-6

Notes to Consolidated Financial Statements for the Years Ended December 31,
1997, 1996 1995 and 1994. . . . . . . . . . . . . . . . .1995 F-8 through F-21

2. FINANCIAL STATEMENT SCHEDULES.

Schedule II --- Valuation and Qualifying Accounts for the Years Ended
December 31, 1997, 1996 and 1995 and 1994. . . . . . F-22F-24

3. EXHIBITS.

EXHIBIT
NUMBER DESCRIPTION
------ -----------

3.1* Certificate of Incorporation of the Company

3.2* By-laws of the Company

4.1* Registration Rights Agreement entered into as of January 21,
1992 by and between RVM Holding Corporation. RVM/PIA, a
California Limited Partnership, The Riordan Foundation and
Creditanstalt-Bankvering.

10.1* 1990 Stock Option Plan

10.2* 1995 Stock Option Plan

10.3* 1995 Stock Option Plan for Non-employee Directors

10.4 Employment Agreement - Terry Peets

21.1* Subsidiaries of the Company

23.1 Consent of Deloitte & Touche LLP

27.1 Financial Data Schedule

27.2 Restated Financial Data Schedule - 1996

27.3 Restated Financial Data Schedule - 1997

27.4 Restated Financial Data Schedule - ------- -----------
3.1 Certificate of Incorporation of the Company.*

3.2 By-laws of the Company.*

4.1 Registration Rights Agreement entered into as of January 21, 1992 by
and between RVM Holding Corporation, RVM/PIA, a California limited
partnership, The Riordan Foundation and Creditanstalt-Bankverein.*

10.1 1990 Stock Option Plan.*

10.2 1995
Stock Option Plan.*

10.3 1995 Stock Option Plan for Nonemployee Directors.*

10.4 Business Loan Agreement dated as of January 1, 1997 between the
Company and Bank of America National Trust and Savings Association.

11.1 Reconciliation of Earnings Per Share.

21.1 Subsidiaries of the Company.*

23.1 Consent of Deloitte & Touche LLP.

27.1 Financial Data Schedule.

- --------------

* Filed as an Exhibit to the Company's Registration Statement on Form S-1
(Registration No. 33-80429) on December 14, 1995.

(B)(b) REPORTS ON FORM 8-K.

None.

2725
26
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1943, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

PIA MERCHANDISING SERVICES, INC.

By: /s/
CLINTON E. OWENS
------------------------------------------
Clinton E. Owens
Chairman of the Board,-----------------------------------
Terry R. Peets
President, Chief Executive Officer
and Director

Date: March 27, 1997
------------------------------------_________________________________

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

SIGNATURE TITLE DATE
- --------- ----- ----

/s/ CLINTON E. OWENS Chairman of the Board, Chief Executive March
SIGNATURE TITLE
- --------- -----

/s/ Chairman of the Board
------------------------------
Clinton E. Owens

/s/ President, Chief Executive Officer
------------------------------ and Director
Terry R. Peets

/s/ Executive Vice President, Chief Financial
------------------------------ Officer and Secretary (Principal Financial
Cathy L. Wood and Accounting Officer)

/s/ Director
------------------------------
Patrick W. Collins

/s/ Director
------------------------------
John A. Colwell

/s/ Director
------------------------------
Joseph H. Coulombe

/s/ Director
------------------------------
Patrick C. Haden

/s/ Director
------------------------------
J. Christopher Lewis

27 1997
- ------------------------ Officer (Principal Executive Officer)
Clinton E. Owens

/s/ ROY L. OLOFSON Executive Vice President, Chief March 27, 1997
- ------------------------ Financial Officer (Principal Financial
Roy L. Olofson and Accounting Officer)

/s/ JOHN A. COLWELL Director, Vice Chairman March 27, 1997
- -----------------------
John A. Colwell

/s/ JOSEPH H. COULOMBE Director March 27, 1997
- -----------------------
Joseph H. Coulombe

/s/ EDWIN E. EPSTEIN Director March 27, 1997
- -----------------------
Edwin E. Epstein

/s/ PATRICK C. HADEN Director March 27, 1997
- -----------------------
Patrick C. Haden

PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT F-1

FINANCIAL STATEMENTS:
Consolidated balance sheets as of December 31, 1995 and 1996 F-2
Consolidated statements of income for each of the three years
in the period ended December 31, 1996 F-4
Consolidated statements of stockholders' equity for each
of the three years in the period ended December 31, 1996 F-5
Consolidated statements of cash flows for each of the three years
in the period ended December 31, 1996 F-6

Notes to consolidated financial statements for each of the three years
in the period ended December 31, 1996 and 1997 F-2

Consolidated statements of operations for each of the three years
in the period ended December 31, 1997 F-4

Consolidated statements of stockholders' equity for each
of the three years in the period ended December 31, 1997 F-5

Consolidated statements of cash flows for each of the three years
in the period ended December 31, 1997 F-6

Notes to consolidated financial statements for each of the
three years in the period ended December 31, 1997 F-8
28

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
PIA Merchandising Services, Inc.:

We have audited the accompanying consolidated balance sheets of PIA
Merchandising Services, Inc. and subsidiaries (the Company) as of December 31,
19951996 and 1996,1997, and the related consolidated statements of income,operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996.1997. Our audits also included the financial statement
schedule listed in Item 14(a)2. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of PIA Merchandising
Services, Inc. and subsidiaries as of December 31, 19951996 and 1996,1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 19961997 in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement schedule,
when considered in relation to the financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

DELOITTE & TOUCHE LLP

Costa Mesa, California
January 30, 1997February 12, 1998
F-1
29

PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

ASSETS

DECEMBER 31,
----------------------
1995 1996

CURRENT ASSETS:
Cash and cash equivalents $ 185 $19,519
Accounts receivable, net (Note 2) 12,213 22,630
Prepaid expenses and other current assets 638 564
Deferred income taxes (Note 5) 493

DECEMBER 31,
----------------------
1996 1997

CURRENT ASSETS:

Cash and cash equivalents $19,519 $12,987
Accounts receivable, net (Note 3) 22,630 16,053
Federal income tax refund receivable (Note 6) 2,905
Prepaid expenses and other current assets 564 816
Deferred income taxes (Note 6) 669
------- -------
Total current assets 13,529 43,382

PROPERTY AND EQUIPMENT, net (Note 2) 2,110 1,847

INVESTMENTS AND OTHER ASSETS:
Investment in affiliate (Note 3) 100 322
Capitalized software development costs, net (Note 1) 1,987
Other assets 347 134
------- -------
Total investments and other assets 447 2,443
------- -------
$ 16,086 $ 47,672
------- -------
------- -------

Total current assets 43,382 32,761

PROPERTY AND EQUIPMENT, net (Note 3) 1,847 2,416

INVESTMENTS AND OTHER ASSETS:
Investment in affiliate (Note 4) 322 418
Capitalized software development costs, net (Note 1) 1,987
Other assets 134 872
------- -------

Total investments and other assets 2,443 1,290
------- -------

$47,672 $36,467
======= =======

See notes to consolidated financial statements.

