View:


<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 third quarterly period ended October 2, 1998




                        PIA MERCHANDISING SERVICES, INC.


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

                  Registrant's telephone number: (949) 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 November 6, 1998 there were 5,473,800 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
                  October 2, 1998 (Unaudited).........................................3

                  Condensed Consolidated Statements of Operations
                  Three Months and Nine Months Ended
                  September 30, 1997 (Unaudited) and October 2, 1998
                   (Unaudited)........................................................4

                  Condensed Consolidated Statements of Cash Flows
                  Nine Months Ended September 30, 1997 (Unaudited)
                  and October 2, 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 6:           Exhibits and Reports on Form 8-K...................................19

SIGNATURES...........................................................................20
</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,        October 2,
                                                               1997               1998
                                                           ------------        ----------
                                                                               (Unaudited)
<S>                                                          <C>                <C>     
ASSETS
CURRENT ASSETS:
Cash and cash equivalents                                    $ 12,987           $ 10,067
Accounts receivable, net of allowance for doubtful
 accounts and other of $1,451 and $991 for 1997 and
 1998, respectively                                            16,053             14,707
Federal income tax refund receivable                            2,905                 --
Prepaid expenses and other current assets                         816                752
                                                             --------           --------
    TOTAL CURRENT ASSETS                                       32,761             25,526

PROPERTY AND EQUIPMENT, NET (NOTE 3)                            2,416              2,108
                                                             --------           --------

INVESTMENTS AND OTHER ASSETS:
Investment in affiliate                                           418                551
Other assets                                                      872                505
                                                             --------           --------
    TOTAL OTHER ASSETS                                          1,290              1,056
                                                             --------           --------

TOTAL ASSETS                                                 $ 36,467           $ 28,690
                                                             ========           ========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable                                             $  3,442           $  2,092
Other current liabilities                                      13,334              8,740
Income taxes payable                                               47                 20
                                                             --------           --------
    TOTAL CURRENT LIABILITIES                                  16,823             10,852

LONG-TERM LIABILITIES                                             966                211
                                                             --------           --------
    TOTAL LIABILITIES                                          17,789             11,063
                                                             --------           --------

STOCKHOLDERS' EQUITY:
Common stock and additional paid-in-capital                    33,488             33,754
Retained earnings (accumulated deficit)                       (11,806)           (13,123)
Less:  Treasury stock                                          (3,004)            (3,004)
                                                             --------           --------
    TOTAL STOCKHOLDERS' EQUITY                                 18,678             17,627
                                                             --------           --------


TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                   $ 36,467           $ 28,690
                                                             ========           ========
</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                       Nine Months Ended
                                            --------------------------------        --------------------------------
                                            September 30,         October 2,        September 30,         October 2,
                                                1997                 1998               1997                 1998
                                            -------------         ----------        -------------         ----------
<S>                                           <C>                 <C>                 <C>                 <C>      
Net Revenues                                  $  33,995           $  29,836           $  94,994           $  98,520
                                              ---------           ---------           ---------           ---------

Operating Expenses:
    Field service costs                          31,534              26,151              87,541              84,195
    Selling expenses                              2,867               1,951               7,928               6,317
    General and administrative
      expenses                                    2,389               2,007               7,074               8,963
    Restructuring and other charges               5,420                  --               5,420                  --
    Depreciation and amortization                   263                 277                 722                 834
                                              ---------           ---------           ---------           ---------

      Total operating expenses                   42,473              30,386             108,685             100,309
                                              ---------           ---------           ---------           ---------

Operating Loss                                   (8,478)               (550)            (13,691)             (1,789)

Other Income:
    Interest income, net                            187                 136                 636                 375
    Equity in earnings of affiliate                  25                  56                  77                 133
                                              ---------           ---------           ---------           ---------

      Total other income                            212                 192                 713                 508
                                              ---------           ---------           ---------           ---------

Loss Before Benefit (Provision)
    For Income Taxes                             (8,266)               (358)            (12,978)             (1,281)

Benefit (Provision) For Income Taxes              2,811                 (12)              4,413                 (36)
                                              ---------           ---------           ---------           ---------

Net Loss                                      $  (5,455)          $    (370)          $  (8,565)          $  (1,317)
                                              =========           =========           =========           =========

Basic Earnings Per Share                      $   (1.01)          $   (0.07)          $   (1.53)          $   (0.24)
                                              =========           =========           =========           =========

Diluted Earnings Per Share                    $   (1.01)          $   (0.07)          $   (1.53)          $   (0.24)
                                              =========           =========           =========           =========
Basic Weighted
    Average Common Shares                         5,393               5,465               5,605               5,428
                                              =========           =========           =========           =========
Diluted Weighted
    Average Common Shares                         5,393               5,465               5,605               5,428
                                              =========           =========           =========           =========
</TABLE>




                             See accompanying notes.


                                       4

<PAGE>   5

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


<TABLE>
<CAPTION>
                                                                     Nine Months Ended
                                                              -------------------------------
                                                              September 30,        October 2,
                                                                  1997                1998
                                                              -------------        ----------
<S>                                                             <C>                <C>      
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                        $ (8,565)          $ (1,317)
Adjustments to reconcile net loss to net cash
used in operating activities:
  Depreciation and amortization                                      722                834
  Provision for doubtful receivables and other, net                  694                173
  Equity in earnings of affiliate                                    (77)              (133)
  Restructuring and other charges                                  5,420                 --

Changes in operating assets and liabilities:
  Accounts receivable                                              4,965              1,285
  Federal income tax refund receivable                                --              2,801
  Prepaid expenses and other assets                               (5,264)               221
  Accounts payable and other liabilities                             118             (6,429)
  Income taxes payable                                              (111)               (27)
                                                                --------           --------

  Net cash used in operating activities                           (2,098)            (2,592)

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures                                                (358)              (426)
Capitalization of software development costs                        (294)                --
                                                                --------           --------
  Net cash used in investing activities                             (652)              (426)

CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of treasury stock                                      (3,004)                --
Proceeds from issuance of common stock, net                           62                 98
                                                                --------           --------
  Net cash provided by (used in) financing activities             (2,942)                98

NET DECREASE IN CASH AND
  CASH EQUIVALENTS                                                (5,692)            (2,920)

CASH AND CASH EQUIVALENTS:
  Beginning of period                                             19,519             12,987
                                                                --------           --------

  End of period                                                 $ 13,827           $ 10,067
                                                                ========           ========

SUPPLEMENTAL DISCLOSURES OF CASH
  FLOW INFORMATION:
  Cash paid for income taxes                                    $    104           $     87
                                                                ========           ========

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 to 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):

                                               December 31,   October 2,
                                                   1997          1998
                                               ------------   ----------
        Equipment                                 $ 3,680      $ 3,882
        Furniture and fixtures                        662          730
        Leasehold improvements                        160          165
        Capitalized software development costs        902          902
                                                  -------      -------
                                                    5,404        5,679
        Less: Accumulated depreciation
          and amortization                         (2,988)      (3,571)
                                                  -------      -------

                                                  $ 2,416      $ 2,108
                                                  =======      =======


                                       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 quarter and nine months ended October 2, 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.

