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<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    Form 10-Q


Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange 
Act of 1934

               For the second quarterly period ended July 3, 1998


                        PIA MERCHANDISING SERVICES, INC.

               19900 MacArthur Blvd., Suite 900, Irvine, CA 92612

                  Registrant's telephone number: (714) 476-2200




                         Commission file number 0-27824

                 I.R.S. Employer Identification No.: 33-0684451

                        State of Incorporation: Delaware


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: [X] Yes


    On August 10, 1998, there were 5,464,721 shares of Common Stock outstanding.




<PAGE>   2


                        PIA Merchandising Services, Inc.

                                      Index


<TABLE>
<S>                                                                            <C>

PART I: FINANCIAL INFORMATION


Item 1:    Financial Statements

                  Condensed Consolidated Balance Sheets
                  as of  December 31, 1997 and
                  July 3, 1998 (Unaudited).....................................3

                  Condensed Consolidated Statements of Operations
                  Three Months and Six Months Ended
                  June 30, 1997 (Unaudited) and July 3, 1998 (Unaudited).......4

                  Condensed Consolidated Statements of Cash Flows
                  Six Months Ended June 30, 1997 (Unaudited)
                  and July 3, 1998 (Unaudited).................................5

                  Notes to Condensed Consolidated Financial

                  Statements (Unaudited).......................................6



Item 2:    Management's Discussion and Analysis of Financial
           Condition and Results of Operations.................................8

           Risk Factors.......................................................16


PART II:         OTHER INFORMATION



Item 2:    Changes in Securities and Use of Proceeds..........................18


Item 4:    Submission of Matters to a Vote of Security Holders................18


Item 6:    Exhibits and Reports on Form 8-K...................................20


SIGNATURES....................................................................21
</TABLE>




                                       2

<PAGE>   3


PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

PIA MERCHANDISING SERVICES, INC.
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)


<TABLE>
<CAPTION>
                                                      December 31,      July 3,
                                                          1997           1998
                                                      ------------    ----------
                                                                      (Unaudited)
<S>                                                     <C>            <C>     
ASSETS
CURRENT ASSETS:
Cash and cash equivalents                               $ 12,987       $  9,539
Accounts receivable, net of allowance for doubtful
 accounts and other of $1,451 and $1,450 for 1997
 and 1998, respectively                                   16,053         17,485
Federal income tax refund receivable                       2,905             --
Prepaid expenses and other current assets                    816            738
                                                        --------       --------
    TOTAL CURRENT ASSETS                                  32,761         27,762

PROPERTY AND EQUIPMENT, NET (NOTE 3)                       2,416          2,222
                                                        --------       --------
INVESTMENTS AND OTHER ASSETS:
Investment in affiliate                                      418            495
Other assets                                                 872            620
                                                        --------       --------
    TOTAL OTHER ASSETS                                     1,290          1,115
                                                        --------       --------

TOTAL ASSETS                                            $ 36,467       $ 31,099
                                                        ========       ========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable                                        $  3,442       $    315
Other current liabilities                                 13,334         12,501
Income taxes payable                                          47             75
                                                        --------       --------
    TOTAL CURRENT LIABILITIES                             16,823         12,891

LONG-TERM LIABILITIES                                        966            218
                                                        --------       --------
    TOTAL LIABILITIES                                     17,789         13,109
                                                        --------       --------
STOCKHOLDERS' EQUITY:
Common stock and additional paid-in-capital               33,488         33,748
Retained earnings (accumulated deficit)                  (11,806)       (12,754)
Less:  Treasury stock                                     (3,004)        (3,004)
                                                        --------       --------
    TOTAL STOCKHOLDERS' EQUITY                            18,678         17,990
                                                        --------       --------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY              $ 36,467       $ 31,099
                                                        ========       ========
</TABLE>



                             See accompanying notes.


                                       3

<PAGE>   4


PIA MERCHANDISING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
(Unaudited)(In thousands, except per share data)



<TABLE>
<CAPTION>
                                    Three Months Ended      Six Months Ended
                                   -------------------    --------------------
                                    June 30,   July 3,    June 30,     July 3,
                                     1997        1998       1997        1998
                                    --------   --------   --------    --------
<S>                                 <C>        <C>        <C>         <C>     
Net Revenues                        $ 31,643   $ 33,945   $ 60,999    $ 68,684
                                    --------   --------   --------    --------
Operating Expenses:
  Field  service costs                29,638     28,255     56,007      58,044
  Selling expenses                     2,507      2,087      5,061       4,366
  General and administrative 
   expenses                            2,236      3,408      4,685       6,956
  Depreciation and amortization          262        275        459         557
                                    --------   --------   --------    --------
    Total operating expenses          34,643     34,025     66,212      69,923
                                    --------   --------   --------    --------

Operating Loss                        (3,000)       (80)    (5,213)     (1,239)

Other Income:
  Interest income, net                   218        111        449         239
  Equity in earnings of 
   affiliate                              28         57         52          77
                                    --------   --------   --------    --------
    Total other income                   246        168        501         316
                                    --------   --------   --------    --------

Income (Loss) Before Benefit 
 (Provision) For Income Taxes         (2,754)        88     (4,712)       (923)

Benefit (Provision) For 
 Income Taxes                            812        (12)     1,602         (24)
                                    --------   --------   --------    --------
Net Income (Loss)                   $ (1,942)  $     76   $ (3,110)   $   (947)
                                    ========   ========   ========    ========

 Basic Earnings per share           $  (0.35)  $   0.01   $  (0.54)   $  (0.18)
                                    ========   ========   ========    ========

 Diluted Earnings per share         $  (0.35)  $   0.01   $  (0.54)   $  (0.18)
                                    ========   ========   ========    ========
 Basic  Weighted
     Average Common Shares             5,531      5,427      5,714       5,410
                                    ========   ========   ========    ========
 Diluted Weighted
      Average Common Shares            5,531      5,557      5,714       5,410
                                    ========   ========   ========    ========
</TABLE>



                             See accompanying notes.


                                       4

<PAGE>   5

PIA MERCHANDISING SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
(UNAUDITED)  (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                              Six Months Ended
                                                            ----------------------
                                                            June 30,        July 3,
                                                              1997           1998
                                                            --------       --------
<S>                                                         <C>            <C>      
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                    $ (3,110)      $   (947)
Adjustments to reconcile net loss to net cash               
provided by (used in) operating activities:
  Depreciation and amortization                                  459            557
  Provision for doubtful receivables & other, net                326            512
  Equity in earnings of affiliate                                (52)           (77)

Changes in operating assets and liabilities:
  Accounts receivable                                          4,470         (1,432)
  Federal income tax refund receivable                            --          2,801
  Prepaid expenses and other                                  (2,416)           120
  Accounts payable and other liabilities                       1,865         (4,839)
  Income taxes payable                                          (111)            28
                                                            --------       --------
  Net cash provided by (used in) operating activities          1,431         (3,277)

CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures                                          (163)          (263)
  Capitalization of software development costs                  (166)            --
                                                            --------       --------
  Net cash used in investing activities                         (329)          (263)

CASH FLOWS FROM FINANCING ACTIVITIES:
  Repurchase of Treasury Stock                                (2,977)            --
  Proceeds from issuance of common stock, net                     62             92
                                                            --------       --------
  Net cash provided by (used in) financing activities         (2,915)            92

NET DECREASE IN CASH AND
  CASH EQUIVALENTS                                            (1,813)        (3,448)

CASH AND CASH EQUIVALENTS:
  Beginning of period                                         19,519         12,987
                                                            --------       --------
  End of period                                             $ 17,706       $  9,539
                                                            ========       ========
SUPPLEMENTAL DISCLOSURES OF CASH
  FLOW INFORMATION:
  Cash paid for income taxes                                $     98       $     20
                                                            ========       ========
SUPPLEMENTAL DISCLOSURES OF NON-CASH
  FLOW INFORMATION:
  Common stock issued as payment for accrued incentive      $     --       $    168
                                                            ========       ========
</TABLE>



                             See accompanying notes.



                                       5

<PAGE>   6

PIA MERCHANDISING SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1.      Basis of Presentation

        The accompanying unaudited condensed consolidated financial statements
        have been prepared in accordance with generally accepted accounting
        principles for interim financial information and with the instructions
        to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
        include all of the information and footnotes required by generally
        accepted accounting principles for complete financial statements. In the
        opinion of management, all adjustments (consisting of normal recurring
        accruals) considered necessary for a fair presentation have been
        included. This financial information should be read in conjunction with
        the consolidated financial statements and notes thereto for the year
        ended December 31, 1997, included in the Company's Annual Report on Form
        10-K for the year ended December 31, 1997. The results of operations for
        the interim periods are not necessarily indicative of the operating
        results for the year.

