<PAGE>   1

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

                                    Form 10-K

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

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

  For the fiscal year ended February 1, 1998 -- Commission File Number 0-8550

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

                             PCA INTERNATIONAL, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

        North Carolina                                         56-0888429
-------------------------------                            -------------------
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                             Identification No.)

                           815 Matthews-Mint Hill Road
                         Matthews, North Carolina 28105
               --------------------------------------------------
               (Address of principal executive offices)(Zip Code)

        Registrant's telephone number, including area code (704) 847-8011

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

           Securities Registered Pursuant to Section 12(b) of the Act:
                                      None

           Securities Registered Pursuant to Section 12(g) of the Act:
                     Common Stock, $.20 par value per share
                     --------------------------------------
                                (Title of Class)


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

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

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

     At March 31, 1998, there were 7,940,779 shares of the registrant's common
stock outstanding; the aggregate market value of such common stock (based on the
closing price on the over-the-counter National Association of Securities Dealers
National Market System) held by non-affiliates was approximately $178,667,528.

                       Documents Incorporated by Reference
                       -----------------------------------
     The information required by Part III is incorporated by reference to the
Registrant's Definitive Proxy Statement to be filed not later than 120 days
after the end of the registrant's fiscal year 1997.

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


<PAGE>   2

                                     PART I

ITEM 1.  BUSINESS


GENERAL DEVELOPMENT

         THE COMPANY. PCA International, Inc. ("PCA" or the "Company") is a
holding company engaged through its subsidiaries in the sale and processing of
professional color portraits of children, adults, and families. The Company
operates 2,075 portrait studios within Kmart and Wal-Mart stores and
supercenters in the United States, Canada, Mexico, Puerto Rico, and South
America. The Company also operates an extensive traveling business providing
portrait photography services in approximately 1,400 additional retail locations
and to church congregations and other institutions.

         Executive offices and film developing and portrait processing
facilities are located in Matthews, North Carolina. A second portrait processing
facility and distribution center are located in Charlotte, North Carolina. The
Company was organized as a North Carolina corporation in 1967 and has been in
business since 1967. The Company's world-wide web address is
http://www.pca-online.com.

         During the fiscal year ended February 1, 1998, the Company had sales of
$242,899,027. The Company's fiscal year ends on the Sunday nearest the end of
January. The fiscal years ended February 1, 1998 and January 28, 1996 were
52-week years. The fiscal year ended February 2, 1997 was a 53-week year. The
1998 fiscal year that will end January 31, 1999 will be 52 weeks.

         ACQUISITION OF WAL-MART PORTRAITURE BUSINESSES. The Company
strengthened its position in the discount retail market segment with the January
27, 1997 acquisition of American Studios, Inc. ("American Studios"), the
portrait provider to Wal-Mart stores in the United States and Mexico. This
acquisition increased by 2,300 the number of Wal-Mart locations serviced by the
Company in the United States and Mexico through a combination of permanent
studios and traveling promotions.

         CONSOLIDATION OF PORTRAITURE BUSINESSES. In fiscal 1997, the Company
eliminated underperforming businesses to concentrate on its portrait studio
operations. The Company discontinued American Studios' fashion photography and
PCA's pilot pet portraiture program and closed 401 portrait studios in discount
stores which were not meeting the Company's profit objectives.

         DIGITAL STUDIO CONVERSION. The Company leveraged PCA's digital studio
infrastructure over the Wal-Mart distribution channel by redeploying
underutilized digital studio assets to Wal-Mart locations. During the first half
of 1997, the Company converted or upgraded 856 portrait studios in Wal-Mart,
previously operated by American Studios, to digital technology. This action
strengthened the Company's diversified distribution channel and increased by 44%
the Company's base of digital studios operating in discount stores.

         STUDIO EXPANSION. PCA supports its diversified distribution channel
with studio expansion plans, domestically and internationally. In fiscal 1997,
the Company opened 188 new digital studios in Wal-Mart and Kmart stores. At
February 1, 1998, the Company operated a total of 2,075 studios, 1,953
domestically and 122 internationally.

         CAPITAL EXPENDITURES. Capital expenditures in fiscal 1997 of $12.1
million were principally for leasehold improvements and digital studio
conversion of acquired studios, materials and equipment for additional permanent
portrait studios, and for upgrading certain equipment in the 


<PAGE>   3

Company's two lab and processing facilities and new computer equipment in the
corporate office. Capital for the expansion and upgrading of PCA's studio and
processing operations came from cash flow with supplemental funding from
available short-term bank financing.

INDUSTRY SEGMENT AND SIGNIFICANT CUSTOMERS

         The Company operates within the professional portrait photography
industry, specializing in preschool children's portraits offered through
permanent studios and traveling promotions, and adult and family portraits
provided through traveling promotions in churches and other institutions. For
information regarding portrait sales through Kmart and Wal-Mart during the last
three fiscal years, see note 1 of Notes to Consolidated Financial Statements,
which begin on page F-1 of this report.

U.S. PRESCHOOL PORTRAIT OPERATIONS

         The Company operates portrait studios in discount stores in all 50
states, principally servicing the preschool portrait market. PCA's portrait
studio operations contributed 92.0% of the Company's sales in fiscal year 1997,
87.2% in 1996, and 90.2% in 1995. At the end of fiscal 1997, the Company
operated 1,953 permanent portrait studios in the United States, a net decrease
of 251 studios compared to prior fiscal year. (As described more fully in the
Management's Discussion and Analysis, PCA's fiscal 1996 financial results do not
reflect the operating results of American Studios; however, studio counts at the
end of 1996 do reflect the combined companies). During the year, the Company
added 150 new studios to its domestic studio base and closed 401 underperforming
studios. The Company also services approximately 1,400 Wal-Mart stores in the
United States four to seven times a year with traveling promotions. The Company
currently plans to open 100 to 150 new permanent studios domestically in 1998.

         In fiscal 1997, PCA became the exclusive portrait studio operator for
Wal-Mart, strengthening a 16-year partnership established by American Studios.
The Company operates 990 studios in Wal-Mart stores and supercenters. The
Company continues its 30-year partnership as the primary portrait studio
operator for Kmart, with 963 portrait studios. The Company seeks to maintain an
advertising presence throughout the year in all geographic markets where the
Company operates permanent studios by advertising under the name of its retail
partners. Customers are attracted to the studio through a variety of advertising
methods including in-store point-of-sale merchandising, television and newspaper
advertising, and direct mail to current and prospective customers.

         The typical permanent studio occupies 250 square feet on average,
consisting of a camera room, a portrait viewing and sales area, and a reception
area with point-of-sale computer. Generally, the permanent studio is staffed by
one to three employees who perform both the photography and sales functions.
Except for extended hours during certain holiday seasons, the majority of PCA's
portrait studios are open from 10:00 a.m. to 7:00 p.m. either five or seven days
a week.

INTERNATIONAL

         At the end of fiscal year 1997, the Company operated 122 portrait
studios internationally in Wal-Mart stores, with 94 permanent studios in Canada,
26 in Mexico and 2 in Argentina. The Company's international studios contributed
4.3%, 4.4%, and 4.5% of sales for fiscal 1997, 1996, and 1995, respectively.
International expansion added 38 new studios in 1997. Fiscal 1998 studio
expansion plans include up to 30 new studios internationally. Since April 1996,
the Company's Canadian subsidiary has operated studios under a long-term
licensing agreement with Wal-Mart's Canadian subsidiary.

                                       2
<PAGE>   4

INSTITUTIONAL OPERATIONS

         The Company's Institutional operations account for 3.1%, 4.7%, and 4.6%
of sales in fiscal years 1997, 1996, and 1995, respectively. The Company
contracts with institutions, primarily church congregations, to photograph and
sell individual and family group portraits of congregation members. The Company
does not pay commissions to the hosting institutions, but provides a free photo
directory to all members who agree to be photographed. Approximately three weeks
after the photography session, the finished portraits are sent to the church or
directly to the consumer. During fiscal 1997, the Company operated approximately
31 portable camera units on average each week for Institutional promotions. The
Company does not expect the number of portable units in service to change
significantly during 1998.

DISCONTINUED BUSINESSES

         In fiscal 1997, the Company discontinued American Studios' fashion
photography business and PCA's pilot pet portrait program and closed 401
portrait studios which were not meeting the Company's profit objectives. These
operations accounted for approximately $9 million or 3.7% of total sales in
fiscal 1997 and approximately $44 million or 16.6% of pro forma Company sales in
fiscal 1996. (Pro forma financial information of the combined results of
operations of PCA and American Studios is presented in note 2 of Notes to
Consolidated Financial Statements.)

SEASONALITY

         Because of the retail nature of its services and its locations in
discount stores, the Company's business is very seasonal. The Christmas season
accounts for a high percentage of the Company's sales and earnings, and the
Company's fourth fiscal quarter (late October through late January) typically
produces a large percentage of annual sales and annual earnings. The fourth
fiscal quarters of 1997, 1996, and 1995, accounted for approximately 31.2%,
33.2%, and 32.2%, respectively, of sales, and 89.4%, 32.8%, and 64.2%,
respectively, of earnings for those years. Fiscal 1997 fourth quarter earnings
as a percentage of total earnings were out of proportion compared to prior years
due to significant costs incurred for restructuring the Company's digital studio
operations, which led to operating losses in the first half of the year. The
1996 fourth quarter earnings would have accounted for 69.5% of annual earnings
before giving effect to the $3.6 million after-tax charge for studio closure
costs. The Company's operations can be adversely affected by inclement weather,
especially during the important fiscal fourth quarter.

COMPETITION

         The preschool portrait market is highly competitive and no one firm
dominates the United States market. The market comprises several large
competitors, including the Company, operating in multiple locations, and
numerous smaller entities operating in only one or a few locations. The Company
believes that it is one of the largest portrait providers measured by annual
sales and the largest operator of portrait studios in the discount segment
through association with Kmart and Wal-Mart.

         Competition for the Company's products centers on the quality and
value-pricing of its portraits and service. Other competitive factors include
the benefits of the Company's digital imaging technology, the convenience of its
studios located in major discount stores, and the industry experience of the
Company's management. The Company believes that the quality of its portraits and
customer service, enhanced by its digital imaging technology, is important in
obtaining repeat business from customers. Major competitors attract new
customers through advertised value-priced portrait packages and the benefits of
digital technology, or custom ordering of low-priced portrait sheets coupled
with higher-priced session fees.