5.      New Revolving Credit Facility

        In October 1998 the Company secured a commitment for a revolving line of
        credit with a major financial institution subject to loan documentation
        for working capital and potential acquisitions. This commitment will
        allow maximum borrowings of $20 million with a minimum borrowing
        requirement of $2 million. The line of credit has a contractual period
        of three years and is limited to 80% of eligible accounts receivable.
        The agreement would require the Company to maintain customary financial
        and non-financial covenants.

6.      Restructuring And Other Charges

        During 1997, the Company experienced declining gross margins, and
        resultant operating losses, due to service performance issues and the
        loss of several shared clients. This decline in margins resulted in
        insufficient margin dollars to cover the overhead structure which had
        developed at the field level and in the general corporate area. In the
        quarter ended September 30, 1997, the Company addressed these conditions
        by restructuring its operations, focusing on a more disciplined and
        functional operational structure, and redirecting its technology
        strategies, resulting in a $5.4 million charge for restructuring and
        other charges.


                                       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 October 2,
1998, compared to the quarter ended September 30, 1997, the Company generated
approximately 60% and 66% of its net revenues from manufacturer clients and 40%
and 34% from retailer clients, respectively. For the nine months ended October
2, 1998, compared to nine months ended September 30, 1997, the Company generated
approximately 60% and 79% of its net revenues from manufacturer clients and 40%
and 21% 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
through the third quarter of 1998. The net revenues associated with dedicated
clients increased, as a percentage of overall net revenues, from 27% in the
third quarter of 1997 to 34% in the third quarter of 1998. The net revenues
associated with dedicated clients increased, as a percentage of overall net
revenues, from 24% in the nine months ended September 30, 1997 to 34% in the
nine months ended October 2, 1998. Contracts with these dedicated clients are
expected to continue throughout 1998 and beyond; however, revenue may not be at
historical levels due to the changing mix of projects and store initiatives and
the completion of a major project in the third quarter of 1998. The Company
currently anticipates that revenue for the fourth quarter of 1998 will be lower
than the third quarter of 1998 and the comparable prior year period, due to the
scheduled completion of several projects, the annualized effect of business lost
over the last 18 months and the impact of the Company's internal focus on
restructuring operations for long-term growth and profitability.

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 OCTOBER 2, 1998 COMPARED TO THREE MONTHS ENDED
        SEPTEMBER 30, 1997

NET REVENUES

Net revenues for the quarter ended October 2, 1998 decreased from the comparable
period of 1997 due principally to a decrease in shared service and project
client net revenues. For the third quarter of 1998, net revenues were $29.8
million compared to $34.0 million in the third quarter of 1997, a 12.4%
decrease.

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
                                       ----------------------------------------------------
                                       September 30, 1997       October 2, 1998
                                       ------------------      ------------------    Change
    (amounts in millions)              Amount        %         Amount       %           %
                                       ------------------      -----------------     -------
<S>                                     <C>         <C>        <C>         <C>       <C>    
   Shared service and
     project client net revenues        $25.0       73.5%      $19.6       65.8%     (21.6%)
   Dedicated client net revenues          9.0       26.5%       10.2       34.2%      13.3%
                                       ------------------      -----------------     -------

     Net Revenue                        $34.0      100.0%      $29.8      100.0%     (12.4%)
                                       ==================      =================     =======
</TABLE>


The Company's dedicated client net revenues have grown from $9.0 million in the
third quarter of 1997 to $10.2 million in the third quarter of 1998, a 13.3%
increase. The increase in dedicated client net revenues for the third quarter of
1998 compared to 1997 resulted from an increase in revenue from existing
dedicated clients.

Shared service and project client net revenues have decreased from $25.0 million
in the third quarter of 1997 to $19.6 million in the third quarter of 1998, a
21.6% decrease. Shared service and project client net revenue as a percentage of
net revenue decreased by 7.7%. Dedicated client net revenues, however, as a
percentage of net revenue increased in the third quarter.

The decrease in shared service and project client net revenues for the third
quarter of 1998 compared to 1997 resulted from an increase in revenue from new
clients of $1.9 million, offset by a decrease in revenue from existing shared
service and project client accounts of $1.4 million and by a decrease in revenue
of $5.9 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
                                            -----------------------------------------------------
                                            September 30, 1997      October 2, 1998
                                            ------------------     ------------------     Change
   (amounts in millions)                    Amount       %         Amount       %           %
                                            ------------------     ------------------    --------
<S>                                         <C>         <C>        <C>         <C>        <C>    
   Field service costs                      $31.5       92.6%      $26.1       87.6%      (17.1%)
   Selling expenses                           2.9        8.5%        2.0        6.7%      (31.0%)
   General & administrative expenses          2.4        7.1%        2.0        6.7%      (16.7%)
   Restructuring & other charges              5.4       15.9%       --          0.0%     (100.0%)
   Depreciation & amortization                0.3        0.9%        0.3        1.0%        0.0%
                                            ------------------     ------------------    --------

     Total Operating Expenses               $42.5      125.0%      $30.4      102.0%      (28.5%)
                                            ==================     =================      =======
</TABLE>



For the third quarter of 1998, field service costs decreased $5.4 million, or
17.1%, to $26.1 million, as compared to $31.5 million in the third 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 third quarter of
1998 decreased to 87.6% from 92.6% in the same period last year. The decrease in
field service costs in the third quarter of 1998 was due primarily to a
reduction of direct labor costs resulting from an improvement of labor
productivity, initial implementation of labor scheduling systems, reorganization
of field divisions, and client rationalization.

For the quarter ended October 2, 1998, selling expenses decreased $0.9 million,
or 31.0%, to $2.0 million compared to $2.9 million in the same period last year.
As a percentage of net revenues, selling expenses decreased to 6.7% in the third
quarter of 1998, compared to 8.5% in the third quarter of 1997. This decrease in
costs, both in dollars and as a percentage of net revenues, was a result of a
reduction in salaries and related expenses and a reduction of the Company's
doubtful account reserves. The Company reduced some of its doubtful account and
other reserves due to the decline and improved aging of its receivable balances.

General and administrative expenses decreased 16.7% in the third quarter of 1998
to $2.0 million, compared to $2.4 million in the same period of 1997. The
decrease in general and administrative costs was due primarily to the reversal
of incentive liabilities recorded in the first two quarters of 1998. This
decrease was partially offset by a charge for certain severance costs and by the
cost of the Company's reorganization of its national field structure which cost
$1.0 million in the third quarter of 1998.

In the quarter ended September 30, 1997, the Company undertook a restructuring
of its operations, focusing on a more disciplined and functional operational
structure, and redirecting its technology strategies. This resulted in a $5.4
million charge for restructuring and other charges, which included $3.3 million
in restructuring charges and $2.1 million for other charges.