        Certain amounts have been reclassified in the prior years' consolidated
        financial statements in order to conform with the current year's
        presentation.

    2.   Change in Accounting Periods

        Effective January 1, 1998, the Company changed its accounting period for
        financial statement purposes from a calendar year to a 52/53 week fiscal
        year. Beginning with fiscal year 1998, the Company's fiscal year will
        end on the Friday closest to December 31. Interim fiscal quarters will
        end on the Friday closest to the calendar quarter end.

        The Company does not believe that this change has a material impact on
        the financial statements.

3.      Property and Equipment

        Property and equipment consist of the following (in thousands):


<TABLE>
<CAPTION>
                                                        December 31,    July 3,
                                                            1997          1998
                                                        ------------    --------
<S>                                                       <C>           <C>    
Equipment                                                 $ 3,680       $ 3,737
Furniture and fixtures                                        662           718
Leasehold improvements                                        160           160
Capitalized software development costs                        902           902
                                                          -------       -------
                                                            5,404         5,517

Less: Accumulated depreciation and amortization            (2,988)       (3,295)
                                                          -------       -------
                                                          $ 2,416       $ 2,222
                                                          =======       =======
</TABLE>




                                       6

<PAGE>   7

        PIA MERCHANDISING SERVICES, INC.
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
        (UNAUDITED)

4.      Recent Accounting Pronouncements

        Earnings Per Share - The Company has adopted SFAS No. 128, Earnings per
        Share, which replaces the presentation of "Primary" earnings per share
        with "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 shares for each period presented. Potential common shares include
        stock options, using the treasury stock method.

        New Accounting Pronouncements -In the quarter ended April 3, 1998, the
        Company adopted SFAS No. 130, Reporting Comprehensive Income. Any
        difference between comprehensive income (loss) and net income (loss) for
        the three months and six months ended July 3, 1998 was considered
        immaterial. For the fiscal year ending January 1, 1999, the Company will
        adopt SFAS No. 131, Disclosures About Segments of an Enterprise and
        Related Information, SFAS No. 132, Employers' Disclosures About Pensions
        and Other Postretirement Benefits, and SFAS No. 133, Accounting for
        Derivative Instruments and Hedging Activities. The Company does not
        believe that the adoption of these pronouncements will have a material
        impact.



                                       7

<PAGE>   8


I
TEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

PIA Merchandising Services, Inc. (the "Company" or "PIA") provides merchandising
services to manufacturers and retailers principally in grocery, mass
merchandiser, chain, and discount drug stores. For the quarter ended July 3,
1998, compared to quarter ended June 30, 1997, the Company generated
approximately 56% and 80% of its net revenues from manufacturer clients and 44%
and 20% from retailer clients, respectively. For the six months ended July 3,
1998, compared to six months ended June 30, 1997, the Company generated
approximately 60% and 85% of its net revenues from manufacturer clients and 40%
and 15% from retailer clients, respectively.

The Company's profitability has been adversely affected by the loss
of shared service accounts. The shared service business has historically
required a significant fixed management and personnel infrastructure. Due in
part to performance issues, industry consolidation and increased competition,
the Company lost a number of shared service accounts in the last half of 1996,
which continued into 1997 and 1998. 

During 1998, the Company restructured its operations to address the significant
fixed management infrastructure and rationalize the field organization. This
restructure creates a flexible field deployment organization that allows the
Company to react to fluctuations in business volume. The restructure resulted in
a field organization that is aligned along functional lines of selling and
execution. In addition, new scheduled deployment, labor tracking, and work
generation systems now in place will continue to have a beneficial impact on
managing the direct labor costs.

The Company has experienced an increase in the demand for dedicated client
services, and has significantly increased business with two major customers. The
net revenues associated with dedicated clients increased, as a percentage of
overall net revenues, from 14.2% in the second quarter of 1997 to 37.5% in the
second quarter of 1998. The net revenues associated with dedicated clients
increased, as a percentage of overall net revenues, from 20.2% in the six months
ended June 30, 1997 to 33.5% in the six months ended July 3, 1998. Contracts
with these dedicated clients are expected to continue through out 1998 and
beyond; however, revenue may not be at historical levels due to the changing mix
of projects, store initiatives and the completion of some projects.

PIA's quarterly results of operations are subject to certain variability related
to the timing of retailer-mandated activity and the receipt of commissions.
Retailer-mandated activity is typically higher in the second and third quarters
of the year due to retailer scheduling of activity in off-peak shopping periods.
In addition, new product introductions increase during such periods which
require the reset of categories as the new products gain distribution. In the
dedicated services business, PIA provides each manufacturer or retailer client
with an organization, including a management team, which works exclusively for
that client.




                                       8

<PAGE>   9

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)

The amount of commissions earned by PIA under its commission-based contracts,
typically averaging 13% to 17% of total net revenues, varies seasonally, and
generally corresponds to the peak selling seasons of the clients that have
entered into these types of contracts. Historically, the Company has recognized
greater commission income in the second and fourth quarters. See "Risk Factors
- -- Uncertainty of Commission Income."

RESULTS OF OPERATIONS

THREE MONTHS ENDED JULY 3, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997

NET REVENUES

Net revenues for the quarter ended July 3, 1998 increased from the comparable
period of 1997 due to an increase in dedicated client net revenues. For the
second quarter of 1998, net revenues were $33.9 million compared to $31.6
million in the second quarter of 1997, a 7.3% increase.

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


<TABLE>
<CAPTION>
                                                    Three Months Ended
                                  ---------------------------------------------------
                                   June 30, 1997          July 3, 1998       Change
 (amounts in millions)             Amount      %          Amount      %        %
                                  -----------------      ----------------   ---------
<S>                                <C>         <C>        <C>         <C>      <C>    
Shared service and
  project client net revenues      $27.1       85.8%      $21.2       62.5%    (21.8)%

Dedicated client net revenues        4.5       14.2        12.7       37.5     182.2%
                                   -----      -----       -----      -----     -----
Net revenues                       $31.6      100.0%      $33.9      100.0%      7.3%
                                   =====      =====       =====      =====     =====
</TABLE>



The Company's dedicated client net revenues have grown from $4.5 million in the
second quarter of 1997 to $12.7 million in the second quarter of 1998, a 182.2%
increase. This increase in dedicated client net revenues resulted from two major
new clients. The increase in dedicated client net revenues for the second
quarter of 1998 compared to 1997 resulted from an increase in revenue from two
major new dedicated clients of $5.0 million, and an increase in revenue from 
existing dedicated clients of $3.2 million.

Shared service and project client net revenues have decreased from $27.1 million
in the second quarter of 1997 to $21.2 million in the second quarter of 1998, a
21.8% decrease. Shared service and project client net revenues as a percentage
of net revenues decreased as dedicated client net revenues continue to grow at a
faster rate than the loss of shared service client revenue.

The decrease in shared service and project client account revenues for the
second quarter of 1998 compared to 1997 resulted from an increase in revenue
from new clients of $2.4 million, offset by a decrease in revenue from existing
shared service and project client accounts of $4.2 million, and by a decrease in
revenue of $4.1 million from clients no longer with the Company.



                                       9

<PAGE>   10



MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)

OPERATING EXPENSES

The following table sets forth the operating expenses as a percentage of net
revenues for the periods indicated:



<TABLE>
<CAPTION>
                                                      Three Months Ended
                                   ------------------------------------------------------
 (amounts in millions)                     June 30, 1997         July 3, 1998      Change
                                          Amount      %        Amount      %          %
                                          ------     -----     -----      -----    -------
<S>                                       <C>        <C>       <C>        <C>       <C>   
Field service costs                       $29.6      93.7%     $28.2      83.2%     (4.7)%
Selling expenses                            2.5       7.9        2.1       6.2     (16.0)
General and administrative expenses         2.2       7.0        3.4      10.0      54.5
Depreciation and amortization               0.3       0.9        0.3       0.9       0.0
                                          -----     -----      -----     -----      ----
  Total Operating Expenses                $34.6     109.5%     $34.0     100.1%     (1.7)%
                                          =====     =====      =====     =====      ====
</TABLE>


For the second quarter of 1998, field service costs decreased $1.4 million, or
4.7%, to $28.2 million, as compared to $29.6 million in the second quarter of
1997. Field service costs are comprised principally of field labor and related
costs and overhead expenses required to provide services to both shared and
dedicated service clients.