                                       3
<PAGE>   5

LICENSES, TRADEMARKS, AND PATENTS

         The Company is party to a license agreement with Kmart Corporation that
allows the Company to operate its permanent studios in U.S. Kmart stores under
the Kmart name in exchange for a commission from the Company based on a
percentage of sales from the permanent studio in each store. The Company has
maintained a continuous business relationship with Kmart Corporation since 1967.
The license agreement expires May 9, 2001, and may be terminated by either party
upon 180-days' notice. The Company assumed American Studios' license agreement
with Wal-Mart Stores, Inc. when it acquired American Studios on January 27,
1997. Wal-Mart may terminate or amend the license agreement at any time. The
loss of the license to do business in U.S. Kmart stores, or U.S. Wal-Mart
stores, or the closing of a significant number of U.S. Kmart or Wal-Mart stores,
would have a material adverse effect on the Company.

         On February 9, 1996, the Company's Canadian subsidiary entered into a
license agreement with Wal-Mart Canada, Inc. to operate portrait studios in
Wal-Mart's stores in Canada. The license agreement is for a five-year period on
a store-by-store basis.

         The Company owns certain other patents, trademarks, and licenses that
it does not believe are material to its business.

TECHNOLOGY:  RESEARCH AND DEVELOPMENT

         The Company has developed a proprietary digital imaging system that
allows the customer to view a digital proof of each pose on a high-resolution
video monitor as the photographer photographs the subject. Immediately after the
photography session, customers are able to customize their portrait purchase,
choosing the poses, sizes, and number of portraits they wish to purchase. The
customer then returns to the studio approximately three weeks later to pick up
the finished portraits. The Company believes the increased flexibility and
choice provided to customers by the digital system have improved customer
satisfaction and increased average purchases. As a byproduct of its digital
technology, the Company prints only portraits purchased by the customer,
eliminating waste associated with the speculative production method.
Furthermore, the Company's production efficiency is enhanced through integration
of its digital studio infrastructure with the Company's computerized production
system. The Company believes that its integrated system is unique in the
industry.

         The Company operates two film processing facilities in North Carolina.
The Company processes film from substantially all studios and Institutional
promotions at its finishing laboratory in Matthews, North Carolina. Film from
traveling promotions and approximately 300 digital studios is processed at a
second finishing laboratory located in Charlotte, North Carolina. The finishing
laboratories have adequate capacity to meet the Company's processing needs for
the foreseeable future.

         The Company spent $1,311,000, $1,321,000, and $1,033,000 on research
and development activities during the 1997, 1996, and 1995 fiscal years,
respectively. Research and development efforts have focused on developing and
refining its digital imaging system, enhancing the Company's cameras and studio
systems, and advancing the engineering and performance of the Company's
computerized processing facilities.

SOURCES AND AVAILABILITY OF SUPPLIES

         The Agfa Division of Bayer Corporation is the Company's primary
supplier of photographic film, paper, and processing chemicals. The Company
renewed its supply contract with Agfa in August 1997 after receiving competitive
bids from other suppliers. The Company has 



                                       4
<PAGE>   6

not had significant difficulty obtaining photographic supplies. The Company
builds its own cameras and printing equipment and has an adequate supply of
cameras, camera components, and production equipment. The computer and video
equipment used by the Company in the digital imaging system consists of standard
components that are readily available from multiple suppliers.

         The Company has not found it necessary to carry significant amounts of
inventory to ensure a continuous allotment of raw materials. The Company's
receivables from licensors and customers are due within the cycle of payments to
suppliers.

GOVERNMENTAL REGULATIONS

         The Company is subject to various federal and state laws and
regulations, including the Occupational Safety and Health Act and federal and
state environmental laws. The Company is not aware of any material violation of
such laws and regulations. Continued compliance is not expected to have a
material effect upon capital expenditures, earnings, or the competitive position
of the Company.

EMPLOYEES

         At February 1, 1998, the Company had approximately 5,735 full-time and
part-time employees. The Company believes employee relations are good.

EXECUTIVE OFFICERS OF THE REGISTRANT

<TABLE>
<CAPTION>
Name                      Age   Positions and Offices
----                      ---   ---------------------

<S>                       <C>   <C>                  
John Grosso(1)            51    President, Chief Executive Officer, and
                                Director (Since 1987)

Eric H. Jeltrup(2)        53    Executive Vice President and Chief Technical
                                Officer (Since 1991)

J. Robert Wren Jr.(3)     50    Executive Vice President and General Counsel
                                (Since 1997)

Bruce A. Fisher(4)        48    Senior Vice President and Chief Financial
                                Officer and Secretary (Since 1992)

R. Michael Spencer(5)     50    Senior Vice President and Treasurer (Since 1992)
</TABLE>

(1)  Mr. Grosso has been President and Chief Executive Officer of the Company 
     since 1987.

(2)  Mr. Jeltrup has been with the Company in various positions in research and 
     development and production since 1976. He has served as Executive Vice 
     President since 1991 and was promoted to Chief Technical Officer on 
     August 25, 1994.

(3)  Mr. Wren joined the Company in January 1997 as Executive Vice President
     and General Counsel. Prior to that, Mr. Wren served as Chief Executive
     Officer of American Studios, Inc. from July 1995 until its acquisition in 
     January 1997. He served in various other positions with American Studios, 
     Inc. including director and general counsel from January 1993 to July 1995.
     From July 1986 to December 1992, Mr. Wren was a partner in the law firm of
     Garland & Wren, P.A., Gastonia, NC.

                                       5
<PAGE>   7

(4)  Mr. Fisher has been with the Company in various positions in accounting
     and finance since 1977 and was promoted to Chief Financial Officer and
     Secretary on August 25, 1994.

(5)  Mr. Spencer has been with the Company since 1973 in various positions in 
     accounting. He was promoted to Senior Vice President and Treasurer on 
     January 6, 1992.


ITEM 2.  PROPERTIES

         The Company owns three facilities in the Charlotte, North Carolina,
area. One facility in Matthews, North Carolina, serves as its corporate
headquarters, production facility, and warehouse. The building is approximately
166,000 square feet. The Company also owns two facilities in Charlotte, North
Carolina, acquired through the American Studios' acquisition: a processing and
administrative facility which is approximately 60,000 square feet and a
distribution center which is approximately 31,400 square feet. All of these
facilities are subject to liens in favor of NationsBank of North Carolina, N.A.,
as agent for the Company's $90 million loan facility. The Company operates
approximately 1,000 permanent studios within Kmart stores and approximately
1,100 permanent studios within Wal-Mart stores, all under license agreements.
The Company owns the equipment, furniture, and fixtures in all permanent
studios.


ITEM 3.  LEGAL PROCEEDINGS

         There are no legal proceedings to which the Company, or its
subsidiaries, is a party or of which any of their property is the subject that
are required to be disclosed under this item.


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

         There were no matters submitted to a vote of shareholders during the
fourth quarter ended February 1, 1998.


                                     PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER 
         MATTERS

         The Company's common stock trades on The Nasdaq Stock Market(SM) under
the symbol "PCAI." The following is the range of high and low trade prices for
the shares of common stock during the Company's last two fiscal years, as
reported on The Nasdaq Stock Market(SM):

<TABLE>
<CAPTION>
                            Fiscal Year Ended               Fiscal Year Ended
                            February 1, 1998                February 2, 1997
                          ---------------------           ---------------------
                            High         Low                High         Low
                            ----         ---                ----         ---
        <S>                <C>          <C>                <C>          <C>   
        1st Quarter        $17.25       $14.62             $14.13       $ 9.00
        2nd Quarter        $23.25       $15.50             $17.75       $13.00
        3rd Quarter        $25.50       $21.00             $19.00       $15.50
        4th Quarter        $25.50       $19.75             $18.25       $15.00
</TABLE>

                                       6
<PAGE>   8

         At March 31, 1998, the Company had approximately 931 shareholders of
record and the closing trade price for a share of common stock was $22.50.

         The Company paid cash dividends of $0.07 per share in each of the last
three quarters in fiscal 1997 and in each of the first three quarters of fiscal
1996. On May 28, 1997, the Company's Board of Directors voted to reinstate
payment of a quarterly dividend which was suspended on December 4, 1996 in
anticipation of the financial requirements for the acquisition of American
Studios, Inc. The credit agreement with NationsBank, N.A., as Agent, allows the
Company to pay dividends provided that the following restrictions are met: (a)
immediately before and after making such payment, no default or event of default
exists or would result from making the payment, (b) the Company, after giving
effect to such payment, remains in compliance with the financial covenants, and
(c) the aggregate amount of such dividends paid in any fiscal year does not
exceed 25% of consolidated excess cash flow for the prior year.



                                       7
<PAGE>   9




ITEM 6.  SELECTED FINANCIAL DATA

(In thousands, except for percentages, ratios, statistics, and per share data)



<TABLE>
<CAPTION>
                                                                      For the Fiscal Years Ended Approximately January 31,
                                                           -------------------------------------------------------------------------
                                                                 1998           1997*            1996           1995          1994
                                                           --------------  -------------   ------------   ------------  ------------
<S>                                                        <C>             <C>             <C>            <C>           <C> 
SUMMARY OF OPERATIONS:
    Sales...................................................   $242,899     $156,099          $144,715       $144,881      $149,150
    General and administrative expenses.....................   $ 36,160     $ 31,676 (1)      $ 23,782       $ 22,936      $ 20,594
    Total costs and expenses................................   $220,036     $150,783 (1)      $131,392       $137,028      $140,947
    Income from continuing operations.......................   $  8,735     $  2,994 (2)      $  7,617       $  4,372      $  4,912
    Net Income..............................................   $  8,735     $  2,994 (2)      $  7,617       $  4,785      $  2,712

    Basic earnings per common share:
      From continuing operations............................   $   1.12     $   0.40          $   1.00       $   0.54      $   0.61
      Net Income............................................   $   1.12     $   0.40          $   1.00       $   0.59      $   0.34

    Diluted earnings per common share:
      From continuing operations............................   $   1.07     $   0.38 (2)      $   0.96       $   0.52      $   0.58
      Net Income............................................   $   1.07     $   0.38 (2)      $   0.96       $   0.57      $   0.32

    Number of common shares:
      Basic.................................................      7,779        7,522             7,632          8,149         8,092
      Diluted...............................................      8,195        7,836             7,895          8,398         8,513