                                       10

<PAGE>   11

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

OTHER INCOME

Interest income decreased in the third quarter of 1998, as compared to the third
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 $2.8 million in the third quarter of 1997 represents
an effective tax rate of 34.0%. There was no material income tax impact for the
third quarter of 1998.

NET LOSS

The Company had a net loss of $0.4 million in the third quarter of 1998 or $0.07
per basic and diluted share compared to a net loss of approximately $5.5
million, or $1.01 per basic and diluted share, in the third quarter of 1997. The
loss in the third quarter of 1998 was primarily a result of a reduction in
shared service and project client net revenues offset by a reduction in field
service costs and a reduction in selling and general and administrative costs.

RESULTS OF OPERATIONS

        NINE MONTHS ENDED OCTOBER 2, 1998 COMPARED TO NINE MONTHS ENDED
        SEPTEMBER 30, 1997

NET REVENUES

Net revenues for the nine months ended October 2, 1998 increased from the
comparable period of 1997 primarily due to an increase in dedicated client net
revenues. For the first nine months of 1998, net revenues were $98.5 million
compared to $95.0 million in the first nine months of 1997, a 3.7% increase.

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


<TABLE>
<CAPTION>
                                                         Nine Months Ended
                                          ------------------------------------------------
                                          September 30, 1997   October 2, 1998      
                                          ------------------   ---------------      Change
    (amounts in millions)                   Amount     %       Amount     %           %
                                          ------------------   ---------------      ------
<S>                                         <C>       <C>      <C>       <C>        <C>   
    Shared service and
      project client net revenues           $ 72.1    75.9%    $ 65.4    66.4%      (9.3%)
    Dedicated client net revenues             22.9    24.1%      33.1    33.6%      44.5%
                                          ------------------   ---------------      ------

      Net Revenue                           $ 95.0   100.0%    $ 98.5   100.0%       3.7%
                                          ==================   ===============      ======
</TABLE>



                                       11

<PAGE>   12

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

The Company's dedicated client net revenues have grown from $22.9 million in the
first nine months of 1997 to $33.1 million in the first nine months of 1998, a
44.5% increase. The increase in dedicated client net revenues for the first nine
months of 1998 compared to 1997 resulted from an increase of $17.3 million in
revenue from two major existing clients that became new clients late in the
second quarter of 1997. This increase was offset by a $7.1 million decrease in
dedicated client net revenues due to a major client transitioning from a
dedicated to a shared service client in the second quarter of 1997.

Shared service and project client net revenues have decreased from $72.1 million
in the first nine months of 1997 to $65.4 million in the first nine months of
1998, a 9.3% decrease. Shared service and project client net revenues as a
percentage of net revenues decreased. Dedicated client net revenue, however,
continued to increase as a percentage of net revenue in the first nine months of
1998.

The decrease in shared service and project client net revenues for the first
nine months of 1998 compared to 1997 resulted from an increase in revenue from
new clients of $5.4 million, an increase in revenue from existing shared service
and project client accounts of $0.8 million and a decrease in revenue of $12.9
million from clients no longer with the Company.

OPERATING EXPENSES


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


<TABLE>
<CAPTION>
                                                       Nine Months Ended
                                        -----------------------------------------------
                                        September 30, 1997   October 2, 1998
                                        ------------------   ---------------     Change
 (amounts in millions)                    Amount     %       Amount     %          %
                                        ------------------   ---------------     ------
<S>                                       <C>       <C>      <C>       <C>        <C>   
 Field service costs                      $ 87.6    92.2%    $ 84.2    85.5%      (3.9%)
 Selling expenses                            7.9     8.3%       6.3     6.4%     (20.3%)
 General & administrative expenses           7.1     7.5%       9.0     9.1%      26.8%
 Restructuring & other charges               5.4     5.7%       -       0.0%    (100.0%)
 Depreciation & amortization                 0.7     0.7%       0.8     0.8%      14.3%
                                        ------------------   ---------------     ------

   Total Operating Expenses              $ 108.7   114.4%   $ 100.3   101.8%      (7.7%)
                                        ==================  ================     ====== 
</TABLE>



For the first nine months of 1998, field service costs decreased $3.4 million,
or 3.9%, to $84.2 million, as compared to $87.6 million for the first nine
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.

As a percentage of net revenues, field service costs in the first nine months of
1998 decreased to 85.5% from 92.2% in the same period last year. The decrease in
field service costs for the nine months ended October 2, 1998 was due primarily
to significant labor efficiency savings from new labor deployment systems and
controls and a decline in services due to a loss of some significant shared
service and project clients.


                                       12

<PAGE>   13

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

For the nine months ended October 2, 1998, selling expenses decreased $1.6
million, or 20.3%, to $6.3 million compared to $7.9 million in the same period
last year. As a percentage of net revenues, selling expenses decreased to 6.4%
in the first nine months of 1998, compared to 8.3% in the first nine months of
1997. This decrease in costs, both in dollars and as a percentage of net
revenues, was a result of a reduction in salaries and related expenses and a
reduction of the Company's doubtful account reserves. The Company reduced some
of its doubtful account and other reserves due to the decline and improved aging
of its receivable balances.

General and administrative expenses increased 26.8% in the first nine months of
1998 to $9.0 million, compared to $7.1 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 the costs for the Company's
reorganization of its national field structure of $1.3 million through the first
nine months of 1998.

In the quarter ended September 30, 1997, the Company undertook a restructuring
of its operations, focusing on a more disciplined and functional operational
structure, and redirecting its technology strategies. This resulted in a $5.4
million charge for restructuring and other charges, which included $3.3 million
in restructuring charges and $2.1 million for other charges.

Depreciation and amortization expenses increased 14.3% for the nine months ended
October 2, 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.

OTHER INCOME

Interest income decreased in the first nine 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 $4.4 million for the nine months ended September 30,
1997, represents an effective tax rate of 34.0%. There was no material income
tax impact for the first nine months of 1998.

NET LOSS

The Company incurred a net loss of $1.3 million in the first nine months of
1998, or $0.24 per basic and diluted share, compared to a net loss of
approximately $8.6 million, or $1.53 per basic and diluted share, in the first
nine months of 1997. The current year's improved performance was due to labor
efficiency savings from utilizing new labor systems and controls, a reduction in
field service costs, and the $5.4 million in restructuring and other charges
that affected last year's performance.


                                       13

<PAGE>   14

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

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 nine-month periods ended September 30,
1997 and October 2, 1998.