F-2

30
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31,
----------------------
1995 1996

CURRENT LIABILITIES:
Accounts payable $ 1,838 $ 772
Other current liabilities (Note 2) 4,105 9,762
Income taxes payable (Note 5) 455 111
------- -------
Total current liabilities 6,398 10,645

DEFERRED INCOME TAXES (Note 5) 300 309

LINE OF CREDIT (Note 4) 3,400

COMMITMENTS AND CONTINGENCIES (Note 7)

STOCKHOLDERS' EQUITY (Notes 9 and 10):
Preferred stock, no par value, $.01 par value;
3,000,000 shares authorized; none issued and
outstanding Common stock, no par value, $.01 par
value; 15,000,000 shares authorized; 3,563,929 and
5,891,451 shares issued and outstanding as of
December 31, 1995 and 1996, respectively 6,454 58
Additional paid-in capital 33,367
Retained earnings (accumulated deficit) (466) 3,293
------- -------
Total stockholders' equity 5,988 36,718
------- -------
$16,086 $47,672
------- -------
------- -------
DECEMBER 31,
-------------------------
1996 1997

CURRENT LIABILITIES:
Accounts payable $ 772 $ 3,442
Other current liabilities (Note 3) 9,762 13,334
Income taxes payable (Note 6) 111 47
-------- --------

Total current liabilities 10,645 16,823

DEFERRED INCOME TAXES (Note 6) 309

LONG-TERM LIABILITIES AND LINE OF CREDIT (Note 5) 966

COMMITMENTS AND CONTINGENCIES (Note 8)

STOCKHOLDERS' EQUITY (Notes 10 and 11):
Preferred stock, no par value, $.01 par value;
3,000,000 shares authorized; none issued and outstanding
Common stock, no par value, $.01 par value;
15,000,000 shares authorized; 5,891,451 and 5,392,558
shares issued and outstanding as of December 31, 1996
and 1997, respectively 58 59
Additional paid-in capital 33,367 33,429
Retained earnings (accumulated deficit) 3,293 (11,806)
Less treasury stock at cost (507,000 shares at December 31, 1997) (3,004)
-------- --------

Total stockholders' equity 36,718 18,678
-------- --------

$ 47,672 $ 36,467
======== ========

See notes to consolidated financial statements.

F-3

31
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

YEARS ENDED DECEMBER 31,
----------------------------------
1994-------------------------------------------
1995 1996 1997

NET REVENUES $80,449 $104,791 $119,940$ 104,791 $ 119,940 $ 128,208

OPERATING EXPENSES:
Field service costs 61,876 81,320 94,841 119,830
Selling expenses 9,028 10,339 11,133 10,482
General and administrative expenses (Notes 6, 7, 8 and 8) 5,8009) 6,810 8,081 10,234
Restructuring and other charges (Note 2) 5,420
Depreciation and amortization 339 497 595 ------- -------- --------997
--------- --------- ---------

Total operating expenses 77,043 98,966 114,650 ------- -------- --------146,963
--------- --------- ---------

OPERATING INCOME 3,406(LOSS) 5,825 5,290 (18,755)

OTHER INCOME (EXPENSE):
Interest expense (Note 8) (729) (493) (46)
Interest income 4 28 869 799
Equity in earnings of affiliate (Note 3)4) 72 ------- -------- --------96
--------- --------- ---------

Total other income (expense) (725) (465) 895 ------- -------- --------895
--------- --------- ---------

INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES 2,681 5,360 6,185 (17,860)

INCOME TAX PROVISION FOR INCOME TAXES(BENEFIT) (Notes 1 and 5) 1016) 1,829 2,426 ------- -------- --------(2,761)
--------- --------- ---------

NET INCOME $ 2,580(LOSS) $ 3,531 $ 3,759 ------- -------- --------
------- -------- --------
NET INCOME$ (15,099)
========= ========= =========

BASIC EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE $0.67 $0.88 $0.63
------- -------- --------
------- -------- --------(Note 12) $ 1.13 $ 0.70 $ (2.72)
========= ========= =========

DILUTED EARNINGS PER SHARE $ 0.89 $ 0.63 $ (2.72)
========= ========= =========

WEIGHTED AVERAGE COMMON ANDSHARES - BASIC 3,117 5,370 5,551
========= ========= =========

WEIGHTED AVERAGE COMMON EQUIVALENT SHARES 3,930 4,016- DILUTED 3,981 5,990 ------- -------- --------
------- -------- --------5,551
========= ========= =========

See notes to consolidated financial statements.

F-4

PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)

RETAINED
COMMON STOCK TREASURY STOCK ADDITIONAL EARNINGS TOTAL
--------------------- ------------------ PAID-IN (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) EQUITY

BALANCE, January 1, 1994 2,9161995 3,084 $ 5,5146,478 -- $ - $(6,577) $(1,063)

Issuance of common stock for
cash 20 168 168
Repurchase of common stock (3) (34) (34)
Conversion of subordinated debt
to common stock 151 830 830
Net income 2,580 2,580
----- ------- ------- ------- -------
BALANCE, December 31, 1994 3,084 6,478-- $ -- $ (3,997) $ 2,481

Repurchase of common stock (3) (24) (24)
Cashless exercise of warrants (Note 10)11) 483
Net income 3,531 3,531
----- ------- ------- ------- --------------- -------- -------- -------- -------- -------- --------
BALANCE, December 31, 1995 3,564 6,454 (466) 5,988

Change in stated par value of
shares from no par to $.01 (6,418) 6,418
Stock issued to the public 2,138 21 26,499 26,520
Stock options exercised 58 1 334 335
Tax benefit related to exercise
of stock options 116 116
Cashless exercise of warrants (Note 10)11) 131
Net income 3,759 3,759
----- ------- ------- ------- --------------- -------- -------- -------- -------- -------- --------

BALANCE, December 31, 1996 5,891 58 33,367 3,293 36,718

Stock options exercised 9 1 62 63
Repurchase of common stock (507) 507 (3,004) (3,004)
Net loss (15,099) (15,099)
-------- -------- -------- -------- -------- -------- --------

BALANCE, December 31, 1997 5,393 $ 58 $33,36759 507 $ 3,293 $36,718
----- ------- ------- ------- -------
----- ------- ------- ------- -------(3,004) $ 33,429 $(11,806) $ 18,678
======== ======== ======== ======== ======== ======== ========

See notes to consolidated financial statements.