BALANCE SHEET DATA & FINANCIAL RATIOS:
    Working capital.........................................   $(20,334)    $(18,472)         $ (3,878)      $ (6,697)     $ (4,321)
    Current ratio...........................................       0.64         0.55              0.82           0.67          0.81
    Quick ratio.............................................       0.47         0.38              0.70           0.52          0.59
    Total assets............................................   $153,301     $146,661          $ 59,884       $ 59,557      $ 56,751
    Long-term debt (noncurrent portion).....................   $ 42,064     $ 58,680          $      -       $      -      $      -
    Ratio of long-term debt (noncurrent portion)
      to total capitalization(3)............................       0.48         0.64                 -              -             -
    Total shareholders' equity per share(4).................   $   5.45     $   4.29          $   3.96       $   3.93      $   3.56
    Return on average equity................................      22.3%         9.2%             23.7%          15.1%          9.3%

STATEMENT OF CASH FLOWS DATA:
    Depreciation expense....................................   $ 13,543     $  9,498          $  8,490       $  7,136      $  5,159
    Capital expenditures....................................   $ 12,086     $ 13,424          $  6,309       $ 14,698      $ 21,875
    Cash dividends per share................................   $   0.21     $   0.21          $   0.28       $   0.28      $   0.28
</TABLE>

*    PCA's operating results for the fiscal year ended February 2, 1997, do 
     not include operating results from American Studios, Inc. as the 
     acquisition was accounted for by the purchase method at year-end; balance 
     sheet information includes the assets and liabilities of the combined 
     companies.

(1)  Includes $6 million charge for studio closure costs.

(2)  Net income and earnings per share include tax effected studio closure 
     costs of $3.6 million or $0.46 per share. Excluding this amount, net 
     income was $6.6 million or $0.84 per diluted share.

(3)  Total capitalization is long-term debt and total shareholders' equity.

(4)  Total shareholders' equity per share has been calculated by dividing 
     total shareholders' equity by the number of diluted shares.




                                       8
<PAGE>   10

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


OVERVIEW

         PCA International, Inc. is engaged, through its subsidiaries, in the
sale and processing of professional color portraits of children, adults, and
families. The Company operates 2,075 retail portrait studios in the United
States, Canada, Mexico, Puerto Rico, and South America. The Company also
operates an extensive traveling business providing portrait photography services
in approximately 1,400 additional retail locations and to church congregations
and other institutions. Portrait sales at discount stores accounted for 96.2% of
sales in fiscal 1997. At February 1, 1998, the Company operated 1,953 permanent
portrait studios in the United States and 122 internationally.

         Following the January 1997 acquisition of American Studios, the Company
completed several strategic initiatives intended to strengthen the Company's
competitive position and improve the profitability of its portrait studio
operations, as follows:

--   Integration and consolidation of corporate administrative functions and
     field operations yielding cost savings in excess of $6 million.

--   Discontinuation of American Studios' fashion photography and PCA's pilot
     pet portraiture businesses and the closure of 401 portrait studios which
     were not meeting the Company's profit objectives. Closed and discontinued
     businesses represented $9 million of 1997 sales and $44 million of pro
     forma Company sales in fiscal 1996.

--   Conversion and upgrade of approximately 850 acquired studios to digital
     imaging technology. The Company leveraged its digital studio infrastructure
     over the Wal-Mart distribution channel which strengthened and diversified
     the Company's distribution channels and increased by 44% the number of
     digital studios the Company operates in discount stores.

--   Expansion of the Company's customer base by opening 188 new studios
     domestically and internationally.

HISTORICAL BUSINESS REVIEW

         In fiscal 1996, portrait studio sales in discount stores were 91.6% of
total sales. During the year, the Company diversified its retail partnerships
and expanded its distribution principally through the acquisition of Wal-Mart
portraiture businesses in Canada and the United States. In April 1996, the
Company acquired two Canadian Wal-Mart portraiture businesses, Portrait Works,
Inc. and Portrait Experience of Canada, Ltd. PCA's Canadian subsidiary entered
into a long-term license agreement with Wal-Mart's Canadian subsidiary to
operate permanent studios in Wal-Mart's Canadian stores.

         On January 27, 1997, the Company acquired 94.9% of the outstanding
common stock of American Studios, portrait provider to Wal-Mart in the United
States and Mexico. This acquisition expanded the number of Wal-Mart stores PCA
serves to over 2,300, including 856 permanent studios in U.S. Wal-Mart stores
previously served by American Studios. At the end of fiscal 1996, the Company
operated 2,288 portrait studios in discount stores, which includes 892 studios
acquired through the acquisitions mentioned above. PCA's studio counts at the
end of fiscal 1996 reflect the combined companies for fiscal 1996 while
financial results do not include the results of American Studios.

                                       9
<PAGE>   11

        In fiscal 1995, PCA operated 1,508 portrait studios principally in Kmart
stores in the United States, Canada and Mexico. Portrait studio sales in
discount stores accounted for 94.8% of 1995 total sales. The Company opened 164
permanent Kmart studios in 1995 and closed 73 studios, resulting in a net
addition of 91 studios.

        Beginning with the fourth quarter of fiscal 1993 and continuing through
fiscal 1996, the portrait services industry experienced extremely competitive
pricing and promotional conditions. The Company expects competitive pricing
conditions will be less aggressive than in the past and continues to place
emphasis on the quality and value-pricing of its portrait products and services,
and the enhanced portrait experience made possible through its digital imaging
system.

         Because of the retail nature of its services and its locations in
discount stores, the Company's business is very seasonal. The Christmas season
accounts for a high percentage of the Company's sales and earnings, and the
Company's fourth fiscal quarter (late October through late January) typically
produces a large percentage of annual sales and annual earnings. The fourth
fiscal quarters of 1997, 1996, and 1995, accounted for approximately 31.2%,
33.2%, and 32.2%, respectively, of sales, and 89.4%, 32.8%, and 64.2%,
respectively, of earnings for those years. Fiscal 1997 fourth quarter earnings
as a percentage of total earnings were out of proportion compared to prior years
due to significant costs incurred for restructuring the Company's digital studio
operations, which led to operating losses in the first half of the year. The
1996 fourth quarter earnings would have accounted for 69.5% of annual earnings
before giving effect to the $3.6 million after-tax charge for studio closure
costs. The Company's operations can be adversely affected by inclement weather,
especially during the important fiscal fourth quarter.

OPERATIONS

        1997 PCA FISCAL YEAR COMPARED WITH 1996 PCA FISCAL YEAR. Sales for
fiscal year 1997 increased 55.6% to $242.9 million, compared to $156.1 million
in fiscal year 1996. Fiscal 1997 was a 52-week year versus 53 weeks in fiscal
1996. The sales increase of $86.8 million in fiscal 1997 was attributable to the
Company's acquisition of American Studios' Wal-Mart distribution channel, net of
discontinued businesses, and to a lesser degree, studio expansion and increased
customer purchase averages realized in each of the Company's retail channels.
PCA's financial results for fiscal 1996 do not include the operating results of
American Studios while studio counts reflect the combined companies at the end
of fiscal 1996.

         Total operating costs and expenses as a percentage of sales declined
2.2 percentage points to 90.6% in fiscal 1997 compared to 92.8% in fiscal 1996,
before the 1996 fourth quarter pretax charge of $6.0 million to close 401
underperforming portrait studios. Advertising and promotional costs as a
percentage of sales were 6.9% in 1997, versus 10.4% in 1996, reflecting a less
promotional environment in the discount retail segment. Costs of photographic
sales increased to 35.3% of sales in 1997, compared to 33.7% of sales in 1996,
principally due to higher labor costs to operate American Studios' non-digital
studios for half the year and traveling operations for the full year. Store
commission and selling costs increased to 32.8% of sales in 1997, compared to
32.3% the prior year. Increased labor expenses related to staffing requirements
to operate more seven-day studios in discount stores was a primary factor for
the rise in direct selling cost. General and administrative expenses declined
1.5 percentage points to 14.9% of sales in fiscal 1997 compared to 16.4% of
sales in fiscal 1996. This decline is principally the result of cost savings
from the consolidation of field and corporate general and administrative
functions.

         Income from operations increased to $22.9 million or 9.4% of sales in
fiscal 1997 versus $11.3 million or 7.2% of sales in fiscal 1996 (stated before
the 1996 studio closure charge). This 102.0% increase in 1997 reflects one full
year of operations of American Studios, as well as the elimination of
underperforming operations and improved performance of the Company's 



                                       10
<PAGE>   12

portrait studio operations. Fiscal 1997 operating costs include $1.9 million for
amortization of intangible assets relating to the acquisition of American
Studios.

         Pretax income increased to $16.3 million or 6.7% of sales in fiscal
1997 compared to $5.1 million or 3.3% of sales in the prior year. Fiscal 1996
pretax income includes a $6.0 million charge for studio closure costs noted
above. Fiscal 1997 net interest expense was $6.6 million compared to $0.2
million in 1996, reflecting an increase in indebtedness related to the
acquisition of American Studios.

         Income tax provision for 1997 was $7.6 million as compared to $2.1
million in 1996. The fiscal 1997 tax provision as a percentage of pretax income
was 46.4% versus 41.7% in 1996. The increase in the effective tax rate in 1997
was due to amortization of intangibles related to the American Studios
acquisition, which are not deductible for tax purposes. Net income in 1997 was
$8.7 million or 3.6% of sales compared to $3.0 million or 1.9% of sales in 1996.
Fiscal 1997 earnings per share on a diluted basis were $1.07 compared to $0.38
in fiscal 1996. Fiscal 1996 results include the previously mentioned studio
closure charge, which reduced net income by $3.6 million after tax or $0.46 per
diluted share. Excluding this charge, fiscal 1996 net income was $6.6 million or
$0.84 per diluted share.

         1996 PCA FISCAL YEAR COMPARED WITH 1995 PCA FISCAL YEAR. Sales for
fiscal year 1996 increased 7.9% to $156.1 million, compared to $144.7 million in
fiscal year 1995. The sales increase of $11.4 million in fiscal 1996 was
attributable to the Company's diversification strategy, which led to an increase
in the number of customers served. Fiscal 1996 was a 53-week year versus 52
weeks in fiscal 1995. On a comparable 52-week basis, sales increased 6.5%.