<TABLE>
<CAPTION>
                                                       Three Months Ended                       Nine Months Ended
                                              -------------------------------------    -------------------------------------
                                              September 30, 1997    October 2, 1998    September 30, 1997    October 2, 1998
                                              ------------------    ---------------    ------------------    ---------------
(amounts in millions)                          Amount      %        Amount     %        Amount      %        Amount     %
                                              ------------------    ---------------    ------------------    ---------------
<S>                                             <C>      <C>        <C>      <C>        <C>       <C>        <C>      <C>   
Net revenue                                     $34.0    100.0%     $29.8    100.0%     $ 95.0    100.0%     $98.5    100.0%

Direct business unit field expense               26.2     77.1%      22.2     74.5%       71.3     75.1%      71.7     72.8%
                                              ------------------    ---------------    ------------------    ---------------
    Gross Margin                                  7.8     22.9%       7.6     25.5%       23.7     24.9%      26.8     27.2%

Overhead and Allocated Field Expense              6.1     17.9%       4.9     16.4%       18.7     19.7%      16.0     16.2%
                                              ------------------    ---------------    ------------------    ---------------
    Business Unit Margin                          1.7      5.0%       2.7      9.1%        5.0      5.2%      10.8     11.0%

Selling, General & Administrative Expenses        4.5     13.2%       3.0     10.1%       12.5     13.1%      11.7     11.9%
Restructuring & other charges                     5.4     15.9%      --        0.0%        5.4      5.7%      --        0.0%
                                              ------------------    ---------------    ------------------    ---------------
Earnings (loss) before interest, taxes,
  depreciation and amortization (EBITDA)        $(8.2)   (24.1%)    $(0.3)    (1.0%)    $(12.9)   (13.6%)    $(0.9)    (0.9%)
                                              ==================    ===============    ==================    ===============
</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.

Certain amounts within the new financial model have been reclassified in prior
periods in order to conform to the current period's presentation.

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 $10.1 million at October 2, 1998. At December 31, 1997 and October 2, 1998
the Company had working capital of $15.9 million and $14.7 million,
respectively, and current ratios of 1.9 and 2.4 respectively.


                                       14

<PAGE>   15

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

Net cash used in operating activities for the nine months ended October 2, 1998
was $2.6 million, compared with $2.1 million for the comparable period in 1997.
This use of cash for operating activities in 1998 resulted primarily from a
decrease in accounts payable and other liabilities, and a net operating loss
offset by a decrease in Federal income tax refund receivable and accounts
receivable. Net cash used in investing activities for the nine months ended
September 30, 1997 and October 2, 1998 was $0.7 million and $0.4 million,
respectively. Net cash generated by financing activities for the nine month
period ended October 2, 1998 was $0.1 million, compared to net cash used in
financing activities for the nine month period ended September 30, 1997 of $2.9
million. This net increase was the result of the Company repurchasing its Common
Stock for $3.0 million in the first nine months of 1997.

The above activity resulted in a net decrease in cash and cash equivalents of
$5.7 million for the nine month period ended September 30, 1997, compared to a
net decrease of $2.9 million for the comparable period in 1998. Cash and cash
equivalents and the timely collection of its receivables provide the Company's
current liquidity.

In October 1998 the Company secured a commitment for a revolving line of credit
with a major financial institution subject to loan documentation. This
commitment will allow maximum borrowing of $20.0 million and will require the
Company to borrow and maintain a minimum balance of $2.0 million. The three-year
credit facility will be used for working capital purposes and potential
acquisitions.

The Company had a $1.3 million loss and experienced a decrease in cash and cash
equivalents of $2.9 million for the nine months ended October 2, 1998. However,
with the addition of a revolving line of credit, the timely collection of
receivables, and the Company's positive working capital position, Management
believes the funding of operations over the next twelve months will be
sufficient.

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 has developed an
implementation plan to resolve these issues. The Company has incurred
approximately $27 thousand in the first nine months of 1998 for software
upgrades for Year 2000 compliance. The Company believes it will incur another
$12 thousand for other upgrades within the next two quarters, and expects all
necessary systems to be in compliance by the end of the first quarter of 1999.
The Company does not have any contingency plan, nor does the Company foresee the
need to create one. The Company considers the impact of Year 2000 compliance to
be insignificant and will not have a material adverse effect on the Company's
operating results.

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.


                                       15

<PAGE>   16

I
TEM 2: 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 nine months
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 $1.3 million for the nine months ended October 2, 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 restructuring and other charges. In addition, the Company
incurred a net loss of $1.3 million for the first nine months of 1998, compared
to a net loss of $8.6 million in the first nine months of 1997, and generated
negative cash flow of $2.9 million in the first nine 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 nine months of 1998.
This change was 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. 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.

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 70% and 81% of the Company's net revenues for
the quarter ended September 30, 1997 and October 2, 1998, respectively. During
the third quarter ended October 2, 1998, none of the Company's manufacturer or
retailer clients accounted for greater than 10% of net revenues, other than CVS
Pharmacy Incorporated, Eckerd Drug Stores, and Buena Vista Home Video, Inc.,
which accounted for 17%, 15% and 11% of net revenues, respectively.


                                       16

<PAGE>   17

RISK FACTORS   (continued)

For the nine months ended September 30, 1997, and October 2, 1998 the Company's
ten largest clients generated approximately 70% and 76%, respectively, of the
Company's net revenue. During the nine months ended October 2, 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 Buena
Vista Home Video, Inc., which accounted for 16%, 15%, and 10% 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 14% of the Company's net revenues for the quarter ended October 2,
1998 were earned under commission-based contracts. These contracts provide for
commissions based on a percentage of the client's net sales of certain of its
products to designated retailers. 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


PART 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 $13.5 million through the
               period ended October 2, 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

               None


Item 5: Other Information

               None


                                       18

<PAGE>   19

PART II: OTHER INFORMATION


Item 6: Exhibits and Reports on Form 8-K

(A)            EXHIBITS.

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

   3.1         Certificate of Incorporation of the Company (incorporated 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 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 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 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 (incorporated by reference to
               Exhibit 10.2 to the Company's Form 10-Q for the 2nd Quarter ended
               July 3, 1998).

  10.3         1995 Stock Option Plan for Nonemployee Directors (incorporated 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 by reference to Exhibit
               10.5 to the Company's Form 10-Q for the 2nd Quarter ended June
               30, 1997).

  10.5         Severance 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 10-Q for the 1st Quarter ended April
               3, 1998).

  10.6         Severance Agreement dated as of August 10, 1998 between the
               Company and Clinton E. Owens (filed herein).

  27.1         Financial Data Schedule.


(B)            REPORTS ON FORM 8-K.

                       None


                                       19

<PAGE>   20


                                   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:  November 11, 1998


                                       20

<PAGE>   21


                                 EXHIBIT INDEX



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

   3.1         Certificate of Incorporation of the Company (incorporated 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 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 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 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 (incorporated by reference to
               Exhibit 10.2 to the Company's Form 10-Q for the 2nd Quarter ended
               July 3, 1998).

  10.3         1995 Stock Option Plan for Nonemployee Directors (incorporated 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 by reference to Exhibit
               10.5 to the Company's Form 10-Q for the 2nd Quarter ended June
               30, 1997).

  10.5         Severance 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 10-Q for the 1st Quarter ended April
               3, 1998).

  10.6         Severance Agreement dated as of August 10, 1998 between the
               Company and Clinton E. Owens (filed herein).