F-5
33

PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEARS ENDED DECEMBER 31,
-----------------------------
1994 1995 1996

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,580 $ 3,531 $ 3,759
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 339 497 595
Amortization of other assets and discount on
subordinated debt 101 89
Equity in earnings of affiliate (72)
Deferred income taxes, net (193) (167)
Provision for doubtful receivables 148 354 105
Changes in assets and liabilities:
Accounts receivable 294 (6,605) (10,522)
Prepaid expenses and other current assets (75) 97 74
Other assets (20) (187) 213
Accounts payable (173) 840 (1,066)
Other current liabilities 1,131 946 5,657
Income taxes payable 35 420 (228)
------ ------ -------
Net cash provided by (used in) operating
activities 4,360 (211) (1,652)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (859) (743) (332)
Capitalization of software development costs (1,987)
Investment in affiliate (100) (150)
------ ------ -------
YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,531 $ 3,759 $(15,099)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 497 595 997
Amortization of other assets and discount on
subordinated debt 89
Equity in earnings of affiliate (72) (96)
Deferred income taxes, net (193) (167) 360
Provision for doubtful receivables 354 105 918
Restructuring and other charges (Note 3) 5,420
Changes in assets and liabilities:
Accounts receivable (6,605) (10,522) 5,659
Federal income tax refund receivable (2,905)
Prepaid expenses and other current assets 97 74 (252)
Other assets (187) 213 (744)
Accounts payable 840 (1,066) 2,670
Other current liabilities 946 5,657 173
Income taxes payable 420 (228) (64)
Long-term liabilities 131
-------- -------- --------

Net cash used in operating activities (211) (1,652) (2,832)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (743) (332) (759)
Capitalization of software development costs (1,987)
Investment in affiliate (100) (150)
-------- -------- --------
Net cash used in investing activities (859) (843) (2,469) (759)

See notes to consolidated financial statements.

F-6
34

PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)

YEARS ENDED DECEMBER 31,
------------------------------
1994------------------------------------
1995 1996 1997

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (includes payments
to a stockholder of $350,000 and $845,000$845 in 1994 and 1995,
respectively) $(2,984) $(5,551) $(3,400)1995) $ (5,551) $ (3,400) $ --
Proceeds from long-term debt 300 5,400
Proceeds from issuance of common stock to the public 26,520
Proceeds from issuance of common stock 168 335 63
Repurchase of common stock (34) (24) ------- ------- -------(3,004)
-------- -------- --------

Net cash (used in) provided by (used in) financing activities (2,550) (175) 23,455 ------- ------- -------(2,941)
-------- -------- --------

NET (DECREASE) INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 951 (1,229) 19,334 (6,532)

CASH AND CASH EQUIVALENTS, beginning of period 463 1,414 185 ------- ------- -------19,519
-------- -------- --------

CASH AND CASH EQUIVALENTS, end of period $ 1,414 $ 185 $ 19,519 ------- ------- -------

------- ------- -------$ 12,987
======== ======== ========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:INFORMATION -
Cash paid for interest $ 623during the year for:
Interest $ 390 $ 69 ------- ------- -------
------- ------- -------
Cash paid for income$ --
======== ======== ========
Income taxes $ 66 $ 1,621 $ 2,853 ------- ------- -------
------- ------- -------$ 129
======== ======== ========

See Notes 4, 91, 10 and 1011 to consolidated financial statements for description of
noncash transactions.

See notes to consolidated financial statements.

F-7
35
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 19961997

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

COMPANY DESCRIPTIONCompany Description - PIA Merchandising Services, Inc. and subsidiaries
(the Company) provides in-store merchandising services primarily on behalf
of branded product manufacturers at retail grocery stores, mass
merchandisers, drug stores and deep discount drug stores. The Company's
in-store services include checking for authorized distribution of client
products, cutting in products that are approved for distribution but not
present on the shelf, setting category shelves in accordance with approved
store schematics, ensuring that shelf tags are in place, checking for the
overall salability of clients' products, and performing new product and
promotion selling. The Company also performs special in-store projects
such as new store sets and existing store resets, remerchandisings,
remodels and category implementations, and executes and maintains point of
purchase displays and materials. In addition, the Company collects and
provides to certain clients a variety of merchandising data that is
category and store specific. The Company is also a supplier of regularly
scheduled, routedshared merchandising services in the United States.

The Company was organized in 1943 and was acquired in 1988 by an
individual and a private investment firm. PIA Holding Corporation, the
predecessor of the Company, was incorporated in California. In December
1995, the Company's Board of Directors approved a reincorporation of the
Company in the State of Delaware and a change in the Company's name to PIA
Merchandising Services, Inc. The reincorporation was effective concurrent
with the initial public offering of the Company's common stock. The
reincorporation resulted in an increase in authorized preferred stock to
3,000,000 shares, an increase in authorized common stock to 15,000,000
shares, and a change in the par value of both the Company's common stock
and preferred stock from no par value to $.01 par value. This change in
par value resulted in a reclassification of $6,418,000 from common stock
to additional paid-in capital.

PRINCIPLES OF CONSOLIDATIONPrinciples of Consolidation - The consolidated financial statements
include the accounts of PIA Merchandising Services, Inc. and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. The equity method of
accounting is used for the Company's investment in affiliate (Note 3)4).

CASH EQUIVALENTSCash Equivalents - The Company considers all highly-liquid short-term
investments with original maturities of three months or less to be cash
equivalents.

ACCOUNTS RECEIVABLE AND CREDIT RISKAccounts Receivable and Credit Risk - During the ordinary course of the
Company's business, the Company grants trade credit to its clients, which
consist primarily of packaged goods manufacturers and retailers. The
Company's ten largest clients generated approximately 59%56%, 56%57% and 57%69% of
the Company's net revenues for the fiscal years ended December 31, 1994,
1995,
1996 and 1996,1997, respectively.