         In 1996, PCA diversified its retail partnerships, and sales through the
retail distribution channel reflect this strategy. Sales through U.S. Kmart
portrait studios were $135.1 million, or 86.5% of total sales; and Wal-Mart
portrait studio sales, both international and domestic, were $6.6 million, or
4.2% of sales. PCA's Institutional Division and pet portrait pilot program
provided an aggregate of $13.3 million, or 8.5% of sales. In 1995, U.S. Kmart
studios provided sales of $130.6 million, or 90.2% of sales; and PCA's pet
portrait pilot and Institutional sales provided sales of $7.5 million, or 5.2%
of sales.

         Total operating costs and expenses increased 10.2%, before the fourth
quarter charge of $6.0 million to close underperforming portrait studios, and
accounted for 92.8% of sales compared to 90.8% of sales in 1995. Advertising and
promotional costs as a percentage of sales were 10.4%, versus 10.2% in 1995.
Cost of photographic sales increased $4.9 million, or 10.3%, to 33.7% of sales
in 1996, compared to 32.9% of sales in 1995, due principally to the increase in
customers photographed. Store commission and selling costs increased to 32.3% of
sales, compared to 31.2% the prior year. Labor costs associated with the pilot
pet portrait program and staffing requirements to operate more seven-day studios
in discount store permanent studios caused the increase in direct selling cost.

         General and administrative expense levels before the fourth quarter
charge were 16.4% of sales for 1996, similar to prior year's level. The Company
recorded a pretax charge of $6.0 million for the closing of 401 portrait studios
which were not meeting the Company's profitability objectives. This charge
includes the write-off of leasehold improvements and other fixed assets in these
stores, separation pay, cost to restore the studios to the same condition they
were in prior to the Company installing the portrait studio, and customer
refunds.

         Income from operations, before the charge to close 401 portrait
studios, declined to 7.2% of sales from 9.2% of sales in 1995, a direct result
of the investment spending initiatives to pursue the Company's diversification
objectives. The costs associated with the pilot pet portrait 



                                       11
<PAGE>   13

expansion, the Wal-Mart expansion, and overall costs to support the
diversification activities were the principal reasons for the operating margin
decline.

         Pretax income declined 60.1% to $5.1 million, compared to $12.9 million
in 1995. This pretax figure includes the $6.0 million charge for studio closure
costs noted above. Net interest expense declined 60.9% due to repayment of
borrowings to fund the Company's repurchase of over $7.7 million of stock in
1995. Income tax provision for 1996 was $2.1 million as compared to $5.2 million
in 1995. The tax provision as a percentage of income was 41.7% versus 40.8% in
1995. The increase in effective tax rate was generally attributable to losses in
the pet portraiture pilot operation which did not generate state tax benefits.
Net income in 1996 was $3.0 million, or $0.38 per diluted share, including the
previously mentioned charge, which reduced per share earnings by $0.46, compared
to $7.6 million, or $0.96 per diluted share in 1995. Excluding the charge, net
income was $6.6 million or $0.84 per diluted share.

LIQUIDITY AND CAPITAL RESOURCES

        Cash flow, defined as earnings before interest, taxes, depreciation and
amortization ("EBITDA"), was $38.3 million in fiscal 1997, up from $14.8 million
in fiscal 1996. The increase was primarily due to the realization of significant
cost savings and positive operating leverage resulting from the integration of
American Studios, elimination of underperforming operations, and improved
profitability of the Company's portrait studio operations. After funding capital
expenditures of $12.1 million in fiscal 1997, operating cash flow provided an
excess of $26.1 million. This enabled the Company to reduce long-term borrowings
and pay dividends. At February 1, 1998, the Company had $12.3 million in cash
and cash equivalents, $4.3 million in short-term borrowings and letters of
credit, and $20.7 million available under its revolving credit facility. The
Company had $51.0 million debt outstanding from its senior term loan which
compares to $58.7 million debt outstanding one year earlier. The terms of the
senior term loan and the revolving credit facility were amended on September 15,
1997 to reduce the applicable margin up to 0.75% from the range of 0.75% to 2.5%
in the original loan agreement.

        During fiscal 1997, the Company had property additions of $12.1 million,
principally for materials and equipment for the addition of new permanent
studios in Wal-Mart and Kmart, the upgrading of certain processing equipment in
the Company's two lab and processing facilities, and new computing equipment in
the corporate office.

        Shareholders' equity increased by $11.0 million to $44.7 million. Net
income was $8.7 million and dividends paid totaled $1.6 million. Exercised stock
options contributed $4.2 million to shareholders' equity.

        Capital expenditures for 1998 are estimated to be approximately $13.0
million, and will be financed from operations augmented by borrowing under the
Company's credit facility. The Company believes, based on its short- and
long-term business plans, that it has the ability to fund adequately from
operations, augmented by borrowings under its line of credit for seasonal credit
needs, its operating and capital expenditure needs for fiscal 1998 and the
foreseeable future. The Company currently expects that cash flow from operations
will exceed future capital expenditures in 1998. Any excess cash flows generated
may be used to make prudent repayment of debt, purchase Company stock, pay
dividends or for other investing or financing needs, provided that conditions
are met in the restrictive covenants set forth in the credit agreement with
NationsBank, N.A., as Agent.

                                       12
<PAGE>   14

YEAR 2000 ISSUES

         During 1997, the Company upgraded its mainframe computer hardware to a
version that will be vendor supported into the new millennium. The Company has
initiated plans to correct programming code in existing computer software
applications as the year 2000 approaches. The Company will utilize both internal
and external resources to reprogram Company-developed applications, install
up-to-date releases of purchased systems, and test all systems for year 2000
compliance. The Company continues to evaluate its various systems to determine
the most cost-effective corrective action which could include replacement of
certain systems. The Company currently believes that reprogramming will be
completed by the first quarter of 1999. The cost to correct year 2000 program
code is expected to be $0.8 to $1.2 million and will be expensed over the next
two years.

PROSPECTIVE INFORMATION

         Note regarding Private Securities Litigation Reform Act: Statements 
made by the Company which are not historical facts are forward-looking
statements that involve risks and uncertainties. Actual results could differ
materially from those expressed or implied in forward-looking statements. All
such forward-looking statements are subject to the safe harbor created by the
Private Securities Litigation Reform Act of 1995. Important factors that could
cause financial performance to differ materially from past results and from
those expressed or implied in this document include, without limitation, the
risks of acquisition of businesses (including limited knowledge of the
businesses acquired and misrepresentations by sellers), new store openings,
availability of financing, competition, management's ability to manage growth,
loss of customers, and a variety of other factors.

INFLATION

         Over the past few years, inflation has not had a significant impact on
the Company's financial condition or results of operations.

COMPREHENSIVE INCOME

         In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, Reporting Comprehensive Income. SFAS No. 130 requires the reporting of
comprehensive income in financial statements by all entities that provide a full
set of financial statements. The Statement is effective for fiscal years
beginning after December 15, 1997. Management of the Company does not expect
that the adoption of SFAS No. 130 will have a material impact on the Company's
financial position or results of operation.

SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

         In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information. SFAS
No. 131 requires disclosures of and provides accounting guidance for reporting
information about operating segments in annual financial statements. The
Statement is effective for fiscal years beginning after December 15, 1997.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The information required by this item is submitted beginning on 
page F-1 of this report.

                                       13
<PAGE>   15

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

         None.


                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Information required by this item will be contained in the Registrant's
definitive proxy statement relating to its Annual Meeting of Shareholders to be
held on May 27, 1998 under the caption "Election of Directors."

ITEM 11. EXECUTIVE COMPENSATION

         Information required by this Plan will be contained in the Registrant's
definitive proxy statement relating to its Annual Meeting of Shareholders to be
held on May 27, 1998 under the captions "Directors' Remuneration; Attendance"
and "Executive Compensation" (excluding the five-year comparison of cumulative
total shareholder returns).

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information required by this item will be contained in the Registrant's
definitive proxy statement relating to the Annual Meeting of Shareholders to be
held on May 27, 1998 under the caption "Stock Ownership of Certain Beneficial
Owners" and "Stock Ownership of Directors and Executive Officers."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information required by this item will be contained in the Registrant's
definitive proxy statement relating to its Annual Meeting of Shareholders to be
held on May 27, 1998 under the caption "Certain Relationships and Related
Transactions."


                                     PART IV

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

(a) The following documents are filed as part of this report:

       1 & 2.     The financial statements and schedules required by this Item 
                  can be found as indexed on Page F-1 following page 18.
       3.         Exhibits shown by index beginning on page 15.

(b) Reports on Form 8-K.

       None



                                       14
<PAGE>   16




                                  EXHIBIT INDEX
                             PCA INTERNATIONAL, INC.
                                Index to Exhibits

<TABLE>
<CAPTION>
     Index No.                      Description                                               Page No.
     ---------                      -----------                                               --------

     <S>         <C>    
        3(a)     Restated Charter, as amended to date, incorporated by reference
                 to Exhibit 4(b) to the Company's Registration Statement on Form
                 S-2, Commission File No. 33-50738, dated August 12, 1992.

        3(b)     Bylaws of PCA International, Inc. as amended to date,
                 incorporated by reference to Exhibit 3.4 to the Company's
                 Quarterly Report on Form 10-Q, Commission File No. 0-8550, for
                 the quarter ended May 3, 1992.

        4        Instruments defining the rights of security holders,
                 incorporated by reference to Exhibit 4 to the Company's
                 Quarterly Report on Form 10-Q, Commission File No. 0-8550, for
                 the quarter ended May 3, 1992.

       10(a)     License Agreement dated July 29, 1992, between Wal-Mart 
                 Corporation and American Studios, Inc., incorporated by
                 reference to Exhibit 10.1 to American Studios, Inc. 1992 Form 
                 S-1 (Registration No. 33-58958).

       10(b)     License Agreement dated May 10, 1996, between Kmart Corporation
                 and PCA International, Inc., incorporated by reference to
                 Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q
                 for the quarter ended April 28, 1996.

       10(d)*    The 1990 Non-Qualified Stock Option Plan, incorporated by
                 reference to Exhibit 4 to the Company's Registration
                 Statement on Form S-8 (Registration No. 33-36793).

       10(e)*    The 1992 Non-Qualified Stock Option Plan, as amended, 
                 incorporated by reference to Exhibit 4 to the Company's
                 Registration Statement on Form S-8 (Registration No. 33-51458).