As a percentage of net revenues, field service costs in the second quarter of
1998 decreased to 83.2% from 93.7% in the same period last year. The decrease in
field service costs in the second quarter of 1998 is due primarily to a
reduction of direct labor costs from a restructuring of the Company's
operations, improvement of labor productivity, initial implementation of labor
scheduling systems, reorganization of field divisions, and customer
rationalization.

For the quarter ended July 3, 1998, selling expenses decreased $0.4 million, or
16.0%, to $2.1 million compared to $2.5 million in the same period last year. As
a percentage of net revenues, selling expenses decreased to 6.2% in the second
quarter of 1998, compared to 7.9% in the second quarter of 1997. This decrease
in costs, both in dollars and as a percentage of net revenues, is a result of a
reduction in salaries and related expenses.

General and administrative expenses increased 54.5% in the second quarter of
1998 to $3.4 million, compared to $2.2 million in the same period of 1997. The
increase in general and administrative costs was due primarily to additional
salaries and benefits resulting from increasing the financial, information 
systems and management infrastructure, and higher consulting costs necessary 
to implement the Company's restructure program.



                                       10

<PAGE>   11


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)

OTHER INCOME

Interest income decreased in the second quarter of 1998, as compared to the
second quarter of 1997, due to lower cash balances available for investment in
1998.

Equity in earnings of affiliate represents the Company's share of the earnings
of Ameritel, Inc., a full service telemarketing company.

BENEFIT FROM INCOME TAXES

The income tax benefit of $0.8 million in the second quarter of 1997 represents
an effective tax rate of 29.5%. There was no material income tax impact for the
second quarter of 1998.

NET INCOME (LOSS)

The Company had net income of approximately $0.1 million in the second quarter
of 1998 or $0.01 per basic and diluted share compared to a net loss of
approximately $1.9 million, or $0.35 per basic and diluted share, in the second
quarter of 1997. The income generated in the second quarter is primarily a
result of a growth in dedicated client revenues, a reduction in field service
costs from implementing the Company's restructure program, and a reduction in
selling expenses partially offset by higher general and administrative costs
from increasing the management infrastructure.




                                       11

<PAGE>   12

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)

RESULTS OF OPERATIONS

    SIX MONTHS ENDED JULY 3, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997

NET REVENUES

Net revenues for the six months ended July 3, 1998 increased from the comparable
period of 1997 due to an increase in dedicated client net revenues. For the
first six months of 1998, net revenues were $68.7 million compared to $61.0
million in the first six months of 1997, a 12.6% increase.

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


<TABLE>
<CAPTION>
                                                 Six Months Ended
                                  -----------------------------------------------
                                  June 30, 1997         July 3, 1998       Change
 (amounts in millions)            Amount      %       Amount       %         %
                                  ------    ------    ------     ------    ------
<S>                               <C>        <C>       <C>        <C>       <C>   
Shared service and
  project client net revenues     $48.7      79.8%     $45.7      66.5%     (6.2)%
Dedicated client net revenues      12.3      20.2       23.0      33.5      87.0
                                  -----     -----      -----     -----      ----
Net revenues                      $61.0     100.0%     $68.7     100.0%     12.6%
                                  =====     =====      =====     =====      ====
</TABLE>


The Company's dedicated client net revenues have grown from $12.3 million in the
first six months of 1997 to $23.0 million in the first six months of 1998, an
87.0% increase. The increase in dedicated client net revenues for the first six
months of 1998 compared to 1997 resulted from an increase in revenue from two
major new clients of $9.7 million, and an increase in revenue from existing
dedicated clients of $1.0 million.

Shared service and project client net revenues have decreased from $48.7 million
in the first six months of 1997 to $45.7 million in the first six months of
1998, a 6.2% decrease. Shared service and project client net revenues as a
percentage of net revenues decreased as dedicated client net revenues continue
to grow at a faster rate than the loss of shared service client revenue.

The decrease in shared service and project client net revenues for the first six
months of 1998 compared to 1997 resulted from an increase in revenue from new
clients of $3.9 million, a decrease in revenue from existing shared service and
project client accounts of $0.6 million, and a decrease in revenue of $6.3
million from clients no longer with the Company.



                                       12

<PAGE>   13

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)

OPERATING EXPENSES

The following table sets forth the operating expenses as a percentage of net
revenues for the periods indicated:


<TABLE>
<CAPTION>
                                                          Six Months Ended
                                         -------------------------------------------------
 (amounts in millions)                    June 30, 1997        July 3, 1998        Change
                                          Amount      %       Amount      %           %
                                          ------    -----     ------     -----     -------
<S>                                       <C>        <C>       <C>        <C>        <C>
Field service costs                       $56.0      91.8%     $58.0      84.4%      3.6
Selling expenses                            5.1       8.4        4.4       6.4     (13.7)
General and administrative expenses         4.7       7.7        7.0      10.2      48.9
Depreciation and amortization               0.4       0.7        0.5       0.7      25.0
                                          -----     -----      -----     -----      ----
  Total Operating Expenses                $66.2     108.6%     $69.9     101.7%      5.6%
                                          =====     =====      =====     =====      ====
</TABLE>


For the first six months of 1998, field service costs increased $2.0 million, or
3.6%, to $58.0 million, as compared to $56.0 million for the first six months of
1997. Field service costs are comprised principally of field labor and related
costs and overhead expenses required to provide services to both shared and
dedicated service clients.

The increase in field service costs for the six months ended July 3, 1998 is due
primarily to an increase in the volume of labor hours necessary to support the
revenue growth offset by significant labor efficiency savings from utilizing the
new deployment tracking systems.

For the six months ended July 3, 1998, selling expenses decreased $0.7 million,
or 13.7%, to $4.4 million compared to $5.1 million in the same period last year.
As a percentage of net revenues, selling expenses decreased to 6.4% in the first
six months of 1998, compared to 8.4% in the first six months of 1997. This
decrease in costs, both in dollars and as a percentage of net revenues, is a
result of a reduction in salaries and related expenses.

General and administrative expenses increased 48.9% in the first six months of
1998 to $7.0 million, compared to $4.7 million in the same period of 1997. The
increase in general and administrative costs was due primarily to additional
salaries and benefits resulting from increasing the financial, information 
systems and management infrastructure, and higher consulting costs necessary 
to implement the Company's restructure program.

Depreciation and amortization expenses increased for the six months ended July
3, 1998, as compared to the same period of 1997, as a result of additional
depreciation from completed software development in the third quarter ended
September 30, 1997.



                                       13

<PAGE>   14

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)

OTHER INCOME

Interest income decreased in the first six months of 1998, as compared to the
same period last year, due to lower cash balances available for investment in
1998.

Equity in earnings of affiliate represents the Company's share of the earnings
of Ameritel, Inc., a full service telemarketing company.

BENEFIT FROM INCOME TAXES

The income tax benefit of $1.6 million for the six months ended June 30, 1997,
represents an effective tax rate of 34.0%. There was no material income tax
impact for the first six months of 1998.

NET INCOME (LOSS)

The Company incurred a net loss of approximately $0.9 million in the first six
months of 1998, or $0.18 per basic and diluted share, compared to a net loss of
approximately $3.1 million, or $0.54 per basic and diluted share, in the first
six months of 1997. The current year's improved performance is due to new labor
deployment systems and controls and a reduction in field service costs.

NEW FINANCIAL MODEL

The Company has developed a new financial model 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 quarter and six month periods ended June 30, 1997
and July 3, 1998.