F-8
36
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)

During the fiscal year ended December 31, 1996,1997, two of the Company's
clients accounted for 16% and 13.6%, of the Company's net revenues. During
1996, two clients accounted for 11.7% and 10.3%,
respectively, of the Company's net
revenues.

Given the significant amount of net revenues

F-8
derived from certain clients,
collectibility issues arising from financial difficulties of any of these
clients or the loss of any such clients could have a material adverse
effect on the Company's business.

Unbilled accounts receivable represent merchandising services performed
that are pending billing until the requisite documents have been processed
or projects have been completed (Note 2)3).

PROPERTY AND EQUIPMENTProperty and Equipment - Property and equipment are stated at cost and
depreciated on the straight-line method over estimated useful lives,
ranging from three to ten years. Leasehold improvements are amortized over
the estimated useful life of the asset or the term of the lease, whichever
is shorter.

SOFTWARE DEVELOPMENT COSTSSoftware Development Costs - Certain software development costs are
capitalized when incurred. Capitalization of software development costs
begins upon the establishment of technical feasibility and ceases
capitalization when the product is ready for release. Research and
development costs related to software development that has not reached
technological feasibility are expensed as incurred. As of December 31,
1996, software had not reached the release stage; and, therefore,
amortization of the related costs had not begun. WhenDuring 1997, such product
was completed and the product is
available for release, therelated software development costs will bewere transferred
to property and equipment and are being amortized on
a straight-line method over five years or thetheir expected
life of the product,
whichever is less.

OTHER ASSETSuseful life.

Other Assets - Other assets consist primarily of refundable deposits.

DEFERRED REVENUEDeferred Revenue - Client payments received in advance of merchandising
services performed are classified as deferred revenue (Note 2)3).

AMOUNTS HELD ON BEHALF OF THIRD PARTIESAmounts Held on Behalf of Third Parties - Amounts held on behalf of third
parties arise from agreements with retailers to provide services for their
private label manufacturers' products and represent amounts to be utilized
for certain future services,services; merchandising-related expenditures on behalf
of the retailers (Note 2)3). These agreements renew annually and are
cancelable on December 31 of each year or upon ninety-day written notice
by either party.

REVENUE RECOGNITIONRevenue Recognition - The Company's services are provided under various
types of contracts which consist primarily of fixed fee and
commission-
basedcommission-based arrangements. Under fixed fee arrangements, revenues are
recognized monthly based on a fixed fee per month over a service period of
typically one year, as defined in the contract.

F-9

37
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)

The Company's commission-based contracts provide for commissions to be
earned based on a specified percentage of the client's net sales of
certain products to designated retail chains. In conjunction with these
commission arrangements, the Company receives draws on a monthly basis,
which are to be applied against commissions earned. These draws
approximate estimated minimum revenue to be earned on the contract and are
recognized on a monthly basis, over a service period of

F-9
typically one
year. The Company recognizes adjustments on commission-based sales in the
period such amounts become determinable. Commissions are usually owed to
the Company in excess of draws received.

The Company also performs services on a specific project basis. Revenues
related to these projects are recognized as services are performed or
costs are incurred. Certain of the Company's contracts are to perform
project work over a specified period of time ranging from one to twelve
months. Revenue under these types of contracts is recognized on the
percentage of completion method using the cost-to-cost method. FIELD SERVICE COSTSProvisions
for estimated losses on uncompleted contracts are recorded in the period
in which such losses are determinable.

Field Service Costs - Field service costs are comprised principally of
field labor and related costs and expenses required to provide routed
coverage,shared
services, project activities, key account management and related
technology costs, as well as field overhead required to support the
activities of these groups of employees.

INCOME TAXESAccounting for Stock-Based Compensation - SFAS No. 123, Accounting for
Stock-Based Compensation, requires disclosure of fair value method of
accounting for stock options and other equity instruments. Under the fair
value method, compensation cost is measured at the grant date based on the
fair value of the award and is recognized over the service period which is
usually the vesting period. The Company has chosen, under the provisions
of SFAS No. 123, to continue to account for employee stock-based
transactions under Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. The Company has disclosed in
Note 11 to the financial statements pro forma diluted net income (loss)
and net income (loss) per share as if the Company had applied the new
method of accounting.

Income Taxes - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, ACCOUNTING FOR
INCOME TAXESAccounting for
Income Taxes (Note 5)6). Under SFAS No. 109, income taxes are provided for
the tax effects of transactions reported in the financial statements and
consist of taxes currently due plus deferred taxes related primarily to
differences between the basis of assets and liabilities for financial and
tax reporting. The deferred tax assets and liabilities represent the
future tax return consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are recovered or
settled. Deferred taxes are also recognized for operating losses that are
available to offset future taxable income and tax credits that are
available to offset future

F-10
38
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)

income taxes. In the event the future consequences of differences between
financial reporting bases and tax bases of the Company's assets and
liabilities result in deferred tax assets, SFAS No. 109 requires an
evaluation of the probability of being able to realize the future benefits
indicated by such asset. A valuation allowance is provided when it is more
likely than not that some portion or all of the deferred tax asset will
not be realized.

NET INCOME PER COMMON AND COMMON EQUIVALENT SHAREEarnings Per Share - Net incomeThe Company has adopted SFAS No. 128, Earnings per
Share, which replaces the presentation of "Primary" earnings per share
is
computed by dividing net income bywith "Basic" earnings per share and the presentation of "Fully Diluted"
earnings per share with "Diluted" earnings per share. Prior periods have
been restated to reflect the change in presentation.

Basic earnings per share amounts are based upon the weighted average
number of common shares outstanding. Diluted earnings per share amounts
are based upon the weighted average number of common and potential common
equivalent shares outstanding. Weighted averagefor each period presented. Potential common and
common equivalent shares include common shares, warrants and stock
options using the modified treasury stock method.

Net income per share at
December 31, 1994 was calculated assuming the subordinated convertible note
payable had been converted and the shares were outstanding as of the
beginning of the year.

Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
Topic 4D, stock options granted during the twelve months prior to the date
of the initial filing of the Company's Form S-1 Registration Statement have
been included in the calculation of the weighted average common shares,
using the modified treasury stock method, as if they were outstanding for
all periods presented.

F-10

STOCK SPLITStock Split - In December 1995, the Company effected a 1-for-1.85 reverse
stock split of its common stock. All share and per share amounts included
in the accompanying financial statements and notes have been restated to
reflect the stock split.