       10(f)     Loan Agreement dated January 27, 1997, between PCA
                 International, Inc., PCA Photo Corporation of Canada, Inc., PCA
                 Specialty Retail Photo Corporation, Inc., Photo Corporation of
                 America, PCA National, Inc., ASI Acquisition Corp., and
                 NationsBank, N.A., as Agent, incorporated by reference to the
                 Company's Schedule 14D-1 and Schedule 13-D, Amendment No. 3,
                 dated January 27, 1997.

       10(g)     Loan Agreement dated February 28, 1997, between PCA
                 International, Inc., PCA Photo Corporation of Canada, Inc., PCA
                 Specialty Retail Photo Corporation, Inc., Photo Corporation of
                 America, PCA National, Inc., ASI Acquisition Corp., and
                 NationsBank, N.A., as Agent, incorporated by reference to
                 Exhibit 10(g) to the Company's Annual Report on Form 10-K for
                 the year ended February 2, 1997.

       10(i)     Merger Agreement dated December 17, 1996, between PCA
                 International, Inc., ASI Acquisition Corp., and American
                 Studios, Inc., incorporated by reference to the Company's Form
                 8-K dated January 23, 1997.

       10(j)*    1996 Omnibus Long-Term Compensation Plan, incorporated by 
                 reference to Exhibit 10(j) to the Company's Quarterly
                 Report on Form 10-Q for the quarter ended April 28, 1996.
</TABLE>

                                       15
<PAGE>   17

                             PCA INTERNATIONAL, INC.
                                Index to Exhibits

<TABLE>
<CAPTION>
     Index No.                      Description                                               Page No.
     ---------                      -----------                                               --------

     <S>         <C>    
       10(l)*    Employment and Noncompete Agreement dated December 17, 1996,
                 between Randy J. Bates and PCA International, Inc.,
                 incorporated by reference to Exhibit 10(l) to the Company's
                 Annual Report on Form 10-K for the year ended February 2, 1997.

       10(m)*    Employment and Noncompete Agreement dated December 17, 1996,
                 between Robert Kent Smith and PCA International, Inc.,
                 incorporated by reference to Exhibit 10(m) to the Company's
                 Annual Report on Form 10-K for the year ended February 2, 1997.

       10(n)*    Employment and Noncompete Agreement dated December 17, 1996,
                 between J. Robert Wren, Jr., and PCA International, Inc.,
                 incorporated by reference to Exhibit 10(n) to the Company's
                 Annual Report on Form 10-K for the year ended February 2, 1997.

       10(o)*    Employment and Noncompete Agreement dated June 9, 1997, between
                 John Grosso and PCA International, Inc., incorporated by
                 reference to Exhibit 10(o) to the Company's Quarterly Report on
                 Form 10-Q for the quarter ended August 3, 1997.

       10(p)*    Employment and Noncompete Agreement dated June 9, 1997, between
                 Eric Jeltrup and PCA International, Inc., incorporated by
                 reference to Exhibit 10(p) to the Company's Quarterly Report on
                 Form 10-Q for the quarter ended August 3, 1997.

       10(q)*    Employment and Noncompete Agreement dated June 9, 1997, between
                 Bruce Fisher and PCA International, Inc., incorporated by
                 reference to Exhibit 10(q) to the Company's Quarterly Report on
                 Form 10-Q for the quarter ended August 3, 1997.

       10(r)     Sales contract dated August 1, 1997, between PCA International,
                 Inc., and Agfa Division of Bayer Corporation, incorporated by
                 reference to Exhibit 10(r) to the Company's Quarterly Report on
                 Form 10-Q for the quarter ended November 2, 1997.

       23        Consent of KPMG Peat Marwick LLP.

       27        Financial Data Schedule.
</TABLE>


           * Management contract or compensatory plan or arrangement required 
             to be filed as an exhibit.




                                       16
<PAGE>   18

                                   SIGNATURES


        Pursuant to the requirements of Section 13 or 15(d) 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.


                                             PCA INTERNATIONAL, INC.



Date:  April 9, 1998                         By: /s/ Joseph H. Reich
                                                 -------------------------------
                                             Joseph H. Reich
                                             Chairman of the Board




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

<TABLE>
<CAPTION>
Signature                       Title                           Date
---------                       -----                           ----


<S>                             <C>                             <C> 
/s/ Joseph H. Reich             Chairman of the Board           April 9, 1998
---------------------------
Joseph H. Reich



/s/ John Grosso                 President, Chief Executive      April 9, 1998
---------------------------     Officer and Director
John Grosso                     



/s/ Eric H. Jeltrup             Executive Vice President        April 9, 1998
---------------------------     Chief Technical Officer
Eric H. Jeltrup                 



/s/ J. Robert Wren Jr.          Executive Vice President        April 9, 1998
---------------------------     General Counsel
J. Robert Wren Jr.              
</TABLE>




                                       17
<PAGE>   19

<TABLE>
<CAPTION>
Signature                          Title                           Date
---------                          -----                           ----


<S>                                <C>                             <C> 

/s/ Bruce A. Fisher                Senior Vice President        April 9, 1998
-----------------------------      Chief Financial Officer
Bruce A. Fisher                    Secretary



/s/ R. Michael Spencer             Senior Vice President        April 9, 1998
-----------------------------      Treasurer
R. Michael Spencer                    



/s/ R. Stuart Dickson              Director                     April 9, 1998
-----------------------------
R. Stuart Dickson



/s/ Peter B. Foreman               Director                     April 9, 1998
-----------------------------
Peter B. Foreman



/s/ George Friedman                Director                     April 9, 1998
-----------------------------
George Friedman



/s/ Donald P. Greenberg            Director                     April 9, 1998
-----------------------------
Donald P. Greenberg



/s/ Bridgette P. Heller            Director                     April 9, 1998
-----------------------------
Bridgette P. Heller



/s/ Charlotte H. Mason             Director                     April 9, 1998
-----------------------------
Charlotte H. Mason



/s/ Albert F. Sloan                Director                     April 9, 1998
-----------------------------
Albert F. Sloan



/s/ Stanley Tulchin                Director                     April 9, 1998
-----------------------------
Stanley Tulchin

</TABLE>


                                       18

<PAGE>   20

                    PCA INTERNATIONAL, INC. AND SUBSIDIARIES
                   Index to Financial Statements and Schedules

<TABLE>
<CAPTION>
                                                                                         Page No.
Financial Statements:                                                                    --------
<S>                                                                                    <C> 

          Independent Auditors' Report.................................................    F-2

          Consolidated Balance Sheets at February 1, 1998 and February 2, 1997.........  F-3-F-4

          Consolidated Statements of Income for Fiscal Years Ended
          February 1, 1998; February 2, 1997; and January 28, 1996.....................    F-5

          Consolidated Statements of Changes in Shareholders' Equity for Fiscal
          Years Ended February 1, 1998; February 2, 1997; and January 28, 1996.........    F-6

          Consolidated Statements of Cash Flows for Fiscal Years Ended
          February 1, 1998; February 2, 1997; and January 28, 1996.....................    F-7

          Notes to Consolidated Financial Statements...................................  F-8-F-22


Schedules:

      II  Valuation and Qualifying Accounts for Fiscal Years Ended
          February 1, 1998; February 2, 1997; and January 28, 1996.....................    S-1


Exhibits:

      21    Subsidiaries of the Registrant
      23    Consent of Independent Auditors
      27.1  Financial Data Schedule 2/1/98
      27.2  Financial Data Schedule 2/2/97

</TABLE>






Financial statements, historical information, and schedules other than those
listed above have been omitted for the reason that they are not required or
because the required information is given in the financial statements or notes
thereto.


                                      F-1
<PAGE>   21

                          Independent Auditors' Report



The Board of Directors and Shareholders
PCA International, Inc.:


We have audited the consolidated financial statements of PCA International, Inc.
and subsidiaries as of February 1, 1998 and February 2, 1997 and for each of the
years in the three-year period ended February 1, 1998, as listed in the
accompanying index. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule as listed in
the accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PCA International,
Inc. and subsidiaries as of February 1, 1998 and February 2, 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended February 1, 1998, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.



                                          /s/ KPMG Peat Marwick LLP
                                          KPMG PEAT MARWICK LLP





Charlotte, North Carolina
March 13, 1998



                                      F-2
<PAGE>   22

                    PCA INTERNATIONAL, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS


                                     ASSETS

<TABLE>
<CAPTION>
                                                         February 1,       February 2,
                                                             1998              1997
                                                         ------------      ------------

<S>                                                      <C>               <C>         
CURRENT ASSETS:
   Cash and cash equivalents ......................      $ 12,289,761      $  1,536,234
   Accounts receivable (net of allowance for
      doubtful accounts of $1,315,666 and
      $867,961):
        Due from licensor stores and customers ....         6,740,560         6,702,335
        Other, including employee advances ........           763,925           602,349
   Inventories ....................................        10,078,719         9,814,682
   Deferred income taxes ..........................         5,827,324         6,853,985
   Prepaid expenses ...............................         1,043,708         1,490,918
                                                         ------------      ------------

        TOTAL CURRENT ASSETS ......................        36,743,997        27,000,503


PROPERTY:
   Land and improvements ..........................         2,305,293         2,443,939
   Building and improvements ......................        12,148,732        12,883,962
   Photographic and sales equipment ...............        57,713,911        61,902,588
   Photographic finishing equipment ...............        15,599,525        18,660,080
   Furniture and equipment ........................        13,872,058        14,188,792
   Transportation equipment .......................           292,593           477,073
   Leasehold improvements .........................        16,050,719        17,935,712
   Construction in progress .......................         1,429,621         1,120,788
                                                         ------------      ------------

      Total .......................................       119,412,452       129,612,934
   Less:  Accumulated depreciation and amortization        64,488,965        71,348,374
                                                         ------------      ------------

      PROPERTY, NET ...............................        54,923,487        58,264,560
                                                         ------------      ------------

   INTANGIBLE ASSETS ..............................        59,733,731        60,256,854

   OTHER ASSETS ...................................         1,899,611         1,139,305
                                                         ------------      ------------

      TOTAL ASSETS ................................      $153,300,826      $146,661,222
                                                         ============      ============
</TABLE>


See notes to consolidated financial statements.