<TABLE>
<CAPTION>
                                                     Three Months Ended                                  Six Months Ended
                                            ----------------------------------------     ----------------------------------------
(amounts in millions)                         JUNE 30, 1997          JULY 3, 1998         JUNE 30, 1997          JULY 3, 1998
                                              Amount     %           Amount      %        Amount      %          Amount        %
                                              ------     ----        ------    -----      -------    ----        ------      -----
<S>                                           <C>        <C>         <C>       <C>        <C>        <C>         <C>        <C> 
Net revenues                                  $31.6      100%        $33.9     100%       $61.0      100%        $68.7      100%

Direct business unit field expense             24.2       76.6        23.9      70.5       45.1       73.9        49.5       72.1
                                               ----       ----        ----      ----       ----       ----        ----       ----
    Gross margin                                7.4       23.4        10.0      29.5       15.9       26.1        19.2       27.9

Overhead and allocated field expense            6.5       20.6         5.7      16.8       13.4       22.0        11.7       17.0
                                               ----       ----        ----      ----       ----       ----        ----       ----
    Business unit margin                        0.9        2.8         4.3      12.7        2.5        4.1         7.5       10.9

Selling, general and administrative expenses    3.6       11.3         4.1      12.1        7.3      (12.0)        8.2       11.9
                                               ----       ----        ----      ----       ----       ----        ----       ----

Earnings (loss) before interest, taxes,
  depreciation and amortization (EBITDA)      $(2.7)      (8.5%)     $ 0.2       0.6%     $(4.8)      (7.9%)     $(0.7)      (1.0%)
                                               ----       ----        ----      ----       ----       ----        ----       ----
</TABLE>



Management expects to continue to review the business results on the basis of
the comparable financial statement format contained in this Form 10-Q until the
second quarter ending April 2, 1999, when comparisons can be made utilizing the
new financial model.



                                       14

<PAGE>   15

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)

LIQUIDITY AND CAPITAL RESOURCES

In March 1997, the Company's Board of Directors approved a stock repurchase
program under which the Company was 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 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 $9.5 million at July 3, 1998. At December 31, 1997 and July 3, 1998 the
Company had working capital of $15.9 million and $14.9 million, respectively,
and current ratios of 1.9 and 2.2 respectively.

Net cash used in operating activities for the six months ended July 3, 1998 was
$3.3 million, compared to cash provided by operating activities of $1.4 million
for the comparable period in 1997. This use of cash for operating activities in
1998 resulted primarily from an increase in accounts receivables, a decrease in
accounts payable and other liabilities, and a net operating loss offset by a
decrease in Federal income tax refund receivable. The increase in accounts
receivable during the six months ended July 3, 1998 was the result of an
increase in net revenues. Net cash used in investing activities for the six
months ended June 30, 1997 and July 3, 1998 was $0.3 million. Net cash generated
by financing activities for the six month period ended July 3, 1998 was $0.1
million, compared to net cash used in financing activities for the six month
period ended June 30, 1997 of $2.9 million. This net increase was the result of
the repurchase of $3.0 million of Common Stock in the first six months of 1997.

The above activity resulted in a net decrease in cash and cash equivalents of
$1.8 million for the six month period ended June 30, 1997, compared to a net
decrease of $3.4 million for the comparable period in 1998.

The Company's current liquidity is provided by cash and cash equivalents and the
timely collection of its receivables. The Company currently has no committed
credit facility available for working capital needs. Management believes that
cash and cash equivalents and the timely collection of its receivables will be
sufficient to provide for ongoing working capital needs and generally fund the
ongoing operations of the business over the next twelve months.

YEAR 2000 SOFTWARE COSTS

The Company has conducted a review of its computer systems to identify those
areas that could be affected by 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.



                                       15

<PAGE>   16

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)

FORWARD-LOOKING STATEMENTS

This quarterly report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, that involve risks and
uncertainties. In addition, the Company may from time to time make oral
forward-looking statements. Actual results are uncertain and may be impacted by
various factors. In particular, certain risks and uncertainties that may impact
the accuracy of the forward-looking statements include the Company's history of
losses, loss of business, concentrated client base and uncertainty of commission
income. As a result, the actual results may differ materially from those
projected in the forward-looking statements.

RISK FACTORS

It is recommended that this Form 10-Q be read in conjunction with the Company's
1997 Annual Report on Form 10-K. The following risk factors should also be
carefully reviewed in addition to the other information contained in this Form
10-Q.

HISTORY OF LOSSES

During the years ended December 31, 1992, 1993, 1997, and the first quarter of
1998, the Company incurred significant losses and experienced substantial
negative cash flow. The Company had net losses of $3.2 million, $2.6 million and
$15.1 million for the years ended December 31, 1992, 1993 and 1997, respectively
and a net loss of $0.9 million for the six months ended July 3, 1998. In 1992
and 1993, these losses resulted primarily from additional field service costs to
provide shared service coverage in grocery stores for relatively few clients in
newly 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 1997, these losses resulted primarily from margin reductions due to the loss
of shared service and project client accounts, and start up expenses on
dedicated client services, inefficiencies in field labor execution, poor pricing
decisions for some client contracts, and higher business unit overhead costs and
the recognition of restructure charges and other charges. In addition, the
Company incurred a net loss of $0.9 million for the first six months of 1998,
compared to a net loss of $3.1 million in the first six months of 1997, and
generated negative cash flow of $3.4 million in the first six months of 1998.
There can be no assurance that the Company will not sustain further losses.

LOSS OF BUSINESS

PIA's business mix has changed during 1997 and the first six months of 1998.
This change is due in part to performance issues, industry consolidation and
increased competition. The Company has lost a substantial amount of shared
service business over the last 18 months, and new revenue added has been at
lower margins than the margins of the lost business. The Company has not engaged
any sizable new shared business to offset this loss. The Company has
historically required a significant fixed management and personnel
infrastructure for shared services. Accordingly, the loss of shared service
business, without offsetting gains or cost reductions, has a material adverse
effect on the Company's results of operations. 



                                       16

<PAGE>   17

Risk Factors (continued)

INDUSTRY CONSOLIDATION; CONCENTRATED CLIENT BASE

The retail and manufacturing industries are undergoing a consolidation process
that is resulting in fewer large 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 69% and 78% of the Company's net revenues for
the quarter ended June 30, 1997 and July 3, 1998, respectively. During the
second quarter ended July 3, 1998, none of the Company's manufacturer or
retailer clients accounted for greater than 10% of net revenues, other than
Eckerd Drug Stores, CVS Pharmacy Incorporated, and S.C. Johnson & Son, Inc.,
which accounted for 20%, 15% and 11% of net revenues, respectively.

For the six months ended June 30, 1997, and July 3, 1998 the Company's ten
largest clients generated approximately 70% and 76%, respectively, of the
Company's net revenue.

During the six months ended July 3, 1998, none of the Company's manufacturer or
retailer clients accounted for greater than 10% of net revenues, other than
Eckerd Drug Stores and CVS Pharmacy Incorporated, which accounted for 17% and
14% of net revenues, respectively.

The majority of the Company's contracts with its clients for shared services
have multi-year terms. PIA believes that 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, could have a material adverse
effect on the Company's results of operations.

UNCERTAINTY OF COMMISSION INCOME

Approximately 13% of the Company's net revenues for the quarter ended July 3,
1998 was 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. Commissions paid to PIA under these contracts
have had a significant effect on the Company's profitability in certain
quarters. Under 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. The Company has historically experienced consistent positive
commission reconciliation income.

In addition, the amount of commissions earned by the Company under these
contracts varies seasonally, and generally corresponds to the peak selling
seasons of the clients who have entered into these types of contracts.
Historically, the Company has recognized greater commission income in its second
and fourth quarters due to the timing of such clients' sales.




                                       17

<PAGE>   18


P
ART II:  OTHER INFORMATION


Item 1: Legal Proceedings

        None


Item 2: Changes in Securities and Use of Proceeds

        Use of Proceeds - The Company received $26.5 million in net proceeds
        from its initial public offering in March 1996. The Company, as
        originally outlined in "Use of Proceeds" in its prospectus, has used
        approximately $14.0 million through the period ended July 3, 1998 for
        debt repayment, capital spending and working capital requirements. In
        addition, $3.0 million has been used to repurchase the Company's Common
        Stock.


Item 3: Defaults Upon Senior Securities

        None


Item 4: Submission of Matters to a Vote of Security Holders

        The Company's Annual Meeting of Stockholders was held on May 12, 1998.
        The stockholders elected a Board of seven directors, approved amendments
        to the Company's 1995 Stock Option Plan, and ratified the appointment of
        Deloitte & Touche LLP as the Company's independent auditors.