VENDOR CONCENTRATIONVendor Concentration - In addition to the Company's own employees, the
Company utilizes a force of trained merchandisers employed by a third
party payrolling company engaged principally in the performance of
retailer mandated and project activities. For the years ended December 31,
1994, 1995, 1996 and 1996,1997, the Company paid this payrolling company
approximately $15,465,000, $26,917,000, $31,145,000 and $31,145,000,$38,936,000, respectively (Note
2)3).

USE OF ESTIMATESUse of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
these estimates.

NEW ACCOUNTING PRONOUNCEMENTFair Value of Financial Instruments - The Company's consolidated balance
sheet includes the following financial instruments: cash and cash
equivalents, accounts receivable and accounts payable. The Company
considers the carrying amounts of current assets and liabilities in the
consolidated financial statements to approximate the fair value for these
financial instruments because of the relatively short period of time
between origination of the instruments and their expected realization.

F-11
39

PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)

New Accounting Pronouncements - For the fiscal years beginning after
December 31, 1997, the Company will adopt SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair
value.130, Reporting
Comprehensive Income, SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information and SFAS No. 132 Employers' Disclosures
About Pensions and Other Postretirement Benefits. The Company has chosen to continue to account for stock-based
compensation usingis reviewing
the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,
and related interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any,impact of the quoted market price of
the Company's stock at the date of the grant over the amount an employee
must pay to acquire the stock (Note 10).

RECLASSIFICATIONSsuch information on its financial statements.

Reclassifications - Certain amounts as previously reported have been
reclassified to conform to the December 31, 19961997 presentation.

F-11
2. RESTRUCTURING AND OTHER CHARGES

During 1997, the Company experienced declining gross margins, and
resultant operating losses, due to service performance issues and the loss
of several shared clients. This decline in margins has resulted in
insufficient margin dollars to cover the overhead structure which had
developed at the field level and in general corporate area. In the quarter
ended September 30, 1997, the Company addressed these conditions by
restructuring its operations, focusing on a more disciplined and
functional operational structure, and redirecting its technology
strategies, resulting in a $5,420,000 charge for restructuring and other
charges. The restructure charges consist of $1,264,000 of identified
severance and lease costs in various management and administrative
functions and $2,021,000 in writedowns and accruals associated with the
redirection of the Company's technology strategies (Note 3). Other charges
consist primarily of $1,297,000 of reserves and write-offs related to
unprofitable contracts and $555,000 of costs associated with changes in
the Company's service delivery model. At December 31, 1997, $2,314,000 is
remaining in accrued liabilities in the accompanying consolidated balance
sheet.

3. SUPPLEMENTAL BALANCE SHEET INFORMATION

Accounts receivable, net, consist of the following (in thousands):

DECEMBER 31,
--------------------
1996 1997

Trade $ 21,603 $ 15,411
Unbilled 1,610 2,034
Non-trade 59
--------- ---------
23,213 17,504
Allowance for doubtful accounts
and other (583) (1,451)
--------- ---------
$ 22,630 $ 16,053
========= ========

F-12

40
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, --------------------
1995 1996

Trade $11,975 $21,603
Unbilled 662 1,610
------- -------
12,637 23,213
Allowance1997 (CONTINUED)

During 1997, the Company recorded certain restructuring charges (Note 2).
In connection with the restructuring, the Company recorded a charge of
approximately $1,000,000 for doubtful accounts (424) (583)
------- -------
$12,213 $22,630
------- -------
------- -------the impairment of capitalized software costs.

Property and equipment consist of the following (in thousands):
DECEMBER 31,
--------------------
1995 1996

Equipment $ 3,054 $ 3,343
Furniture and fixtures 614 641
Leasehold improvements 102 118
------- -------

3,770 4,102
Less accumulated depreciation and amortization (1,660) (2,255)
------- -------

$ 2,110 $ 1,847
------- -------
------- -------

F-12

DECEMBER 31,
-----------------
1996 1997

Equipment $ 3,343 $ 3,680
Furniture and fixtures 641 662
Leasehold improvements 118 160
Capitalized software development costs 902
------- -------

4,102 5,404
Less accumulated depreciation
and amortization (2,255) (2,988)
------- -------

$ 1,847 $ 2,416
======= =======

Other current liabilities consist of the following (in thousands):

DECEMBER 31,
----------------
1996 1997

Accrued salaries and other related costs $ 944 $ 1,237
Accrued payroll to third party 1,952 2,847
Accrued insurance 855 1,456
Deferred revenue 2,479 1,039
Amounts held on behalf of third parties 1,055 1,116
Accrued software costs 603
Accrued rebate 788 2,200
Customer deposits 230 90
Restructuring costs 1,475
Other 856 1,874
------ ------
$9,762 $13,334
====== =======

F-13

41
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, --------------------
1995 1996

Accrued salaries and other related costs $ 829 $ 944
Accrued payroll to third party 581 1,952
Accrued insurance 532 640
Deferred revenue 436 2,479
Amounts held on behalf of third parties 864 1,055
Accrued software costs 603
Accrued rebate 788
Customer deposits 358 230
Other 505 1,071
------ ------
$4,105 $9,762
------ ------

3.1997 (CONTINUED)

4. INVESTMENT IN AFFILIATE

During 1996, the Company increased its voting ownership in Ameritel
Corporation, a full service telemarketing company, to 20%. Accordingly,
the Company changed its method of carrying the investment from cost to
equity as required by generally accepted accounting principles. The change
in method had no cumulative effect onwas not material to the carrying value of the investment in the
accompanying financial statements.