                                      F-3
<PAGE>   23

                    PCA INTERNATIONAL, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS


                      LIABILITIES AND SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                  February 1,        February 2,
                                                                     1998                1997
                                                                 -------------       -------------

<S>                                                              <C>                 <C>        
CURRENT LIABILITIES:
   Current portion long-term debt .........................      $   8,750,000       $        --
   Accounts payable-trade .................................         25,915,285          19,799,067
   Accrued insurance ......................................          4,085,191           2,705,199
   Accrued income taxes ...................................          1,188,859           1,643,816
   Accrued compensation ...................................          6,474,414           5,924,407
   Other accrued liabilities ..............................         10,664,577          15,399,563
                                                                 -------------       -------------

      TOTAL CURRENT LIABILITIES ...........................         57,078,326          45,472,052

   LONG-TERM DEBT .........................................         42,063,857          58,679,770

   DEFERRED INCOME TAXES ..................................          1,738,255                --

   OTHER LIABILITIES ......................................          7,730,964           8,868,660



COMMITMENTS AND CONTINGENCIES:

SHAREHOLDERS' EQUITY:

   Preferred stock, $10.00 par value (authorized--2,000,000
      shares; outstanding--none) ..........................               --                  --
   Common stock, $0.20 par value (authorized--20,000,000
      shares; outstanding--7,901,579 and 7,607,129  shares)          1,580,316           1,521,426
   Additional paid-in capital .............................          9,995,238           5,838,131
   Retained earnings ......................................         33,423,465          26,334,992
   Cumulative foreign currency translation adjustments ....           (309,595)            (53,809)
                                                                 -------------       -------------

      TOTAL SHAREHOLDERS' EQUITY ..........................         44,689,424          33,640,740
                                                                 -------------       -------------

      TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..........      $ 153,300,826       $ 146,661,222
                                                                 =============       =============
</TABLE>


See notes to consolidated financial statements.


                                      F-4
<PAGE>   24

                    PCA INTERNATIONAL, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME


<TABLE>
<CAPTION>
                                                          FOR THE FISCAL YEARS ENDED
                                                ------------------------------------------------
                                                 February 1,      February 2,        January 28,
                                                    1998              1997              1996
                                                ------------      ------------      ------------
<S>                                             <C>               <C>               <C>         
SALES ....................................      $242,899,027      $156,099,050      $144,714,535
COSTS AND EXPENSES:
   Advertising and promotional costs .....        16,661,542        16,163,273        14,784,803
   Costs of photographic sales ...........        85,707,294        52,558,425        47,635,178
   Store commissions and selling costs ...        79,597,084        50,384,753        45,190,783
   General and administrative expenses ...        36,160,218        31,676,471        23,781,509
   Amortization of intangibles ...........         1,909,772              --                --
                                                ------------      ------------      ------------
      Total Costs and Expenses ...........       220,035,910       150,782,922       131,392,273

INCOME FROM OPERATIONS BEFORE INTEREST
   AND INCOME TAXES ......................        22,863,117         5,316,128        13,322,262
   Interest expense, net .................         6,570,945           179,221           458,923
                                                ------------      ------------      ------------

INCOME FROM OPERATIONS BEFORE INCOME TAXES        16,292,172         5,136,907        12,863,339

INCOME TAX PROVISION .....................         7,557,320         2,143,053         5,246,170
                                                ------------      ------------      ------------

NET INCOME ...............................      $  8,734,852      $  2,993,854      $  7,617,169
                                                ============      ============      ============

WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
   Basic .................................         7,779,176         7,522,188         7,632,297
                                                ============      ============      ============
   Diluted ...............................         8,195,108         7,835,613         7,894,656
                                                ============      ============      ============

BASIC AND FULLY DILUTED EARNINGS PER
   COMMON SHARE:
   Basic .................................      $       1.12      $       0.40      $       1.00
                                                ============      ============      ============
   Diluted ...............................      $       1.07      $       0.38      $       0.96
                                                ============      ============      ============

CASH DIVIDENDS PER COMMON SHARE ..........      $       0.21      $       0.21      $       0.28
                                                ============      ============      ============
</TABLE>


See notes to consolidated financial statements.


                                      F-5
<PAGE>   25

                    PCA INTERNATIONAL, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY


                  For the Fiscal Years ended February 1, 1998;
                     February 2, 1997; and January 28, 1996

<TABLE>
<CAPTION>
                                                                      
                                                                                                      Cumulative                 
                                                                                                       Foreign                   
                                         Common Stock              Additional                          Currency                  
                                 -----------------------------      Paid-In          Retained        Translation         Unearned
                                    Shares         Amount           Capital          Earnings        Adjustments       Compensation
                                 -------------  --------------   ---------------  ----------------  ---------------  ---------------

<S>                              <C>            <C>              <C>              <C>               <C>              <C>       
BALANCE, JANUARY 29, 1995:          8,160,171     $ 1,632,035      $ 12,204,069      $ 19,444,035       $ (215,087)      $ (32,597)

   Net income                                                                           7,617,169
   Exercise of stock options           66,200          13,240           415,533
   Dividends                                                                           (2,142,495)
   Acquisition of Company stock      (744,300)       (148,860)       (7,565,092)
   Compensatory stock options                                                                                               23,665
   Canceled compensatory
      stock options                                                      (8,932)                                             8,932
   Foreign currency translation
      adjustment                                                                                           (11,006)
                                 -------------  --------------   ---------------  ----------------  ---------------  --------------


BALANCE, JANUARY 28, 1996:          7,482,071       1,496,415         5,045,578        24,918,709         (226,093)              -

   Net income                                                                           2,993,854
   Exercise of stock options          434,300          86,860         4,372,329
   Dividends                                                                           (1,577,571)
   Acquisition of Company stock      (309,242)        (61,849)       (4,128,776)
   Issuance of warrants to
      purchase common stock                                             549,000
   Foreign currency translation
      adjustment                                                                                           172,284
                                 -------------  --------------   ---------------  ----------------  ---------------  --------------


BALANCE, FEBRUARY 2, 1997:          7,607,129       1,521,426         5,838,131        26,334,992          (53,809)              -

   Net income                                                                           8,734,852
   Exercise of stock options          294,450          58,890         4,157,107
   Dividends                                                                           (1,646,379)
   Foreign currency translation
      adjustment                                                                                          (255,786)
                                 -------------  --------------   ---------------  ----------------  ---------------  --------------

BALANCE, FEBRUARY 1, 1998:          7,901,579     $ 1,580,316       $ 9,995,238      $ 33,423,465       $ (309,595)            $ -
                                 =============  ==============   ===============  ================  ===============  ==============
</TABLE>



See notes to consolidated financial statements.



                                      F-6
<PAGE>   26

                    PCA INTERNATIONAL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                FOR THE FISCAL YEARS ENDED
                                                                     --------------------------------------------------
                                                                     February 1,         February 2,        January 28,
                                                                         1998               1997               1996
                                                                     ------------       ------------       ------------
<S>                                                                  <C>                <C>                <C>         
OPERATING ACTIVITIES:
   Net income .................................................      $  8,734,852       $  2,993,854       $  7,617,169
   Adjustments to reconcile net income to net cash
      provided from operating activities:
        Depreciation and amortization .........................        15,453,159          9,498,315          8,489,754
        Increase (decrease) in allowance for doubtful accounts            449,734           (167,303)           165,140
        Provision for deferred income taxes ...................         2,764,916         (1,421,999)         1,264,649
        Loss on disposal of property ..........................         1,539,689          3,287,772            776,592
        Compensatory stock option expense .....................              --                 --               23,665
        (Increase) decrease in other liabilities ..............        (1,147,285)          (375,932)           177,572
        Increase in other noncurrent assets ...................          (760,306)              (156)           (15,659)
   Changes in operating assets and liabilities:
        (Increase) decrease in accounts receivable ............          (660,510)         1,254,260           (530,433)
        (Increase) decrease in inventories ....................          (268,838)        (4,489,573)           755,065
        Decrease (increase) in prepaid expenses ...............           454,106           (178,505)           122,987
        Increase (decrease) in accounts payable ...............         6,124,980          2,596,851         (2,246,715)
        (Decrease) increase in accrued expenses ...............        (3,150,299)         4,679,050          3,686,168
                                                                     ------------       ------------       ------------
      NET CASH PROVIDED FROM OPERATING ACTIVITIES .............        29,534,198         17,676,634         20,285,954

INVESTING ACTIVITIES:
   Purchase of property .......................................       (12,086,194)       (13,423,544)        (6,309,168)
   Proceeds from sales of fixed assets ........................            16,100             10,151             47,311
   Purchase of Canadian assets ................................              --           (1,201,213)              --
   Purchase of American Studios, Inc. .........................        (1,410,741)       (52,689,671)              --
                                                                     ------------       ------------       ------------

      NET CASH USED IN INVESTING ACTIVITIES ...................       (13,480,835)       (67,304,277)        (6,261,857)

FINANCING ACTIVITIES:
   (Decrease) increase in borrowings ..........................        (7,865,913)        48,334,816           (974,215)
   Exercise of stock options ..................................         4,215,997          4,459,189            428,773
   Acquisition of Company stock ...............................              --           (4,190,625)        (7,713,952)
   Cash dividends .............................................        (1,646,379)        (1,577,571)        (2,142,495)
                                                                     ------------       ------------       ------------
      NET CASH (USED IN) PROVIDED FROM FINANCING
        ACTIVITIES ............................................        (5,296,295)        47,025,809        (10,401,889)
                                                                     ------------       ------------       ------------

      Effect of exchange rate changes on cash .................            (3,541)           223,555            (19,454)
                                                                     ------------       ------------       ------------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..............        10,753,527         (2,378,279)         3,602,754

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..............         1,536,234          3,914,513            311,759
                                                                     ------------       ------------       ------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD ....................      $ 12,289,761       $  1,536,234       $  3,914,513
                                                                     ============       ============       ============

SUPPLEMENTAL CASH FLOW INFORMATION:
   Cash Flow Data:
      Interest paid ...........................................      $  7,749,779       $    173,644       $    364,041
                                                                     ============       ============       ============
      Income taxes paid .......................................      $  2,751,652       $  3,160,160       $  3,059,180
                                                                     ============       ============       ============
   Schedule of Noncash Financing Activities:
      Stock options canceled and unearned compensation credited      $       --         $       --         $      8,932
                                                                     ============       ============       ============
      Warrants issued to purchase common stock ................      $       --         $    549,000       $       --
                                                                     ============       ============       ============
</TABLE>


See notes to consolidated financial statements.