  27.1         Financial Data Schedule.







<PAGE>   1

                                                                    EXHIBIT 10.6


                                    AGREEMENT

               THIS AGREEMENT (this "Agreement") is entered into effective as of
August 10, 1998 by and between Clinton E. Owens ("Owens") and PIA Merchandising
Services, Inc., a Delaware corporation (the "Corporation").

                                R E C I T A L S:

               A. Owens is currently employed by the Corporation and holds the
office of Chairman of the Board of Directors of the Corporation ("Chairman of
the Board").

               B. The Corporation and Owens desire to provide for the terms and
conditions on which Owens will continue to be employed by the Corporation
through November 10, 1998 and the terms and conditions on which such employment
relationship will terminate at that time.

                               A G R E E M E N T:

               NOW, THEREFORE, in consideration of the foregoing recitals and
the covenants contained herein, the parties agree as follows:

               1. Salary. From and after the date of this Agreement until
November 10, 1998, Owens shall be entitled to receive a salary of $20,833.33 per
month, such payments to be made in accordance with the Corporation's regular
payroll schedule. During such period of employment with the Corporation, Owens
shall provide assistance with the Corporation's Program RENEWAL and the
evaluation of possible merger and acquisition opportunities. Owens shall
 devote
such time and efforts in providing such assistance as may be necessary, but
shall not be required to work full time.

               2. Termination. Effective November 10, 1998 and without the need
for notice or further action on the part of Owens or the Corporation of any
kind, Owens employment by the Corporation (and by any subsidiary of the
Corporation) will terminate, and, as of such date, Owens shall cease to hold any
office with the Corporation (or any subsidiary of the Corporation) other than
the office of Chairman of the Board. Owens shall not be required to resign as a
member of the Board of Directors of the Corporation, however, and shall continue
to hold the office of Chairman of the Board; provided, however, that Owens
shall, upon the request of the Chief Executive Officer of the Corporation, at
any time and for any reason or for no reason, tender his resignation from the
office of Chairman of the Board. Whether or not serving as Chairman of the
Board, Owens shall be entitled to continue to serve as a member of the Board of
Directors of the Corporation to the extent elected at future annual stockholder
meetings, it being agreed and understood that Owens will not receive fees of any
kind for such service on the Board of Directors so long as payments under this
Agreement continue and that, after such time as such payments cease, to the
extent Owens is a member of the Board of Directors, he shall be compensated to
the same extent and in the same manner (including stock option grants) as other
outside directors. So long as Owens continues to hold at least 250,000 shares of
Common Stock, the Board of Directors will nominate Owens as a candidate for
election to the Board of Directors at each annual stockholder meeting and will
recommend a vote for his election.


                                       1.


<PAGE>   2

               3. Payments and Benefits Upon Termination of Employment. Subject
to the terms and conditions of this Agreement, from and after November 10, 1998,
Owens shall receive severance pay equal to $37,500.00 per month for a period of
nine months (the "Term"), such payments to be made in accordance with the
Corporation's regular payroll schedule. All payments hereunder shall be net of
any required withholding taxes and other authorized deductions. Any salary and
unused vacation pay for any period prior to November 10, 1998 will be paid on
November 10, 1998. To the extent the Corporation is able to obtain stop loss
insurance coverage with respect to Owens during the Term, Owens shall be
entitled to participate in the Corporation's employee health insurance plans
during the Term. To the extent the Corporation is not able to obtain such stop
loss insurance coverage, Owens shall not be entitled to participate in the
Corporation's employee health insurance plans during the Term, except to the
extent permitted by COBRA, and the Corporation shall reimburse Owens for his
COBRA premiums during the Term. Except as otherwise required by law, from and
after November 10, 1998, Owens shall cease to be entitled to participate in the
Corporation's 401(k) plan and its long-term disability and life insurance
programs; provided, however, that the Corporation shall cooperate with Owens to
make available to him any benefit plan continuation programs which may be
available (e.g., life insurance policy conversion options). Without limiting the
generality of the foregoing, Owens acknowledges that there is no conversion
provision under the Corporation's long term disability insurance. Owens shall
not be entitled to any other benefits during the Term or thereafter except as
otherwise expressly provided herein or required by law. Without limiting the
generality of the foregoing, upon termination of his employment, Owens shall
have no further right to an office, voice mail, or clerical or secretarial
support and shall have no right to retain or maintain access to any property of
the Corporation; provided, however, that Owens shall be entitled to purchase his
computer and installed software (but not any confidential or proprietary
information belonging to the Corporation stored thereon) at book value.

               4. Amendment of Stock Options. Pursuant to authorization of the
Compensation Committee of the Board of Directors of the Corporation, all stock
options held by Owens to purchase Common Stock of the Corporation ("Stock
Options") with an exercise price of $7.40 per share are hereby amended effective
as of September 16, 1998 to provide that, subject to Owens' compliance with the
terms and conditions hereof, such options may be exercised at any time during
the Term and shall terminate on August 10, 1999 to the extent not exercised
prior to the close of business on the last day of the Term. All Stock Options
held by Owens with an exercise price of $2.78 per share shall not be amended in
any way. Owens shall notify the Corporation in writing prior to any sale of
shares of Common Stock, whether acquired upon the exercise of Stock Options or
otherwise.

               5. Consulting Services. From and after November 10, 1998, Owens
will serve as a consultant to the Chief Executive Officer of the Corporation and
the Board of Directors on an as-needed, non-exclusive basis on such reasonable
terms and conditions as Owens and the Corporation may mutually agree. Any such
consulting services provided by Owens shall be provided as an independent
contractor and not as an employee of the Corporation. If Owens and the
Corporation are unable to mutually agree on reasonable terms and conditions,
Owens shall have no obligation to provide consulting services hereunder.


                                       2.


<PAGE>   3

               6.     Noncompetition and Related Covenants.

                      (a) During his employment with the Corporation and
thereafter during the Term, Owens shall not directly or indirectly (i) own or
control any debt, equity or other interest in any business (except as a passive
investor of less than 1% of the capital stock or publicly traded notes or
debentures of a publicly held company) that competes with the business of the
Corporation or any of its subsidiaries (a "Competitor"), (ii) act as a director,
officer, manager, employee, participant or consultant to, or accept or solicit
any office to act as any of the foregoing to, any Competitor or (iii) be
connected in any advisory, business or ownership capacity with, any Competitor.

                      (b) During his employment with the Corporation and
thereafter during the Term, Owens shall not, directly or indirectly, and shall
not cause or assist any other person or entity, to solicit the services of any
person that is or was employed at any time on or after January 1, 1997, by the
Corporation or any of its subsidiaries for any purpose, including without
limitation to hire or employ such person, whether on Owens's own behalf or on
behalf of a Competitor. As used herein the word "indirectly" includes, but is
not limited to, attempting to induce any employee of the Corporation or any of
its subsidiaries to leave such employer for any purpose. In the event that an
employee leaves during the Term not by reason of any solicitation by Owens,
Owens may request the Corporation's permission to subsequently hire that former
employee, which approval will not be unreasonably withheld.