Following is a summary of condensed unaudited financial information
pertaining to Ameritel Corporation (in thousands):
DECEMBER 31,
-------------------
1995

DECEMBER 31,
---------------
1996 1997

Current assets $ 739 $ 1,658
Noncurrent assets 938 1,078
Current liabilities 172 666
Long-term liabilities 872 888
Shareholders' equity 633 673
Income for the year 361 478
$ 739
Noncurrent assets 701 938
Current liabilities 222 172
Long-term liabilities 84 872
Shareholders' equity (deficit) (27) 633
Income (loss) for the year (124) 361

F-13

5. LINE OF CREDIT

In December 1995,On January 1, 1997, the Company entered into a line of credit agreement
with a bank which replaced its existing line of credit agreement with another
bank. The line of credit provided for maximum borrowings of $7,000,000,
was limited to 80% of eligible accounts receivable, as defined, and was
secured by substantially all of the Company's assets. The line of credit
bore interest, payable monthly, at a premium to the bank's reference rate
(8.25% at December 31, 1996). At December 31, 1996, there were no
borrowings outstanding under the line of credit agreement, and $7,000,000
was available for borrowing. All amounts outstanding under the line of
credit were due May 1, 1997. On January 1, 1997, the Company entered into
a new line of credit agreement with its existing bank. Under this agreement, the line matureswas to mature on May 1, 1998
and bearsbear interest at the bank's reference rate. The new line is unsecured and is no longer subject to
available accounts receivable. The newof credit agreement contains certain
financial covenants related to working capital, tangible net worth,
leverage and profitability. In addition, this credit agreement imposes
certain restrictions as to additional indebtedness, and prohibits the
payment of dividends and the ability to make acquisitions. As of
January 1,was
canceled on October 3, 1997.

F-14

PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1997 the Company was in compliance with all covenants related
to this new agreement.

5.(CONTINUED)

6. INCOME TAXES

The provision (benefit) for income taxes is summarized below for the years
ended December 31, 1994, 1995, 1996 and 19961997 (in thousands):
DECEMBER 31,
---------------------------
1994 1995 1996

Current income taxes:
Federal $ 51 $1,538 $2,163
State 50 484 430
---- ------ ------
101 2,022 2,593
Deferred income taxes:
Federal (173) (135)
State (20) (32)
---- ------ ------
(193) (167)
---- ------ ------
$101 $1,829 $2,426
---- ------ ------
---- ------ ------

F-14

DECEMBER 31,
-------------------------------
1995 1996 1997

Current income taxes:
Federal $ 1,538 $ 2,163 $(3,082)
State 484 430 (19)
------- ------- -------

2,022 2,593 (3,101)
Deferred income taxes:
Federal (173) (135) (2,846)
State (20) (32) (380)
------- ------- -------

(193) (167) (3,226)
Increase in valuation allowance 3,566
------- ------- -------
$ 1,829 $ 2,426 $(2,761)
======= ======= =======

A reconciliation between the provision (benefit) for income taxes as
required by applying the federal statutory rate of 35% to that included in
the financial statements is as follows (in thousands):

YEARS ENDED DECEMBER 31,
-------------------------
1994-------------------------------
1995 1996 1997

Provision (benefit) for income taxes at
federal statutory rate $ 938 $1,876 $2,1651,876 $ 2,165 $(6,251)
State income taxes, net of federal benefit 43 210 259 (12)
Other permanent differences 79 101 (31)
Change in valuation allowance (1,141) (565) 3,566
Other 182 207 33 --------(64)
------- ------- -------

$ 101 $1,829 $2,426
-------- ------- -------
-------- ------- -------1,829 $ 2,426 $(2,761)
======= ======= =======

During fiscal 1994 and 1995, the Company's valuation allowance decreased
approximately $1,141 and $565,000, respectively, due to the utilization of
net operating loss carryforwards.F-15
43
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)

The Company had a net deferred tax asset of approximately $193,000 and
$360,000 at
December 31, 1995 and 1996, respectively.

DECEMBER 31,
----------------
1995 1996

Net operating loss carryforwards $ 9 $ -
State1996. During 1997, the Company accrued a valuation allowance
for the amount of its deferred tax provision 112 28
Accrued compensation 79 182
Accrued insurance 121 196
Allowance for doubtful accounts receivable 175 251
Depreciation (300) (314)
Other (3) 17
------- ------
Net deferred taxes $ 193 $ 360
------- ------
------- ------

6.asset.

DECEMBER 31,
-------------------
1996 1997

Net operating loss carryforwards $ -- $ 1,877
State tax provision 28 (270)
Accrued compensation 182 131
Accrued insurance 196 427
Allowance for doubtful accounts receivable 251 1,158
Depreciation (314) (180)
Other 17 423
------- -------

3,566
Valuation allowance (3,566)
------- -------
Net deferred taxes $ 360 $ --
======= =======

7. EMPLOYEE BENEFITS

PENSION PLANSPension Plans - Certain of the Company's employees are covered by
union-
sponsored,union-sponsored, collectively bargained, multi-employer pension plans.
Pension expense related to these plans was approximately $82,000, $162,000,
$172,000 and $172,000$178,000 for the years ended December 31, 1994, 1995, 1996 and
1996,1997, respectively.

F-15
The administrators have advised the Company that there
were no withdrawal liabilities as of December 1990, the most recent date
for which an analysis was made. The Company has no current intention of
withdrawing from any of these plans.

RETIREMENT PLANRetirement Plan - The Company has a 401(k) retirement plan covering all
employees not participating in the pension plans. Eligible employees, as
defined by the 401(k) plan, may elect to contribute up to 15% of their
total compensation, not to exceed the amount allowed by Internal Revenue
Service guidelines. The Company makes matching contributions to the 401(k)
plan each year equal to 50% of the employee contributions, not to exceed
4% of the total compensation, and can also make discretionary matching
contributions. Employee contributions are fully vested at all times, and
the Company's matching contributions vest over five years. The Company's
matching contributions were approximately $376,000, $473,000, $468,000 and $468,000$506,000
for the years ended December 31, 1994, 1995, 1996 and 1996,1997, respectively.

7.F-16
44

PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)

8. COMMITMENTS AND CONTINGENCIES

The Company leases its facilities under operating leases and also leases
certain computer and office equipment under two- to five-year operating
lease agreements. Total rent expense relating to these leases was
approximately $1,852,000, $1,913,000, $2,756,000 and $2,756,000$6,369,000 for the years ended
December 31, 1994, 1995, 1996 and 1996,1997, respectively.

The following table sets forth future minimum lease payments under
noncancelable operating leases as of December 31, 19961997 (in thousands):
Year ending December 31:
1997 $ 4,751
1998 3,803
1999 2,039
2000 761
2001 480
Thereafter 92
-------
Total future minimum lease payments $11,926
-------
-------

F-16

8. RELATED PARTY

Year ending December 31:

1998 $ 6,463
1999 3,948
2000 1,761
2001 1,395
2002 777
Thereafter 35
--------
Total future minimum lease payments $ 14,379
========

9. RELATED-PARTY TRANSACTIONS

The Company receives legal services from a law firm previously affiliated
with its principal stockholder and paid approximately $58,000, $83,000, $516,000
and $516,000$189,000 for such legal services during the years ended December 31,
1994,
1995, 1996 and 1996,1997, respectively. Additionally, the Company paid approximately
$140,000 and $57,000 during the years ended December 31, 1994 and 1995,
respectively, in interest related to the subordinated loans payable to a
stockholder and to a partnership in which certain stockholders of the
Company are partners.