        Results of the voting in connection with each of the matters submitted
        to the stockholders were as follows:



<TABLE>
<CAPTION>
        Board of Directors                  For                  Withheld
        ------------------------------------------------------------------------
<S>                                      <C>                      <C>   
        Patrick W. Collins               4,954,748                  98,099
        John A. Colwell                  4,006,081               1,046,766
        Joseph H. Coulombe               3,970,048               1,082,799
        Patrick C. Haden                 3,969,698               1,083,149
        J. Christopher Lewis             3,969,518               1,083,329
        Clinton E. Owens                 3,989,576               1,063,271
        Terry R. Peets                   4,954,748                  98,099
</TABLE>





                                       18

<PAGE>   19



PART II:              OTHER INFORMATION

Item 4: Submission of Matters to a Vote of Security Holders



<TABLE>
<CAPTION>
                                                 For            Against      Abstain
                                               ---------       --------      --------
<S>                                            <C>              <C>              <C>
        Amend Company's 1995 Stock
           Option Plan                         3,833,458        304,326          300
        Ratification of the appointment
           of Deloitte & Touche LLP as
           independent auditors                5,045,756          3,450        3,641
</TABLE>




Item 5: Other Information

        None




                                       19

<PAGE>   20


Item 6: Exhibits and Reports on Form 8-K

(a)            EXHIBITS.


<TABLE>
<CAPTION>
EXHIBIT
NUMBER         DESCRIPTION
- -------        -----------
<S>            <C>
   3.1         Certificate of Incorporation of the Company (incorporated herein
               by reference to Exhibit 3.1 to the Company's Registration
               Statement on Form S-1, No. 33-80429).

   3.2         By-laws of the Company (incorporated herein by reference to
               Exhibit 3.2 to the Company's Registration Statement on Form S-1,
               No. 33-80429).

   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 (incorporated herein by reference to
               Exhibit 4.2 to the Company's Registration Statement on Form S-1,
               No. 33-80429).

   10.1        1990 Stock Option Plan (incorporated herein by reference to
               Exhibit 10.1 to the Company's Registration Statement on Form S-1,
               No. 33-80429).

   10.2        1995 Stock Option Plan as amended (filed herein).

   10.3        1995 Stock Option Plan for Nonemployee Directors (incorporated
               herein by reference to Exhibit 10.3 to the Company's Registration
               Statement on Form S-1, No. 33-80429).

   10.4        Employment Agreement dated as of June 25, 1997 between the
               Company and Terry R. Peets (incorporated herein by reference to
               Exhibit 10.5 to the Company's Form 10-Q for the 2nd Quarter ended
               June 30, 1997).

   10.5        Employment Agreement dated as of February 20, 1998 between the
               Company and Cathy L. Wood. (incorporated by reference to Exhibit
               10.5 to the Company's Form 10Q for the 1st Quarter ended April 3,
               1998)

   27.1        Financial Data Schedule
</TABLE>



(b)            REPORTS ON FORM 8-K.

               None.




                                       20

<PAGE>   21


                                   SIGNATURES

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


                                        PIA MERCHANDISING SERVICES, INC.
                                        (Registrant)


                                        By:  /s/   CATHY L. WOOD
                                           ----------------------------
                                           Cathy L. Wood
                                           Executive Vice President and
                                           Chief Financial Officer


                                        By:  /s/   DAVID J. FAULDS
                                           ----------------------------
                                           David J. Faulds
                                           Vice President
                                           Corporate Controller


Dated:  August 13, 1998



                                       21


<PAGE>   22

                                  EXHIBIT INDEX



Item 6: Exhibits and Reports on Form 8-K

(a) EXHIBITS



<TABLE>
<CAPTION>
EXHIBIT
NUMBER         DESCRIPTION
- -------        -----------
<S>            <C>
   3.1         Certificate of Incorporation of the Company (incorporated herein
               by reference to Exhibit 3.1 to the Company's Registration
               Statement on Form S-1, No. 33-80429).

   3.2         By-laws of the Company (incorporated herein by reference to
               Exhibit 3.2 to the Company's Registration Statement on Form S-1,
               No. 33-80429).

   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 (incorporated herein by reference to
               Exhibit 4.2 to the Company's Registration Statement on Form S-1,
               No. 33-80429).

   10.1        1990 Stock Option Plan (incorporated herein by reference to
               Exhibit 10.1 to the Company's Registration Statement on Form S-1,
               No. 33-80429).

   10.2        1995 Stock Option Plan as amended (filed herein).

   10.3        1995 Stock Option Plan for Nonemployee Directors (incorporated
               herein by reference to Exhibit 10.3 to the Company's Registration
               Statement on Form S-1, No. 33-80429).

   10.4        Employment Agreement dated as of June 25, 1997 between the
               Company and Terry R. Peets (incorporated herein by reference to
               Exhibit 10.5 to the Company's Form 10-Q for the 2nd Quarter ended
               June 30, 1997).

   10.5        Employment Agreement dated as of February 20, 1998 between the
               Company and Cathy L. Wood. (incorporated by reference to Exhibit
               10.5 to the Company's Form 10Q for the 1st Quarter ended April 3,
               1998)

   27.1        Financial Data Schedule
</TABLE>


(b)  REPORTS ON FORM 8-K

     None

  
                                     22







<PAGE>   1

                                                                    EXHIBIT 10.2

                        PIA MERCHANDISING SERVICES, INC.
                       1995 STOCK OPTION PLAN, AS AMENDED


        Section 1. Description of Plan. This is the 1995 Stock Option Plan,
dated December 5, 1995 (the "Plan"), of PIA Merchandising Services, Inc., a
Delaware corporation (the "Company"). Under the Plan, officers, certain
directors, key employees and consultants of the Company or its wholly-owned
Subsidiaries (as defined below), to be selected as set forth below, may be
granted options ("Options") to purchase shares of the common stock of the
Company ("Common Stock"). The Plan permits the granting of both Options that
qualify for treatment as incentive stock options ("Incentive Stock Options")
under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
and Options that do not qualify as Incentive Stock Options ("Nonqualified Stock
Options"). For purposes of the Plan, the term "Subsidiary" shall mean any
corporation or other entity of which 50% or more of the voting stock (or
equivalent thereof) is owned by the Company or by another Subsidiary (as so
defined) of the Company.

        Section 2. Purpose of Plan. The purpose of the Plan and of granting
Options to specified persons is to further the growth, development and financial
success of the Company and the
 Subsidiaries by providing additional incentives
to certain officers, directors, key employees and consultants of the Company. By
assisting such persons in acquiring shares of the Company's Common Stock, the
Company can ensure that such persons will themselves benefit directly from the
Company's and the Subsidiaries' growth, development and financial success.

        Section 3. Eligibility. The persons who shall be eligible to receive
grants of Options under the Plan shall be, at the time of the grant, the
officers, certain directors, key employees and consultants of the Company and
the Subsidiaries, excluding those directors of the Company and its Subsidiaries
who serve on the Committee (as defined in Section 4). Notwithstanding the
preceding sentence, only persons who are employees of the Company and the
Subsidiaries shall be eligible to receive grants of Incentive Stock Options
under the Plan. In addition, a person who holds an Option is herein referred to
as a "Participant." More than one Option may be granted to any Participant,
grants of Options may be made on more than one occasion to any Participant and
any individual Participant may receive grants of Options on up to 1,000,000
shares of Common Stock. Such grants of Options under the Plan may include an
Incentive Stock Option, Nonqualified Stock Option, or any combination thereof.
Notwithstanding the foregoing, the Board of Directors of the Company (the
"Board") may at any time or from time to time designate one or more Directors as
ineligible for selection as a Participant under the Plan for any period or
periods of time. The designation by the Board of a Director as ineligible for
selection as a Participant under the Plan shall not affect Options previously
granted to such Director under the Plan.


        Section 4. Administration. The Plan shall be administered by the
Compensation Committee (the "Committee") established by the Board. The Committee
shall be constituted so as to permit the Plan to comply with the provisions of
Rule 16b-3 ("Rule 16b-3") under the Securities Exchange Act of 1934 (the
"Exchange Act") and so that each member of the Committee would be an "outside
director" within the meaning of Code Section 162(m). The Committee shall meet at
such times and places as it determines and may meet through a telephone
conference call. A majority of its members shall constitute a quorum, and the
decision of a majority of those present at any meeting at which a quorum is
present shall constitute the decision of the Committee. A memorandum signed by
all the members of the Committee shall constitute the decision of the Committee
without necessity, in such event, for holding an actual meeting. The Committee
is authorized and empowered to administer the Plan and, subject to the Plan (a)
to select the Participants, to specify the number of shares of Common Stock with
respect to which Options are granted to each Participant, to specify the terms
of the Options and whether such Options shall be Incentive Stock Options or
Nonqualified Stock Options, and in general to grant Options; (b) to determine
the dates upon which Options shall be granted and the terms and conditions
thereof in a manner consistent with the Plan, which terms and conditions need
not be identical as to the various Options granted; (c) to interpret the Plan;
(d) to prescribe, amend and rescind rules relating to the Plan; (e) to authorize
any person to execute on behalf of the Company any instrument required to
effectuate the grant of an Option 


                                      A1-1



<PAGE>   2
previously granted by the Committee; (f) to determine the rights and obligations
of Participants under the Plan; (g) to specify the Option Price (as hereinafter
defined); (h) to accelerate the time during which an Option may be exercised,
including, but not limited to, upon a change of control of the Company, and to
otherwise accelerate the time or extend the post-termination exercise period
during which an Option may be exercised, in each case notwithstanding the
provisions in the Option Agreement (as defined in Section 13) stating the time
during which it may be exercised; and (i) to make all other determinations
deemed necessary or advisable for the administration of the Plan. The good faith
interpretation and construction by the Committee of any provision of the Plan or
of any Option granted under it shall be final, conclusive and binding. No member
of the Committee shall be liable for any action or determination made in good
faith with respect to the Plan or any Option granted under it.