                      (c) During his employment with the Corporation and
thereafter, Owens shall not make any untrue, disparaging or defamatory statement
concerning the Corporation or any of its subsidiaries or any of their respective
officers, directors, stockholders or employees, and the Corporation shall not
make any untrue, disparaging or defamatory statement concerning Owens.

                      (d) During his employment with the Corporation and
thereafter, Owens shall cooperate in good faith with the Corporation and the
Corporation's counsel in connection with any pending or future administrative
proceeding, arbitration, mediation or litigation relating to the time of his
employment with the Corporation, including but not limited to providing
information and /or documents, participating in informal interviews(s) and
appearing for depositions(s) and/or testimony if deemed necessary by the
Corporation. Notwithstanding the foregoing, nothing in this paragraph shall
obligate Owens to expend any sum or incur any liability in connection with such
cooperation. The Corporation shall use its best efforts to assure that its
requests for Owens' assistance hereunder shall not conflict with Owens'
obligations to any new employer or with Owens' self-employment.

               7. Confidential Information; Return of Property. During his
employment with the Corporation and thereafter, Owens shall not in any manner
use (other than in the performance of services for the Corporation) or disclose
any (i) trade secrets, confidential information with respect to customers or
prices or other confidential plans, processes, procedures, business concepts,
sales or marketing strategies, financial information, forecasts, drawings,
ideas, discoveries, material or information concerning the operations, business
or financial affairs of the Corporation, or any


                                       3.


<PAGE>   4

subsidiary or affiliate thereof, gained during or as a result of his employment
by the Corporation, or (ii) any confidential third party information gained
during or as a result of his employment by the Corporation. The parties agree
that the terms and conditions of this Agreement shall remain confidential and
shall not be disclosed to any other person (other than Owens' family members,
business advisors, attorneys, and accountants who shall be informed of and bound
by the confidentiality provisions of this Agreement) other than as required by
court order, legal process or applicable law or as otherwise agreed to by Owens
and the Corporation. Any disclosures permitted hereunder shall not be made in a
manner derogatory to any other party hereto. The provisions of this Section 7
shall not apply to any information which becomes generally available to the
public, other than as a result of any disclosure, direct or indirect, by Owens.
Owens covenants and agrees that, upon the termination of his employment with the
Corporation, he will promptly deliver to the Corporation all property of the
Corporation, or any subsidiary or affiliate thereof, including all equipment and
all documents and materials (and copies thereof), of whatever nature in his
possession, relating to the Corporation or any subsidiary or affiliate thereof,
or any of their services, including (without limitation) information contained
in or on computer files, disks or other data storage mediums.

               8. Execution of Mutual Release. On or prior to November 10, 1998,
Owens and the Corporation shall each execute and deliver to each other the
Mutual Release attached hereto as Exhibit A (the "Release"), it being agreed and
understood that the execution and delivery by Owens to the Corporation of the
Release is a condition precedent to the obligations of the Corporation pursuant
to Section 3 and to the amendment of the stock options held by Owens as set
forth in Section 4.

               9.     Miscellaneous.

                      (a) Attorneys' Fees; Injunctive Relief. All controversies,
claims, disputes, and matters in question arising out of, or relating to, this
Agreement or the Release or the breach thereof, shall be decided by arbitration
in accordance with the provisions of this paragraph. The arbitration proceedings
shall be held before a single arbitrator selected in accordance with the
employment arbitration rules of the American Arbitration Association or its
successor (the "AAA") and shall be conducted under the applicable rules of the
AAA in effect at the time a demand for arbitration under the rules is made. The
decision of the arbitrator, including determination of the amount of any damages
suffered, shall be conclusive, final, and binding on the parties hereto, and
their respective heirs, legal representatives, successors, and assigns. The
arbitrator shall be bound to follow California law and case precedent. Any
decision of the arbitrator will not be binding if the arbitrator fail to follow
California law and case precedent. The losing party shall pay to the successful
party its expenses in the arbitration for arbitration costs, including
arbitrator's fees and attorneys' fees, fees for expert testimony, and for other
expenses of presenting its case. Notwithstanding the foregoing and in addition
to the remedy of arbitration, the parties agree that the violation of the
provisions of Section 6 and/or 7 cannot be reasonably or adequately compensated
in damages and, in addition to any other relief to which the Corporation may be
entitled by reason of such violation, the Corporation shall also be entitled to
permanent and temporary injunctive and equitable relief.


                                       4.


<PAGE>   5

Without limiting the generality of the foregoing, Owens specifically
acknowledges that a showing by the Corporation of any breach of any provision of
Section 6 and/or 7 shall constitute, for the purposes of all judicial
determinations of the issue of injunctive relief, conclusive proof of all of the
elements necessary to entitle the Corporation to interim and permanent
injunctive relief against Owens, without the necessity of proving actual
damages. If any legal action or other proceeding is brought for the enforcement
of this Agreement or the Release or because of an alleged dispute, breach,
default or misrepresentation in connection with the provisions hereof, the
prevailing party or parties shall be entitled to recover reasonable attorneys'
fees and other costs incurred in that action or proceeding in addition to any
other relief to which it or they may be entitled.

                      (b) Termination of Agreement. The Corporation's obligation
to make payments and provide benefits to Owens as set forth in Section 3 shall
immediately terminate in the event Owens materially breaches any of the terms of
Sections 6 and/or 7 hereof. Notwithstanding such termination, Sections 6 and 7
hereof and the Release shall remain operative and in full force and effect
regardless of the termination of this Agreement and shall be binding upon and
enure to the benefit of any successors and assigns of the Corporation and any
heirs, legatees, assignees and legal representatives of Owens.

                      (c) Notices. Except as otherwise provided herein, any
notice or demand which, by the provisions hereof, is required or which may be
given to or served upon the parties hereto shall be in writing and shall be
deemed to have been validly served, given or delivered (i) when sent, if sent by
telecopy, (ii) upon actual delivery, if delivered by personal delivery, and
(iii) three business days after deposit in the United States mails, as
registered or certified mail, with proper postage prepaid and addressed to the
party or parties to be notified, if sent by mail. All notices shall be sent or
delivered to the following addresses (or such other address(es) as a party may
designate by like notice):

     If to the Corporation:    PIA Merchandising Services, Inc.
                               19900 MacArthur Boulevard, Suite 900
                               Irvine, California 92718
                               Attention:  Chief Executive Officer
                               Telecopy: (714) 474-3570

     If to Owens:              Clinton E. Owens
                               1933 Bayside Drive
                               Corona Del Mar, California 92625

                      (d) Successors and Assigns. The parties hereto acknowledge
that the Corporation shall have the right to assign, with absolute discretion,
any or all of its rights and obligations under this Agreement and the Release to
any of its affiliates, successors and assigns, and this Agreement and the
Release shall inure to the benefit of, and be binding upon, such respective
affiliates, successors and assigns of the Corporation, in the same manner and to
the same extent as if such affiliates, successors and assigns were original
parties hereto. In the event of a failure to


                                       5.