The Company has an investment in an affiliate which provides telemarketing
and related services (Note 3)4). During 1996,1997, the Company paid approximately
$412,000$524,000 for such services. Approximately $51,000$32,000 was payable to the
affiliate at December 31, 1996.

In December 1995, the Company entered into an agreement with one of its
directors to provide certain consulting services to the Company for $6,500
per month, plus certain additional compensation, based on mutually agreed-
upon objectives. Effective August 1, 1996, this director became an
employee of the Company. In conjunction with this agreement, the Company
issued to this director options to purchase 8,108 shares of the Company's
common stock at $9.81 per share, which represented the estimated fair
market value of the Company's common stock at the date of grant. These
options vest ratably over a four-year period beginning December 1, 1996
(Note 10).

9.1997.

10. STOCK TRANSACTIONS

In December 1994, the Company's principal stockholder converted a
subordinated note payable into 151,182 shares of the Company's common stock
at a conversion price of $7.40 per share, pursuant to the terms of the
subordinated note agreement. At the date of conversion, $289,299 of a
related discount remained unamortized and was offset against the conversion
amount in stockholders' equity.

In March 1996, the Company completed an initial stock offering and sold
1,788,000 shares of its common stock at a net price of $13.02 per share.
An additional 349,800 shares of common stock were sold, also at a net
$13.02 per share, pursuant to an underwriters over-allotment provision.
The net proceeds of the approximately $26 million raised by the Company
were used in part to repay existing bank debt.

F-17
45

PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)

During 1997 and 1996, the Company issued 8,107 and 57,798 shares of common
stock, respectively, as a result of options which were exercised (Note
10)11). The income tax effect of any difference between the market price of
the Company's common stock at the grant date and the market price at the
exercise date is credited to additional paid-in capital.

F-17
capital, as required.

In conjunction with a subordinated convertible note payable to its
principal stockholder, in July 1993 and December 1994, respectively, the
Company issued warrants for the purchase of 43,243 and 21,621 shares of
common stock at approximately $.02 and $8.51 per share, subject to
adjustment for dilution. In December 1995, the July 1993 warrants for the
purchase of 43,243 shares of common stock were exercised through a
cashless exercise, based on the fair market value of the Company's common
stock at the date of exercise of $9.81, which reduced the shares issued to
43,162. The December 1994 warrants expire in 2004.

During December 1995, warrants to purchase 440,433 shares of the Company's
common stock at approximately $.02 per share were exercised through a
cashless exercise, based on the fair market value of the Company's common
stock at the date of exercise of $9.81, which reduced the number of shares
issued to 439,602 (Note 9)11).

During February 1996, 100,000 warrants which were issued in conjunction
with a 1992 line of credit for the purchase of 152,405 shares of common
stock at $1.82 per share were exercised through a cashless exercise, based
on the estimated fair market value of the Company's common stock at the
date of exercise of $14.00, which reduced the number of shares issued to
87,000. During October 1996, the remaining warrants to purchase 52,405
shares of common stock at $1.82 per share were exercised through a
cashless exercise, based on the estimated fair value of the Company's
common stock at the date of exercise of $12.75, which reduced the number
of shares issued to 44,924.

10.11. STOCK OPTIONS AND WARRANTS

The Company has three stock option plans: the 1990 Stock Option Plan (1990
Plan), the 1995 Stock Option Plan (1995 Plan), and the 1995 Director's
Plan (Director's Plan).

The 1990 Plan is a nonqualified option plan providing for the issuance of
up to 810,811 shares of common stock to officers, directors and key
employees. The options have a term of 10 years and one week and are either
fully-vested or will vest ratably no later than five years from the grant
date. During 1996, the Company elected to no longer grant options under
this plan.

The 1995 Plan provides for the granting of either incentive or
nonqualified stock options to specified employees, consultants and
directors of the Company for the purchase of up to 1,000,000 shares of the
Company's common stock. The options have a term of ten years, except in
the case of incentive stock

F-18
46
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)

options granted to greater than ten percent stockholders of the Company,
as to which the term is five years. The exercise price of nonqualified
stock options must be equal to at least 85% of the fair market value of
the Company's common stock at the date of grant, and the exercise price of
incentive stock options must be equal to at least the fair market value of
the Company's common stock at the date of grant. At December 31, 1996,1997,
options to purchase 785,460115,135 shares were available for grant.

F-18

The Director's Plan is a stock option plan for nonemployee directors and
provides for the purchase of up to 100,000 shares of the Company's common
stock. An option to purchase 1,500 shares of the Company's common stock
shall be granted automatically each year to each director following the
Company's annual stockholders' meeting. The exercise price of options
issued under this plan shall be not less than the fair market value of the
Company's common stock on the date of grant. Each option under this plan
shall vest and become exercisable in full on the first anniversary of its
grant date, provided that the optionee is reelected as a director of the
Company. The maximum term of options granted under the plan is ten years
and one day, subject to earlier termination following an optionee's
cessation of service with the Company. At December 31, 1996, all1997, options to
purchase 94,000 shares were available for grant under this plan.

The Company has adopted the disclosure-only provisions of SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION. Accordingly, noAccounting for Stock-Based Compensation. No compensation cost has been
recognized for the stock option plans. The impact of stock options granted
prior to 1995 has been excluded from the pro forma calculation;
accordingly, the 1995, 1996 and 19951997 pro forma adjustments may not be
indicative of future period pro forma adjustments, when the calculation
will apply to all applicable future stock options. Had compensation cost
for the Company's option plans been determined based on the fair value at
the grant date for awards in 1996 and 1997 consistent with the provisions
of SFAS No. 123, the Company's net income (loss) and net income (loss) per
share would have been reduced to the pro forma amounts indicated below:
1995 1996

Net income, as reported $ 3,531 $ 3,759
Net income, pro forma $ 3,507 $ 3,564

Net income per share, as reported $0.88 $0.63
Net income per share, pro forma $0.87 $0.60

1995 1996 1997

Net income (loss), as reported $3,531 $ 3,759 $(15,099)
Net income (loss), pro forma $3,507 $ 3,564 $(15,808)

Basic net income (loss) per share, as reported $ 1.13 $ 0.70 $ (2.72)
Basic net income (loss) per share, pro forma $ 1.13 $ 0.60 $ (2.85)

Diluted net income (loss) per share, as reported $ 0.89 $ 0.63 $ (2.72)
Diluted net income (loss) per share, pro forma $ 0.87 $ 0.60 $ (2.85)

The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-weighted-average assumptions used for grants in 1997: dividend yield of
0%; expected volatility of 79.5%; risk-free interest rate of 6.2%; and
expected lives of 6 years. The following weighted average assumptions were
used for grants in 1996: dividend yield of 0%;

F-19
47

PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)

expected weighted average volatility of 101.7%; risk-free interest rate of
6.3%; and expected lives of 6 years. The following weighted-average
assumptions used for grants in 1995: dividend yield of 0%; expected
volatility of 0%; risk-free interest rate of 6.4%; and expected lives of
6six years.