                                      F-7
<PAGE>   27

                    PCA INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998;
                     FEBRUARY 2, 1997; AND JANUARY 28, 1996


1.       Significant Accounting Policies:

         Principles of Consolidation and Concentrations of Credit Risk:

         The consolidated financial statements include the accounts of PCA
         International, Inc. and its subsidiaries (the "Company"), all of which
         are wholly owned. All material intercompany balances and transactions
         have been eliminated in consolidation. The Company's operations in
         Kmart stores accounted for approximately 40.0%, 87.2%, and 94.8% of
         consolidated sales during the fiscal years ended February 1, 1998;
         February 2, 1997; and January 28, 1996, respectively. The license
         agreement with Kmart Corporation was revised and renewed on May 10,
         1996. The license is for the period through May 9, 2001 and may be
         terminated by either party upon 180-days' notice. Operations in
         Wal-Mart stores accounted for approximately 56.2% of consolidated sales
         in the fiscal year ended February 1, 1998, and less than 5% of total
         sales in fiscal years ending in 1997 and 1996. The Company operates its
         U.S. studios in Wal-Mart stores under the terms of the license
         agreement between Wal-Mart and American Studios, Inc. (see note 2).
         Wal-Mart may amend or terminate this agreement at any time at its sole
         discretion. The loss of the license to do business in Kmart or Wal-Mart
         stores would have a materially adverse effect on the Company. Kmart's
         or Wal-Mart's closing of a significant number of discount stores could
         have a material impact on the Company's revenues and could result in a
         write-off of leasehold improvements and furniture and equipment in the
         affected locations. No estimate can be made of the impact to earnings
         if Kmart or Wal-Mart should close a significant number of locations.

         Fiscal Year:

         The Company's fiscal year ends on the Sunday nearest the end of
         January. The fiscal year ended February 2, 1997 was a 53-week year. The
         fiscal years ended January 28, 1996 and February 1, 1998 were 52-week
         years. The Company's fiscal year that will end January 31, 1999 will be
         52 weeks.

         Foreign Currency Transactions:

         Gains and losses on foreign currency transactions are included in the
         determination of net income for the period. The amount of such gain and
         (loss) was ($78,748); $10,940; and $19,474 for the fiscal years ended
         February 1, 1998; February 2, 1997; and January 28, 1996, respectively.

         Cash and Cash Equivalents:

         The Company considers all highly liquid investments with an original
         maturity of three months or less when purchased to be cash equivalents.

         Inventories:

         Inventories are valued at the lower of cost or market, cost being
         determined on the first-in, first-out basis.



                                      F-8
<PAGE>   28

                    PCA INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998;
                     FEBRUARY 2, 1997; AND JANUARY 28, 1996


1.       Significant Accounting Policies (continued):


         Property and Depreciation:

         Property is recorded at cost. Maintenance and repairs are charged to
         expense as incurred; property additions, renewals, and improvements are
         capitalized. When property is retired or otherwise disposed of, the
         related costs and accumulated depreciation are removed from the
         respective accounts and any gain or loss is credited or charged to
         income. A summary of the estimated useful lives used in computing
         depreciation and amortization, principally on the straight-line method,
         is as follows:

                 Land improvements........................      10 to 30 years
                 Building and improvements................      10 to 55 years
                 Leasehold improvements...................       3 to 10 years
                 Photographic and sales equipment.........       3 to 13 years
                 Photographic finishing equipment.........       3 to 15 years
                 Furniture and equipment..................       3 to 10 years
                 Transportation equipment.................       3 years

         Intangible Assets:

         Substantially all intangible assets are amortized over 35 years by the
         straight-line method. The recoverability of intangible assets is
         evaluated by the Company on the basis of undiscounted expected future
         cash flows from the acquired operations before interest for the
         remaining amortization period. If impairment exists, the carrying
         amount of the intangible assets is reduced based on the greater of fair
         value or estimated shortfall of cash flows.

         Photographic Sales and Deferred Costs:

         Digital photographic sales are recorded when portraits are purchased at
         the time of photography. Substantially all of the Company's sales are
         digital.

         Traditional photographic sales are recorded when portraits are
         delivered to studios and sold to customers. Costs relating to portraits
         processed, or in process, but not recorded as sales prior to the fiscal
         year-end, are deferred. Substantially all portraits are subsequently
         delivered and offered for sale to the customer within three weeks.

         Income Taxes:

         Income taxes are accounted for under the asset and liability method.
         Deferred tax assets and liabilities are recognized for the future tax
         consequences attributable to differences between the financial
         statement carrying amounts of existing assets and liabilities and their
         respective tax bases and operating loss and tax credit carryforwards.
         Deferred tax assets and liabilities are measured using enacted tax
         rates expected to apply to taxable income in the years in which those



                                      F-9
<PAGE>   29

                    PCA INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998;
                     FEBRUARY 2, 1997; AND JANUARY 28, 1996


1.       Significant Accounting Policies (continued):


         temporary differences are expected to be recovered or settled. The
         effect on deferred tax assets and liabilities of a change in tax rates
         is recognized in income in the period that includes the enactment date.

         Postretirement Benefits:

         The Company sponsors a postretirement health care plan for retirees and
         certain current employees. The Company measures the cost of its
         obligations based on actuarial assumptions. The cost of this program is
         not funded.

         Fair Value of Financial Instruments:

         The Company is required to disclose in its consolidated financial
         statements the fair value of all financial instruments, including
         assets and liabilities both on- and off-balance sheet, for which it is
         practicable to estimate such fair value. Fair value methods,
         assumptions, and estimates for the Company are as follows:

           --  Cash and cash equivalents, accounts receivable, prepaid expenses,
               short-term borrowings, accounts payable-trade, and accrued
               expenses--the carrying amount approximates fair value because of
               the short maturity of these instruments.

           --  Non-current liabilities--the carrying amount approximates fair
               value because such liabilities consist primarily of actuarially
               determined postretirement liabilities using current market rate
               assumptions and long-term debt at market rates currently offered.

         Costs and Expenses:

         Advertising and promotional costs consist of the direct mail,
         television broadcasting, and print media costs, and the payroll and
         related taxes, benefits and other costs for employees in the
         adult/family market who directly promote and acquire customers, as well
         as the cost of church directories.

         Costs of photographic sales are all the direct and indirect portrait
         production costs: salaries, commissions, payroll taxes, related
         benefits and traveling costs for all photography personnel, as well as
         the recruiting and training costs of these employees. The costs of
         film, accessories, photography equipment depreciation and maintenance,
         supplies, and distribution are also included in this category.

         Store commissions and selling costs include the commissions paid to
         each chain based on a percentage of net sales, salaries, commissions,
         payroll taxes, related benefits and travel costs for all sales
         personnel, and recruiting and training, sales supplies, sales equipment
         depreciation, and related distribution costs.

                                      F-10
<PAGE>   30

                    PCA INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998;
                     FEBRUARY 2, 1997; AND JANUARY 28, 1996


1.       Significant Accounting Policies (continued):


         Research and Development:

         The Company spent $1,311,000; $1,321,000; and $1,033,000 on research
         and development activities during the fiscal years ended February 1,
         1998; February 2, 1997; and January 28, 1996, respectively. Such costs
         are charged to costs of photographic sales as incurred.

         Stock Option Plan:

         Prior to January 28, 1996, the Company accounted for its stock option
         plan in accordance with the provisions of Accounting Principles Board
         (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and
         related interpretations. As such, compensation expense would be
         recorded on the date of grant only if the current market price of the
         underlying stock exceeded the exercise price. On January 29, 1996, the
         Company adopted Statement of Financial Accounting Standards (SFAS) No.
         123, Accounting for Stock-Based Compensation, which permits entities to
         recognize as expense over the vesting period the fair value of all
         stock-based awards on the date of grant. Alternatively, SFAS No. 123
         allows entities to continue to apply the provisions of APB Opinion No.
         25 and provide pro forma net income and pro forma earnings per share
         disclosures for employee stock option grants made in 1995 and future
         years as if the fair-value-based method defined in SFAS No. 123 had
         been applied. The Company has elected to continue to apply provisions
         for APB Opinion No. 25 and provide the pro forma disclosure provisions
         of SFAS No. 123.

         Earnings per Share:

         During fiscal 1997, the Company adopted the provisions of SFAS No. 128,
         Earnings per Share. SFAS No. 128 specifies the computation,
         presentation, and disclosure requirements for earnings per share (EPS).
         Basic EPS is computed by dividing income available to common
         stockholders by the weighted-average number of common shares
         outstanding during the period. Diluted EPS reflects the dilution that
         would occur if securities or other contracts to issue common stock were
         exercised or converted into common stock or resulted in the issuance of
         common stock that then shared in the earnings of the Company. All prior
         period EPS data presented have been restated to conform with the
         Statement's provisions.

         Use of Estimates:

         The preparation of financial statements in conformity with generally
         accepted accounting principles requires management to make estimates
         and assumptions that affect the reported amounts of assets and
         liabilities at the date of the financial statements and the reported
         amounts of revenue and expenses during the reporting period. Actual
         results could differ from those estimates.


                                      F-11
<PAGE>   31

                    PCA INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998;
                     FEBRUARY 2, 1997; AND JANUARY 28, 1996


1.       Significant Accounting Policies (continued):

         Reclassifications:

         Certain reclassifications have been made to the fiscal year 1996
         amounts to conform to the fiscal 1997 presentation.

2.       Acquisition:

         On January 27, 1997, PCA acquired 94.9% of the outstanding common stock
         of American Studios, Inc. ("ASI") for $2.50 a share, or $50,833,770. In
         addition, the Company incurred transaction costs of $1,855,901,
         resulting in an aggregate purchase price of $52,689,671. ASI was based
         in Charlotte, North Carolina, and was engaged in the sale of
         photographic color portraits of children, adults, and families. The
         acquisition was accounted for by the purchase method at February 2,
         1997. Since the acquisition was accounted for at February 2, 1997, the
         results of operations of ASI were not included in PCA's consolidated
         financial statements for the fiscal year ended February 2, 1997. The
         excess of the purchase price over the fair value of the net
         identifiable assets acquired at February 2, 1997 of $59,134,104 has
         been recorded as an intangible asset and is being amortized on a
         straight-line basis over 35 years. During the fiscal year ended
         February 1, 1998, PCA acquired an additional 4.8% of the outstanding
         common stock of ASI for $2.50 a share, or $2,601,968. Intangible asset 
         adjustments resulted in an addition to intangible assets of $1,410,741.