<PAGE>   6

perform by an assignee, the Corporation shall remain liable hereunder. The
Corporation will require any successor (whether direct or indirect, by purchase,
merger consolidation or otherwise) to all or substantially all of the business
and assets of the Corporation, expressly to assume and agree to perform this
Agreement and the Release in the same manner and to the same extent that the
Corporation would be required to perform it whether or not such succession had
taken place. This Agreement and the Release shall be deemed to be personal to
Owens and shall not be assignable by Owens.

                      (e) Governing Law. This Agreement and the Release shall be
governed by, and construed and interpreted in accordance with, the laws of the
State of California (without regard to choice of law principles). The parties
agree that all actions and proceedings arising directly or indirectly under this
Agreement or the Release shall be litigated or otherwise resolved in the State
of California and hereby waive any objection based on forum non conveniens and
any objection to venue of any action instituted hereunder or thereunder.

                      (f) Amendment; Waiver. This Agreement and the Release may
be amended only by an instrument in writing executed by the parties hereto. No
waiver, expressed or implied, of any breach of any covenant, agreement or duty
shall be held or construed as a waiver of any other breach of the same or any
other covenant, agreement or duty.

                      (g) Entire Agreement. This Agreement and the Release
constitute the entire agreement of the parties hereto and fully supersedes and
replaces any and all prior agreements and understandings, whether oral or
written, express or implied, between the parties pertaining to the subject
matter of this Agreement.

                      (h) Severability. Should any part, term or provision of
this Agreement or the Release be declared or be determined by any arbitrator or
court to be illegal or invalid, the validity of the remaining parts, terms or
provisions shall not be affected thereby and the illegal or invalid part, term
or provision shall be deemed not to be part of this Agreement or the Release, as
the case may be. The parties intend this Agreement and the Release to be
enforced as written; however, if any provision, or any part thereof, is held to
be unenforceable because of the scope or duration of such provision, Owens and
the Corporation agree that the arbitrator or court making such determination
shall have the power to reduce the scope, duration and/or area of such provision
in order to make such provision enforceable to the fullest extent permitted by
law, and/or to delete specific words and phrases ("blue-penciling"), and in its
reduced or blue-penciled form such provision shall then be enforceable and shall
be enforced.

                      (i) Captions. The captions of the several sections and
paragraphs of this Agreement and the Release are used for convenience only and
shall not be considered or referred to in resolving questions of interpretation
with respect to this Agreement and the Release.

                      (j) Counterparts. This Agreement and the Release may be
executed in counterparts, each of which will be deemed an original, and both of
which together shall constitute one and the same agreement.


                                       6.


<PAGE>   7

                      (K) NEGOTIATION. OWENS ACKNOWLEDGES THAT HE HAS HAD AN
OPPORTUNITY TO NEGOTIATE WITH REGARD TO THE TERMS OF THIS AGREEMENT AND THE
RELEASE AND TO RECEIVE ADVICE OF COUNSEL WITH REGARD TO IT AND HAS CAREFULLY
READ AND CONSIDERED THIS AGREEMENT AND THE RELEASE AND FULLY UNDERSTANDS THE
EXTENT AND IMPACT OF THEIR PROVISIONS, AND HAS EXECUTED THIS AGREEMENT
VOLUNTARILY AND WITHOUT COERCION, UNDUE INFLUENCE, THREATS, OR INTIMIDATION OF
ANY KIND OR TYPE WHATSOEVER.

                      (L) TIME PERIODS. OWENS HAS BEEN GIVEN TWENTY-ONE (21)
DAYS TO CONSIDER THIS AGREEMENT. IF OWENS CHOOSES TO SIGN THIS AGREEMENT BEFORE
THAT TIME PERIOD EXPIRES, OWENS DOES SO KNOWINGLY AND VOLUNTARILY. OWENS ALSO
UNDERSTANDS THAT HE HAS UP TO SEVEN (7) DAYS AFTER AGREEING TO THIS AGREEMENT TO
RESCIND THIS AGREEMENT BY NOTIFYING THE CORPORATION OF SUCH RECISSION IN
WRITING.

               IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.

PIA MERCHANDISING SERVICES, INC.


By:  /s/ TERRY R. PEETS                         /s/ CLINTON E. OWENS
   ---------------------------------          ----------------------------------
         TERRY R. PEETS                             CLINTON E. OWENS
Its: Chief Executive Officer 
     and President



                                       7.


<PAGE>   8

                                    EXHIBIT A


                                 MUTUAL RELEASE

               This MUTUAL RELEASE (this "Release") is entered into as of
November 10, 1998 by and between Clinton E. Owens ("Owens") and PIA
Merchandising Services, Inc. (the "Corporation") pursuant to the terms of
Section 8 of that certain Agreement by and between Owens and the Corporation
dated as of August 10, 1998 (the "Agreement").

               1. Release by Owens. In consideration of the severance benefits
being provided to Owens pursuant to the Agreement, Owens hereby irrevocably and
unconditionally releases, acquits and forever discharges the Corporation and
each of the Corporation's past, present and future owners, stockholders,
predecessors, successors, assigns, agents, insurers, directors, officers,
employees, representatives, attorneys, parents, divisions, subsidiaries,
affiliates (and agents, insurers, directors, officers, employees,
representatives and attorneys of such parent companies, divisions, subsidiaries
and affiliates), and all persons acting by, through, under or in concert with
any of them, or any of them (collectively hereinafter referred to as
"Releasees"), from any and all charges, complaints, claims, liabilities,
obligations, promises, agreements, controversies, expenses (including attorneys'
fees and costs actually incurred) of any nature whatsoever, known or unknown,
suspected or unsuspected (collectively, "Owens Claims"), including, but not
limited to, any Owens Claims arising out of alleged violations of any contracts,
express or implied, any covenant of good faith and fair dealing, express or
implied, any obligation for compensation, lost wages, lost benefits, unused
accrued vacation, or any other expectation of remuneration or benefit on the
part of Owens, including but not limited to, any defamation, intentional or
negligent infliction of emotional distress, or any other tort, or any legal
restrictions on the Corporation's right to terminate employees, or any federal
state or other governmental statute, regulation, or ordinance, including,
without limitation: (1) Title VII of the Civil Rights Act of 1964 (race, color,
religion, sex and national origin discrimination); (2) 42 U.S.C. P. 1981
(discrimination); (3) 29 U.S.C. P. 206(d)(1) (equal pay); (4) the California
Fair Employment and Housing Act (discrimination, including race, color, national
origin, ancestry, physical handicap, medical condition, marital status, sex or
age); (5) the California Workers' Compensation Act; (6) the California Labor
Code; (7) Executive Order 11246 (race, color, religion, sex and national origin
discrimination); (8) Executive Order 11141 (age discrimination); (9) P. P. 503
and 504 of the Rehabilitation Act of 1973 (disability discrimination); (10)
Employee Retirement Income Security Act (employee benefits); (11) the Fair Labor
Standards Act; (12) the Americans with Disabilities Act (discrimination against
individuals with a disability); (13) the Age Discrimination in Employment Act
(age discrimination), and (14) the Civil Rights Act of 1991, which Owens now
has, owns or holds, or claims to have, own or hold, or which Owens at any time
heretofore had, owned, or held, or claimed to have, own or hold, against each or
any of the Releasees. The foregoing release shall not limit or otherwise affect
Owens rights under any stock option agreements, employee savings, 401(k),
deferred compensation or similar plans.