        Section 5. Shares Subject to the Plan. The number of shares of Common
Stock in respect of which Options may be granted under the Plan is 1,300,000,
subject to adjustment as provided in Section 12 hereof. Upon the expiration or
termination, in whole or in part, for any reason of an outstanding Option or any
portion thereof which shall not have vested or shall not have been exercised in
full, any shares of Common Stock then remaining unissued which shall have been
reserved for issuance upon such exercise shall again become available for the
granting of additional Options under the Plan. Notwithstanding the foregoing,
shares subject to a terminated Option shall continue to be considered to be
outstanding for purposes of determining the maximum number of shares that may be
issued to a Participant. Similarly, the repricing of an Option will be
considered the grant of a new Option for this purpose.

        Section 6. Option Price. Except as provided in Section 12 hereof, the
purchase price per share (the "Option Price") of the shares of Common Stock
underlying each Incentive Stock Option shall be not less than the fair market
value of such shares on the date of granting of the Incentive Stock Option;
provided, however, that if the Participant is a ten percent (10%) stockholder of
the Company as detailed in Code Section 422(b)(6) at the time such Option is
granted (determined after taking into account the constructive ownership rules
of Section 424(d) of the Code), the Option Price shall be not less than 110
percent (110%) of said fair market value. The Option Price of the shares of
Common Stock underlying each Nonqualified Stock Option shall be not less than
eighty-five percent (85%) of the fair market value of such shares on the date of
granting of the Nonqualified Stock Option; provided, however, that with respect
to any Nonqualified Stock Option granted to a "covered employee" (as such term
is defined in Section 162(m) of the Code), the Option Price of the shares of
Common Stock underlying such Nonqualified Stock Option shall be not less than
the fair market value of such shares on the date of granting of such
Nonqualified Stock Option. The fair market value of such shares shall be
determined by the Committee on the basis of the average, rounded to the nearest
eighth, of the Quoted Prices of a share of Common Stock for the five consecutive
business days prior to the day as of which the fair market value of the Common
Stock is being determined. The "Quoted Price" of a share of Common Stock shall
be the last reported sales price of the Common Stock as reported by the NASDAQ
National Market System ("NASDAQ") or, if the Common Stock is listed on a
securities exchange, the last reported sales price of the Common Stock on such
exchange which shall be for consolidated trading if applicable to such exchange
or, if the Common Stock is not so reported or listed, the average of the last
reported bid and asked price of the Common Stock.

        Section 7. Restrictions on Grants; Vesting of Options. Notwithstanding
any other provisions set forth herein or in any Option Agreement, no Options may
be granted under the Plan subsequent to ten (10) years from December 5, 1995.
All Options granted pursuant to the Plan shall be granted pursuant to Option
Agreements, as described in Section 13 hereof. The vesting of all Options may be
based on the Company's attaining of performance criteria as specified at the
time of the granting thereof and/or may also be based on the passage of time.
The Committee shall determine the performance criteria, the performance
measurement period and the vesting schedule applicable to each Option or group
of Options in a schedule, a copy of which shall be filed with the records of the
Committee and attached to each Option Agreement to which the same applies. The
performance criteria, the performance measurement period and the vesting
schedule and period of exercisability need not be identical for all Options
granted hereunder. Following the conclusion of each applicable performance
measurement period, the Committee shall determine, in its sole good faith
judgment, the extent, if at all, that each Option subject thereto shall have
vested based upon the applicable performance criteria and vesting schedule. To
the extent each such Option shall not have vested, because the applicable
performance criteria has not been met, and does not also vest based on the
passage of time, it shall, to that extent, automatically terminate and cease to
be 


                                      A1-2



<PAGE>   3
exercisable to such extent notwithstanding the stated term during which it may
be exercised. The Committee shall promptly notify each affected Participant of
such determination. The Committee may periodically review the performance
criteria applicable to any Option or Options and, in its sole good faith
judgment, may adjust the same to reflect unanticipated major events, such as
catastrophic occurrences, mergers, acquisitions and the like.

        Section 8. Special Limitations on Incentive Stock Options. To the extent
that the aggregate fair market value (determined at the time the respective
Incentive Stock Option is granted) of Common Stock with respect to which
Incentive Stock Options are exercisable for the first time by a Participant
during any calendar year under all incentive stock option plans of the Company
and the Subsidiaries exceeds $100,000, or such other limit as may be required by
the Code, such excess Incentive Stock Options shall be treated as Nonqualified
Stock Options. The Committee shall determine, in accordance with applicable
provisions of the Code, Treasury Regulations and other administrative
pronouncements, which of a Participant's Incentive Stock Options will not
constitute Incentive Stock Options because of such limitation and shall notify
the Participant of such determination as soon as practicable after such
determination.

        Section 9. Exercise of Options. Subject to all other provisions of the
Plan, once vested, each Option shall be exercisable for the full number of
shares of Common Stock subject thereto, or any part thereof, in such
installments and at such intervals as the Committee may determine in granting
such Option, provided that no option may be exercisable subsequent to its
termination date. Once vested, and prior to its termination date, an Option may
be exercised by the Participant by giving written notice to the Company
specifying the number of full shares to be purchased and accompanied by payment
of the full purchase price therefor in cash, by check or in such other form of
lawful consideration as the Committee may approve from time to time, including,
without limitation and in the sole discretion of the Committee, the assignment
and transfer by the Participant to the Company of outstanding shares of Common
Stock theretofore held by the Participant in a manner intended to comply with
the provisions of Rule 16b-3, if applicable. In connection with such assignment
and transfer, the Company shall have the right to deduct any fractional shares
to be paid to the Participant. Once vested, and prior to its termination date,
an Option may only be exercised by the Participant or, in the event of death of
the Participant, by the person or persons (including the deceased Participant's
estate) to whom the deceased Participant's rights under such Option shall have
passed by will or the laws of descent and distribution. Notwithstanding the
foregoing in the immediately preceding sentence, in the event of disability
(within the meaning of Section 22(e)(3) of the Code) of a Participant, a
designee, or if the Participant has no designee, the legal representative, of
such Participant may exercise the Option on behalf of such Participant (provided
such Option would have been exercisable by such Participant) until the right to
exercise such Option expires, as set forth in such Participant's particular
Option Agreement. No Option granted to a person subject to Section 16 of the
Exchange Act shall be exercisable during the first six (6) months after the date
such Option is granted.

        Section 10. Issuance of Common Stock. The Company's obligation to issue
shares of its Common Stock upon exercise of an Option is expressly conditioned
upon the compliance by the Company with any registration or other qualification
obligations with respect to such shares under any state or federal law or
rulings and regulations of any government regulatory body and the making of such
investment representations or other representations and undertakings by the
Participant (or the Participant's legal representative, heir or legatee, as the
case may be) in order to comply with the requirements of any exemption from any
such registration or other qualification obligations with respect to such shares
which the Company in its sole discretion shall deem necessary or advisable. Such
required representations and undertakings may include representations and
agreements that such Participant (or the Participant's legal representative,
heir or legatee): (a) is purchasing such shares for investment and not with any
present intention of selling or otherwise disposing of such shares; and (b)
agrees to have a legend placed upon the face and reverse of any certificates
evidencing such shares (or, if applicable, an appropriate data entry made in the
ownership records of the Company) setting forth (i) any representations and
undertakings which such Participant has given to the Company or a reference
thereto, and (ii) that, prior to effecting any sale or other disposition of any
such shares, the Participant must furnish to the Company an opinion of counsel,
satisfactory to the Company and its counsel, to the effect that such sale or
disposition will not violate the applicable requirements of state and federal
laws and regulatory agencies; provided, however, that any such legend or data
entry shall be removed when no longer applicable. The Company, during the term
of the Plan, will at all times reserve and keep available, and will use its
reasonable efforts to obtain from any regulatory body having jurisdiction any


                                      A1-3



<PAGE>   4
requisite authority in order to issue and sell such number of shares of Common
Stock as shall be sufficient to satisfy the requirements of the Plan. Inability
of the Company to obtain, from any regulatory body having jurisdiction,
authority reasonably deemed by the Company's counsel to be necessary for the
lawful issuance and sale of any shares hereunder shall relieve the Company of
any liability in respect of the non-issuance or sale of such shares as to which
such requisite authority shall not have been obtained.