The following weighted average assumptions were used
for grants in 1996: dividend yield of 0%; expected weighted average
volatility of 101.7%; risk-free interest rate of 6.3%;table summarizes activity under the Company's 1990 and expected lives
of 6 years.

F-19

Information regarding these option plans is as follows:1995
Plan and Directors Plan:

1994 1995 1996 ----------------------- ------------------------- -----------------------1997
--------------------- -------------------- ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE

Options
outstanding,
beginning of year 598,583 $6.01 686,002 $6.34$ 6.34 791,356 $ 6.76 883,202 $ 8.12
Options granted 95,135 $8.51 110,273 $9.46$ 9.46 234,540 $13.57$ 13.57 938,325 $ 5.55
Options exercised (3,081) $7.40 (57,798) $ 5.85 (8,107) $ 7.77
Options canceled
or expired (4,635) $7.40 (4,919) $8.51$ 8.51 (84,896) $ 9.25 -------- --------(286,569) $ 10.45
------- ------- --------
Options
outstanding,
end of year 686,002 $6.34 791,356 $6.76$ 6.76 883,202 $ 8.12 -------- -------- --------
-------- -------- --------1,526,851 $ 6.50
======= ======= =========

Option price
range at
end of year $2.78 to $2.78$ 2.78 to $2.78$ 2.78 to
$8.51 $9.81 $14.00$ 14.00 $ 14.00

Option price
range for $2.78$ 2.78 to $ 7.40 to
exercised shares $7.40 n/a $9.81$ 9.81 $ 8.51

Weighted average
fair value of
options granted
during the year $ 2.95 $ 11.18 $ 4.01

F-20
48
PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)

The following table summarizes information about fixed-price stock options
outstanding at December 31, 1996:1997:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -------------------------------------------------------------------- ---------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICES 19961997 LIFE PRICE 19961997 PRICE

$2.78 158,557 5.24.20 $ 2.682.78 158,557 $ 2.78
$5.25-$5.75 808,325 9.40 $ 5.50 50,000 $ 5.50
$7.00-$10.00 490,105 7.1489,429 6.30 $ 7.68 337,8617.65 438,901 $ 7.63
$13.00-$14.00 234,540 9.5 $13.57 20,0007.65
$14.00 ------- -------70,540 8.60 $14.00 32,635 $14.00
--------- ------
$2.78 to $14.00 883,202 516,418
------- -------
------- -------1,526,851 7.80 $ 6.50 680,093 $ 6.63
========= =======

F-20

Outstanding warrants are summarized below:
SHARES EXERCISE
SUBJECT TO PRICE PER
WARRANTS SHARE

Balance, January 1, 1994 710,856 $.02 - $2.78
Issuances 21,621 $8.51
--------
Balance, December 31, 1994

SHARES EXERCISE
SUBJECT TO PRICE PER
WARRANTS SHARE

Balance, January 1, 1995 732,477 $.02 - $8.51
Exercised (483,676) $0.02
--------
Balance, December 31, 1995 248,801 $1.82 - $8.51
Exercised (152,405) $1.82
--------
Balance, December 31, 1996 96,396 $2.78 - $8.51
--------
--------

Balance, December 31, 1995 248,801 $1.82 - $8.51
Exercised (152,405) $1.82
--------

Balance, December 31, 1996 96,396 $2.78 - $8.51
--------

Balance, December 31, 1997 96,396 $2.78 - $8.51
========

The above warrants expire at various dates from 2002 through 2004.

F-21
49

PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)

12. EARNINGS PER SHARE

1995 1996 1997

Basic:
Weighted average common shares outstanding 3,117 5,370 5,551

Net income (loss) $ 3,531 $ 3,759 $(15,099)
======== ======== ========

Basic earnings per share $ 1.13 $ 0.70 $ (2.72)
======== ======== ========

Diluted:
Weighted average common shares - basic 3,117 5,370 5,551
Potential common shares 864 620
-------- -------- --------

Weighted average common shares - diluted 3,981 5,990 5,551
======== ======== ========

Net income $ 3,531 $ 3,759 $(15,099)
======== ======== ========

Diluted earnings per share $ 0.89 $ 0.63 $ (2.72)
======== ======== ========

The Company has adopted SFAS No. 128, Earnings Per Share, effective after
December 15, 1997. As a result, the Company's reported earnings per share
for 1996 and 1995 have been restated. The effect of this accounting change
on previously reported earnings per share (EPS) data is as follows:

1995 1996

EPS as reported (Primary) $ 0.88 $ 0.63
Effect of SFAS No. 128 0.25 0.07
-------- --------

EPS as restated (Basic) $ 1.13 $ 0.70

======== ========

For both 1996 and 1995, there is no effect of restating Fully Diluted EPS
to Diluted EPS.

F-22

PIA MERCHANDISING SERVICES, INC. AND SUBSIDIARIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS OF YEAR

Year ended December 31, 1994 -
Allowance for doubtful accounts $169 148 (177) $140

Year ended December 31, 1995 -
Allowance for doubtful accounts $140 354 (70) $424

Year ended December 31, 1996 -
Allowance for doubtful accounts $424 543 (384) $583

F-22

ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
OF YEAR EXPENSES DEDUCTIONS OF YEAR

DESCRIPTION

Year ended December 31, 1995 -
Allowance for doubtful accounts $ 140 354 (70) $ 424

Year ended December 31, 1996 -
Allowance for doubtful accounts $ 424 543 (384) $ 583

Year ended December 31, 1997 -
Allowance for doubtful accounts $ 583 918 (712) $ 789

F-23