               2. Release by the Corporation. In consideration of the foregoing
release and of the other agreements set forth in the Agreement, the Corporation,
on behalf of itself and, to the extent


                                       1.


<PAGE>   9

that it may effectively do so, on behalf of each of the Corporation's
predecessors, successors, assigns, agents, insurers, directors, officers,
employees, representative, attorneys, subsidiaries, affiliates (and the agents,
insurers, directors, officers, employees, representatives and attorneys of such
companies, subsidiaries and affiliates), and all persons acting by, through,
under or in concert with any of them, or any of them, and hereby irrevocably and
unconditionally releases, acquits and forever discharges Owens from any and all
charges, complaints, claims, liabilities, obligations, promises, agreements,
controversies, expenses (including attorneys' fees and costs actually incurred)
of any nature whatsoever, known or unknown, suspected or unsuspected which they
now have, own or hold, or claim to have, own or hold, or which they at any time
heretofore had, owned, or held, or claimed to have, own or hold, against Owens
(collectively, "Corporation Claims"), except for Corporation Claims arising out
of or relating to illegal or fraudulent actions on the part of Owens.

               3. Knowing and Voluntary Waiver. The parties expressly waive and
relinquish all rights and benefits afforded by Section 1542 of the Civil Code of
the State of California, and do so understanding and acknowledging the
significance of such specific waiver of Section 1542. Section 1542 of the Civil
Code of the State of California states as follows:

               "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
               DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
               EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
               AFFECTED HIS SETTLEMENT WITH THE DEBTOR."

               Thus, notwithstanding the provisions of Section 1542, and for the
purpose of implementing a full and complete release and discharge of all those
released by this Agreement, each of the parties expressly acknowledges that this
Agreement is intended to include in its effect, without limitation, all claims
which the party does not know or suspect to exist in its favor at the time of
execution hereof, and that this Agreement contemplates the extinguishment of any
such claims. Owens and the Corporation acknowledge that they have expressly
bargained for the foregoing waiver of the provisions of Section 1542.

               4. Indemnification by the Corporation. The Corporation also
agrees to defend, indemnify and hold Owens harmless, to the fullest extent
permitted by law, from and with respect to any claims, liabilities, charges
and/or actions brought against Owens with regard to any actions taken by Owens
in the course and scope of his employment with the Corporation and/or as a
director of the Corporation, and nothing in this Release shall limit any rights
which Owens may have under the Corporation's Certificate of Incorporation,
Bylaws, or insurance policies to be indemnified for actions taken by him in the
course and scope of his employment. .

               5. Non-Admission of Liability. This Release shall not in any way
be construed as an admission by either party that such party has acted
wrongfully with respect to the other party or any other person, or that either
party has any rights whatsoever against the other party as a result of any such
wrongful act, and each party specifically disclaims any liability to or wrongful
acts against


                                       2.


<PAGE>   10

the other party or any other person, on the part of such party or such party's
agents or affiliates and related parties or their agents.

               6. TIME PERIODS. OWENS HAS BEEN GIVEN MORE THAN TWENTY-ONE (21)
DAYS TO CONSIDER THIS RELEASE. OWENS UNDERSTANDS THAT HE HAS UP TO SEVEN (7)
DAYS AFTER EXECUTING THIS RELEASE TO RESCIND THIS RELEASE BY NOTIFYING THE
CORPORATION OF SUCH RECISSION IN WRITING. ANY SUCH RECISSION SHALL, HOWEVER,
TERMINATE THE CORPORATION'S OBLIGATIONS UNDER SECTION 3 OF THE AGREEMENT AND
SHALL ACT TO NEGATE THE AMENDMENT OF THE STOCK OPTIONS HELD BY OWENS AS SET
FORTH IN SECTION 4 OF THE AGREEMENT.

               IN WITNESS WHEREOF, the parties hereto have executed this Release
as of the date first above written.


PIA MERCHANDISING SERVICES, INC.


By:  /s/ TERRY R. PEETS                       /s/ CLINTON E. OWENS
   ---------------------------------        ----------------------------------
         TERRY R. PEETS                           CLINTON E. OWENS
Its: Chief Executive Officer
     and President


                                       3.



<TABLE> <S> <C>

<ARTICLE> 5
<MULTIPLIER> 1,000
       
<S>                             <C>                     <C>
<PERIOD-TYPE>                   3-MOS                   9-MOS
<FISCAL-YEAR-END>                          JAN-01-1999             JAN-01-1999
<PERIOD-START>                             JUL-04-1998             JAN-01-1998
<PERIOD-END>                               OCT-02-1998             OCT-02-1998
<CASH>                                          10,067                  10,067
<SECURITIES>                                         0                       0
<RECEIVABLES>                                   15,698                  15,698
<ALLOWANCES>                                       991                     991
<INVENTORY>                                          0                       0
<CURRENT-ASSETS>                                25,526                  25,526
<PP&E>                                           5,679                   5,679
<DEPRECIATION>                                   3,571                   3,571
<TOTAL-ASSETS>                                  28,690                  28,690
<CURRENT-LIABILITIES>                           10,852                  10,852
<BONDS>                                              0                       0
<PREFERRED-MANDATORY>                                0                       0
<PREFERRED>                                          0                       0
<COMMON>                                            60                      60
<OTHER-SE>                                      17,567                  17,567
<TOTAL-LIABILITY-AND-EQUITY>                    28,690                  28,690
<SALES>                                              0                       0
<TOTAL-REVENUES>                                29,836                  98,520
<CGS>                                                0                       0
<TOTAL-COSTS>                                   26,151                  84,195
<OTHER-EXPENSES>                                 4,235                  16,114
<LOSS-PROVISION>                                  (339)                    173
<INTEREST-EXPENSE>                                   0                       0
<INCOME-PRETAX>                                   (358)                 (1,281)
<INCOME-TAX>                                        12                      36
<INCOME-CONTINUING>                               (370)                 (1,317)
<DISCONTINUED>                                       0                       0
<EXTRAORDINARY>                                      0                       0
<CHANGES>                                            0                       0
<NET-INCOME>                                      (370)                 (1,317)
<EPS-PRIMARY>                                    (0.07)                  (0.24)
<EPS-DILUTED>                                    (0.07)                  (0.24)
        

</TABLE>