        Section 11.  Non-transferability.

        (a) Except as provided in Section 11(b), an Option may not be sold,
pledged, assigned, hypothecated, transferred or disposed of in any manner other
than by will or by the laws of descent or distribution.

        (b) The Committee may, in its discretion, authorize all or a portion of
the Nonqualified Stock Options to be granted to a Participant to be on terms
which permit transfer by such Participant to (a) the spouse, children or
grandchildren of the optionee ("Immediate Family Members"), (b) a trust or
trusts for the exclusive benefit of such Immediate Family Members, or (c) a
partnership in which such Immediate Family Members are the only partners,
provided that (i) there may be no consideration for any such transfer, (ii) the
Option Agreement (defined below) pursuant to which such Options are granted must
be approved by the Committee, and must expressly provide for transferability in
a manner consistent with this Section 11, and (iii) subsequent transfers of
transferred Options shall be prohibited except those in accordance with Section
11(a). Following transfer, any such Options shall continue to be subject to the
same terms and conditions as were applicable immediately prior to transfer,
provided that for purposes of Sections 9 and 10 hereof the term "Participants"
shall be deemed to refer to the transferee. The events of termination of
employment of Section 25 hereof shall continue to be applied with respect to the
original Participant, following which the Options shall be exercisable by the
transferee only to the extent, and for the periods specified in the Option
Agreement. Any permitted transferee shall be required prior to any transfer of
an Option or shares of Common Stock acquired pursuant to the exercise of an
Option to execute a written undertaking to be bound by the provisions of the
applicable Option Agreement.

        Section 12. Adjustments Upon Capitalization and Corporate Changes;
Substitute Options. Subject to Section 15(b) hereof, if the outstanding shares
of the Common Stock of the Company are changed into, or exchanged for, a
different number or kind of shares or securities of the Company through
reorganization, merger, recapitalization or reclassification, or if the number
of outstanding shares is changed through a stock split, stock dividend, stock
consolidation or like capital adjustment, or if the Company makes a distribution
in partial liquidation or any other comparable extraordinary distribution with
respect to its Common Stock, an appropriate adjustment shall be made by the
Committee in the number, kind or Option Price of shares as to which Options may
be granted. A corresponding adjustment shall likewise be made in the number,
kind or Option Price of shares with respect to which unexercised Options have
theretofore been granted. Any such adjustment in an outstanding Option, however,
shall be made without change in the total price applicable to the unexercised
portion of the Option but with a corresponding adjustment in the price for each
share covered by the Option. In making such adjustments, or in determining that
no such adjustments are necessary, the Committee may rely upon the advice of
counsel and accountants to the Company, and the good faith determination of the
Committee shall be final, conclusive and binding. No fractional shares of stock
shall be issued under the Plan on account of any such adjustment.

        If the Company at any time should succeed to the business of another
corporation through a merger or consolidation, or through the acquisition of
stock or assets of such corporation or its subsidiaries, Options may be granted
under the Plan to option holders of such corporation or its subsidiaries, in
substitution for options to purchase stock of such corporation held by them at
the time of succession. The Committee, in its sole and absolute discretion,
shall determine the extent to which such substitute Options shall be granted (if
at all), the person or persons to receive such substitute Options (who need not
be all option holders of such corporation), the number of Options to be received
by each such person, the Option Price of such Option (which may be determined
without regard to Section 6 hereof) and the terms and conditions of such
substitute Options; provided, however, that the Option Price of each such
substituted Option which is an Incentive Stock Option shall be an amount such
that, in the sole and absolute judgment of the Committee (and in compliance with
Section 424(a) of the Code in the case of an Incentive Stock Option), the
economic benefit provided by such Option is not greater 


                                      A1-4



<PAGE>   5
than the economic benefit represented by the option in the acquired corporation
as of the date of the Company's acquisition of such corporation. Notwithstanding
anything to the contrary herein, no Option shall be granted, nor any action
taken, permitted or omitted, which would cause the Plan, or any Options granted
hereunder as to which Rule 16b-3 under the Exchange Act may apply, not to comply
with such Rule 16b-3.

        Section 13. Option Agreement. Each Option granted under the Plan shall
be evidenced by a written stock option agreement ("Option Agreement") executed
by the Company and the Participant which (a) shall contain each of the
provisions and agreements herein specifically required to be contained therein;
(b) shall indicate whether such Option is to be an Incentive Stock Option or a
Nonqualified Stock Option, and if an Incentive Stock Option, shall contain terms
and conditions permitting such Option to qualify for treatment as an incentive
stock option under Section 422 of the Code; and (c) may contain such other terms
and conditions as the Committee deems desirable and which are not inconsistent
with the Plan.

        Section 14. Rights as a Stockholder. A Participant or permitted
transferee of a Participant shall have no rights as a stockholder with respect
to any shares covered by an Option until the date of an entry evidencing such
ownership is made in the stock transfer books of the Company (the "Exercise
Date"). No adjustment shall be made for dividends (ordinary or extraordinary,
whether in cash, securities or other property) or distributions or other rights
for which the record date is prior to the Exercise Date.

        Section 15.  Termination of Options, Acceleration of Options.

        (a) Each Option shall terminate and expire, and shall no longer be
subject to exercise, as the Committee may determine in granting such Option, and
each Option granted under the Plan shall set forth a termination date thereof,
which, subject to earlier termination as set forth in Section 7 or this Section
15 hereof, or as otherwise set forth in each particular Option Agreement, with
respect to Nonqualified Stock Options, shall be no later than ten years from the
date such Option is granted, and with respect to Incentive Stock Options, shall
also be no later than ten years from the date such Option is granted, unless the
Participant is a ten percent (10%) stockholder of the Company (as described in
Section 422(b)(6) of the Code, and determined after taking into account the
constructive ownership rules of Section 424(d) of the Code) at the time such
Option is granted, in which case the Option shall terminate and expire no later
than five years from the date of the grant thereof. An Incentive Stock Option
shall contain any additional termination events required by Section 422 of the
Code.

        (b) Subject to Section 15(c) hereof, unless the Committee shall, in its
sole discretion, determine otherwise, upon (i) the dissolution, liquidation or
sale of all or substantially all of the business, properties and assets of the
Company, (ii) upon any reorganization, merger or consolidation in which the
Company does not survive, (iii) upon any reorganization, merger, consolidation
or exchange of securities in which the Company does survive and any of the
Company's stockholders have the opportunity to receive cash, securities of
another corporation and/or other property in exchange for their capital stock of
the Company, or (iv) upon any acquisition by any person or group (as defined in
Section 13(d) of the Securities Act of 1934) of beneficial ownership of more
than fifty percent (50%) of the Company's then outstanding shares of Common
Stock (each of the events described in clauses (i), (ii), (iii) or (iv) is
referred to herein individually as an "Extraordinary Event"), the Plan and each
outstanding Option shall terminate. In such event each Participant shall have
the right until 10 days before the effective date of the Extraordinary Event to
exercise, in whole or in part, any unexpired Option or Options issued to the
Participant, to the extent that said Option is then vested and exercisable
pursuant to the provisions of said Option or Options and of Section 7 hereof.

        The termination of employment of, or the termination of a consulting
relationship with, a Participant for any reason shall not accelerate or
otherwise affect the number of shares with respect to which an Option may be
exercised; provided, however, that the Option may only be exercised with respect
to that number of shares which could have been purchased under the Option had
the Option been exercised by the Participant on the date of such termination.

        (c) Notwithstanding the provisions of Section 7 or paragraphs (a) or (b)
of this Section 15, or any provision to the contrary contained in a particular
Option Agreement, the Committee, in its sole discretion, at any 


                                      A1-5



<PAGE>   6
time, or from time to time, may elect to accelerate the vesting of all or any
portion of any Option then outstanding. The decision by the Committee to
accelerate an Option or to decline to accelerate an Option shall be final,
conclusive and binding. In the event of the acceleration of the exercisability
of Options as the result of a decision by the Committee pursuant to this Section
15(c), each outstanding Option so accelerated shall be exercisable for a period
from and after the date of such acceleration and upon such other terms and
conditions as the Committee may determine in its sole discretion; provided,
however, that such terms and conditions (other than terms and conditions
relating solely to the acceleration of exercisability and the related
termination of an Option) may not adversely affect the rights of any Participant
without the consent of the Participant so adversely affected. Any outstanding
Option which has not been exercised by the holder at the end of such stated
period shall terminate automatically and become null and void.

        Section 16. Withholding of Taxes. The Company, or a Subsidiary, as the
case may be, may deduct and withhold from the wages, salary, bonus and other
income paid by the Company or such Subsidiaries to the Participant the requisite
tax upon the amount of taxable income, if any, recognized by the Participant in
connection with the exercise in whole or in part of any Option, or the sale of
Common Stock issued to the Participant upon the exercise of an Option, as may be
required from time to time under any federal or state tax laws and regulations.
This withholding of tax shall be made from the Company's (or such Subsidiaries')
concurrent or next payment of wages, salary, bonus or other income to the
Participant or by payment to the Company (or such Subsidiaries) by the
Participant of the required withholding tax, as the Committee may determine. The
Company may permit the Participant to elect to surrender, or authorize the
Company to withhold, shares of Common Stock (valued at their fair market value
on the date of surrender or withholding of such shares) in satisfaction of the
Company's withholding obligation, subject to such restrictions as the Committee
deems necessary to satisfy the requirements of Rule 16b-3. However, no
fractional shares of Common Stock shall be delivered, nor shall any cash in lieu
of fractional shares be paid, by the Company. The Company shall have the right
to deduct fractional shares to be paid to the Participant as a result of such
surrender or withholding of shares.

        Section 17. Effectiveness and Termination of Plan. The Plan shall be
effective on the date on which it is adopted by the Board, provided the Plan is
approved by the stockholders of the Company within twelve (12) months of
December 5, 1995 and on or prior to the date of the first annual meeting of
stockholders of the Company held subsequent to the acquisition of an equity
security by a Participant hereunder for which exemption is claimed under Rule
16b-3. Notwithstanding any provision of the Plan or in any Option Agreement, no
Option shall be exercisable prior to such stockholder approval. The Plan shall
terminate at the earliest of the time when all shares of Common Stock which may
be issued hereunder have been so issued, or at such time as set forth in Section
15(b) hereof; provided, however, that the Board may in its sole discretion
terminate the Plan at any other time. Unless earlier terminated by the Board,
the Plan shall terminate on December 5, 2005. Subject to Section 15(b) hereof,
no such termination shall in any way affect any Option then outstanding.

        Section 18. Time of Granting Options. The date of grant of an Option
shall, for all purposes, be the date on which the Committee makes the
determination granting such Option. Notice of the determination shall be given
to each Participant to whom an Option is so granted within a reasonable time
after the date of such grant.

        Section 19. Amendment of Plan. The Board may (a) make such changes in
the terms and conditions of granted Options as it deems advisable, provided each
Participant adversely affected by such change consents thereto, and (b) make
such amendments to the Plan as it deems advisable. Such amendments and changes
shall include, but not be limited to, acceleration of the time at which an
Option may be exercised, but may not, without the written consent or approval of
the holders of a majority of that voting stock of the Company which is
represented and is entitled to vote at a duly held stockholder's meeting (i)
increase the maximum number of shares subject to Options, except pursuant to
Section 12 hereof, (ii) change the designation of the class of employees
eligible to receive Incentive Stock Options, or (iii) in any manner modify the
Plan such that it fails to meet the requirements of Rule 16b-3 of the Exchange
Act for the exemption of the acquisition, cancellation, expiration or surrender
of Options from the operation of Section 16(b) of the Exchange Act.

        Section 20. Transfers and Leaves of Absence. For purposes of the Plan,
(a) a transfer of a Participant's employment or consulting relationship, without
an intervening period, between the Company and a Subsidiary 


                                      A1-6



<PAGE>   7
shall not be deemed a termination of employment or a termination of a consulting
relationship, and (b) a Participant who is granted in writing a leave of absence
shall be deemed to have remained in the employ of, or in a consulting
relationship with, the Company (or a Subsidiary, whichever is applicable) during
such leave of absence. Notwithstanding the foregoing, for purposes of
determining the exercisability of an Incentive Stock Option, a Participant who
is on a leave of absence that exceeds ninety (90) days will be considered to
have terminated his or her employment on the ninety-first (91st) day of the
leave of absence, unless the Participant's rights to reemployment are guaranteed
by statute or contract.

        Section 21. No Obligation to Exercise Option. The granting of an Option
shall impose no obligation on the Participant to exercise such Option.

        Section 22. Governing Law. The Plan and any Option granted pursuant to
the Plan shall be construed under and governed by the laws of the State of
Delaware without regard to conflict of law provisions thereof.

        Section 23. Not an Employment or Other Agreement. Nothing contained in
the Plan or in any Option Agreement shall confer, intend to confer or imply any
rights of employment or any rights to any other relationship or rights to
continued employment by, or rights to a continued consulting relationship with,
the Company or any Subsidiaries in favor of any Participant or limit the ability
of the Company or any Subsidiaries to terminate, with or without cause, in its
sole and absolute discretion, the employment of, or relationship with, any
Participant, subject to the terms of any written employment or other agreement
to which a Participant is a party.

        Section 24. Rule 16b-3. It is intended that the Plan and any grant of an
Option made to a person subject to Section 16 of the Exchange Act meet all of
the requirements of Rule 16b-3. If any provision of the Plan or any such grant
would disqualify the Plan or such grant under, or would not otherwise comply
with, Rule 16b-3, such provision or grant shall be construed or deemed amended
to conform to Rule 16b-3.

        Section 25. Termination of Employment. The terms and conditions under
which an Option may be exercised after a Participant's termination of employment
shall be determined by the Committee and shall be specified in the Option
Agreement. The conditions under which such post-termination exercises shall be
permitted with respect to Incentive Stock Options shall be determined in
accordance with the provisions of Section 422 of the Code.

        Section 26. Indemnification. In addition to such other rights of
indemnification as they may have as directors, the members of the Board or
Committee shall be indemnified by the Company to the fullest extent permitted by
law against the reasonable expenses, including reasonable attorneys' fees,
actually and necessarily incurred in connection with the defense of any action,
suit or proceeding, or in connection with any appeal therein, to which they or
any of them may be a party by reason of any action taken or failure to act under
or in connection with the Plan or any Option granted thereunder, and against all
amounts paid by them in satisfaction of a judgment in any such action, suit or
proceeding, except in relation to matters as to which it shall be adjudged in
such action, suit or proceeding that such Committee member is not entitled to
indemnification under applicable law; provided that within 60 days after
institution of any such action, suit or proceeding such Committee member shall
in writing offer the Company the opportunity, at the Company's expense, to
handle and defend the same.


                                      A1-7




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<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   3-MOS
<FISCAL-YEAR-END>                          JAN-01-1999
<PERIOD-START>                             APR-04-1998
<PERIOD-END>                               JUL-03-1998
<CASH>                                           9,539
<SECURITIES>                                         0
<RECEIVABLES>                                   18,935
<ALLOWANCES>                                     1,450
<INVENTORY>                                          0
<CURRENT-ASSETS>                                27,762
<PP&E>                                           5,517
<DEPRECIATION>                                   3,295
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<CURRENT-LIABILITIES>                           12,891
<BONDS>                                              0
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                            60
<OTHER-SE>                                      17,930
<TOTAL-LIABILITY-AND-EQUITY>                    31,099
<SALES>                                              0
<TOTAL-REVENUES>                                33,945
<CGS>                                                0
<TOTAL-COSTS>                                   28,255
<OTHER-EXPENSES>                                 5,770
<LOSS-PROVISION>                                 (182)
<INTEREST-EXPENSE>                                   0
<INCOME-PRETAX>                                     88
<INCOME-TAX>                                        12
<INCOME-CONTINUING>                                 76
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