         The following unaudited pro forma financial information presents the
         combined results of operations of the Company and ASI as if the
         acquisition had occurred as of the beginning of fiscal 1996 and 1995,
         after giving effect to certain adjustments, including amortization of
         intangible assets, additional depreciation expense, increased interest
         expense on debt related to the acquisition, acquisition-related costs,
         and related income tax effects. The pro forma financial information
         does not necessarily reflect the results of operations that would have
         occurred had the Company and ASI constituted a single entity during
         such periods.



<TABLE>
<CAPTION>
                                      For the Fiscal Years Ended
                                   ---------------------------------
                                     February 2,        January 28,
                                        1997               1996
                                    (Unaudited)        (Unaudited)
                                   -------------       -------------

<S>                                <C>                 <C>          
         Sales ..............      $ 263,974,050       $ 246,614,535
                                   =============       =============
         Net loss ...........      $    (855,898)      $  (1,168,645)
                                   =============       =============
         Basic loss per share      $       (0.11)      $       (0.15)
                                   =============       =============
</TABLE>




         During fiscal 1996, the Company also purchased certain assets of two
         Canadian companies for $1.2 million. The effect of this acquisition is
         not material to the results of operations of the Company. Such
         acquisitions were accounted for by the purchase method.


                                      F-12
<PAGE>   32

                    PCA INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998;
                     FEBRUARY 2, 1997; AND JANUARY 28, 1996


3.       Debt:

         The Company signed a new credit agreement with NationsBank of North
         Carolina, N.A. ("NationsBank") on February 28, 1997, for $90 million,
         which includes a $65 million senior term loan and a $25 million
         revolving credit facility. The senior term loan and the revolving
         credit facility bear interest at a rate equal to LIBOR plus an
         applicable margin or an Alternate Base Rate plus an applicable margin.
         The credit agreement was amended on September 15, 1997. The amendment
         reduced the applicable margin up to 0.75% from the range of 0.75% to
         2.5% in the original loan agreement. The applicable margin is based on
         a ratio of debt to EBITDA. Aggregate annual maturities for each of the
         five fiscal years subsequent to February 2, 1997 are as follows: $0 in
         1997, $10 million in 1998, $15 million in 1999, $20 million in 2000,
         and $20 million in 2001. The Company prepaid $10 million of the term
         loan on May 29, 1997, and $4 million on January 29, 1998, reducing the
         amount payable in 1998 to $8.5 million and in 2001 to $10 million.

         On February 2, 1997, the Company had available a $75.8 million senior
         tender facility that included a $25 million revolving credit facility.
         The senior tender facility matured on February 28, 1997, upon the
         closing of the merger between the Company's wholly-owned subsidiary, 
         ASI Acquisition Corporation, and American Studios, Inc.

         Borrowings under the agreements are secured by tangible property other
         than property located in portrait studios. Minimum levels of adjusted
         earnings, tangible net worth, an interest coverage ratio, and a fixed
         charge ratio must be maintained in addition to other financial
         covenants. The Company has been in compliance with all financial
         covenants throughout the life of the credit agreement. The amount of
         debt is reduced by 150,000 stock warrants issued to NationsBank to
         purchase common stock of the Company. The warrants expire January 27,
         2002. The amount available under the revolving credit facility is
         reduced by outstanding letters of credit. As of February 1, 1998 and
         February 2, 1997, the Company had letters of credit of $4,300,000 and
         $3,560,750, respectively, for its Workers' Compensation insurance.

         The components of net interest expense (income) were:


<TABLE>
<CAPTION>
                                      For the Fiscal Years Ended
                               --------------------------------------------
                               February 1,      February 2,     January 28,
                                   1998            1997            1996
                               -----------       ---------       ---------
<S>                            <C>               <C>             <C>       
         Interest Income       $  (218,622)      $(225,748)      $(123,865)

         Interest Expense        6,789,567         404,969         582,788
                               -----------       ---------       ---------

         Net ............      $ 6,570,945       $ 179,221       $ 458,923
                               ===========       =========       =========
</TABLE>


                                      F-13
<PAGE>   33

                    PCA INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998;
                     FEBRUARY 2, 1997; AND JANUARY 28, 1996

4.       Income Taxes:

         PCA International, Inc. and its domestic subsidiaries file a
         consolidated federal income tax return. The components of income tax
         expense are as follows:

<TABLE>
<CAPTION>
                                       For the Fiscal Years Ended
                              ----------------------------------------------
                              February 1,       February 2,      January 28,
                                  1998              1997             1996
                              -----------       -----------       ----------
<S>                           <C>               <C>               <C>       
         Current:
             Federal ...      $ 2,491,486       $ 2,824,740       $2,888,851
             State .....          714,587           957,859        1,082,736
                              -----------       -----------       ----------
                                3,206,073         3,782,599        3,971,587
                              -----------       -----------       ----------

         Deferred:
             Federal ...        3,690,903        (1,270,094)       1,178,154
             State .....          660,344          (369,452)          96,429
                              -----------       -----------       ----------
                                4,351,247        (1,639,546)       1,274,583
                              -----------       -----------       ----------

         Total Provision      $ 7,557,320       $ 2,143,053       $5,246,170
                              ===========       ===========       ==========
</TABLE>



         A reconciliation of the amount computed by applying the statutory
         federal income tax rate to income from operations to the consolidated
         income tax provision follows:

<TABLE>
<CAPTION>
                                                                For the Fiscal Years Ended
                                                        ---------------------------------------------
                                                        February 1,     February 2,       January 28,
                                                           1998             1997              1996
                                                        ----------      -----------       -----------
<S>                                                     <C>             <C>               <C>        
         Tax expense at statutory federal rates ..      $5,539,338      $ 1,746,548       $ 4,402,166

         Tax effect of expenses not deductible ...         218,392           71,011            65,338

         State income taxes, net of federal income
             tax benefit .........................         907,454          388,349           766,458

         Tax effect related to foreign subsidiary           73,078           14,200            13,203

         Amortization of goodwill ................         620,107             --                --

         Other ...................................         198,951          (77,055)             (995)
                                                        ----------      -----------       -----------

         Total Provision .........................      $7,557,320      $ 2,143,053       $ 5,246,170
                                                        ==========      ===========       ===========
</TABLE>


                                      F-14
<PAGE>   34

                    PCA INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998;
                     FEBRUARY 2, 1997; AND JANUARY 28, 1996


4.       Income Taxes (continued)


         The tax effects of temporary differences that give rise to significant
         portions of the deferred tax assets and deferred tax liabilities at
         February 1, 1998 and February 2, 1997 are presented below:


<TABLE>
<CAPTION>
                                                                                    February 1,        February 2,
                                                                                        1998               1997
                                                                                    ------------       ------------
<S>                                                                                 <C>                <C>         
         Deferred Tax Assets:

             Current:
                Accounts receivable, principally due to allowance for
                   doubtful accounts .........................................      $    517,963       $    346,360
                Inventory, principally due to obsolescence reserve ...........           235,856            600,155
                Life and health, principally due to adoption of SFAS No. 106 .           339,210            153,696
                Stock options, principally due to compensation element .......           118,379            139,806
                Workers' compensation ........................................         2,811,175          2,414,430
                Reserves, principally due to accrual for financial reporting
                   purposes ..................................................           878,659            942,945
                Studio closure costs, principally due to accrual for financial
                   reporting purposes ........................................            93,426          2,396,400
                                                                                    ------------       ------------
                Gross current deferred tax assets ............................         4,994,668          6,993,792

             Noncurrent:
                Alternative minimum tax and other tax credits ................           832,654            875,538
                Net operating loss carryforward ..............................         2,546,988          2,770,246
                Life and health, principally due to adoption of SFAS No. 106 .         1,009,407          1,154,131
                Intangibles ..................................................         1,888,075            498,892
                                                                                    ------------       ------------
                Gross noncurrent deferred tax assets .........................         6,277,124          5,298,807
                                                                                    ------------       ------------

                Gross deferred tax assets ....................................        11,271,792         12,292,599
                                                                                    ------------       ------------

         Deferred Tax Liabilities:
             Noncurrent:
                Plant and equipment, principally due to differences in
                   depreciation ..............................................        (7,182,724)        (5,296,956)
                                                                                    ------------       ------------

         Net Deferred Tax Assets .............................................      $  4,089,068       $  6,995,643
                                                                                    ============       ============
</TABLE>





         In assessing the ability to realize deferred tax assets, management
         considers whether it is more likely than not that some portion or all
         of the deferred tax assets will not be realized. The


                                      F-15
<PAGE>   35

                    PCA INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998;
                     FEBRUARY 2, 1997; AND JANUARY 28, 1996


4.       Income Taxes (continued)


         ultimate realization of deferred tax assets is dependent upon the
         generation of future taxable income during the periods in which those
         temporary differences become deductible.

         Management considers the scheduled reversal of deferred tax
         liabilities, projected future taxable income, and tax planning
         strategies in making this assessment. Based upon the level of
         historical taxable income and projections for future taxable income
         over the periods in which the deferred tax assets are deductible,
         management believes it is more likely than not the Company will realize
         the benefits of these deductible differences that were available at
         February 1, 1998.

         At February 1, 1998, the Company has federal net operating loss
         carryforwards of approximately $6,062,000 expiring in various amounts
         beginning 2010; however, net operating loss carryforwards may be
         subject to restriction under Section 382 and the separate return
         limitation year rules of the Internal Revenue Code due to the
         acquisition of ASI. Additionally, the Company has minimum tax credit
         carryforwards with indefinite expiration of approximately $786,000.

5.       Other Accrued Liabilities:


<TABLE>
<CAPTION>
                                                                      February 1,      February 2,
                                                                          1998             1997
                                                                       -----------      -----------

<S>                                                                    <C>              <C>        
         Costs accrued to complete church directories ...........      $ 1,043,437      $   992,786

         Accrued taxes other than income ........................        1,175,602        2,377,105

         Accrued expenses .......................................        8,248,176        8,686,672

         Costs to close approximately 400 underperforming studios          197,362        3,343,000
                                                                       -----------      -----------

         Total ..................................................      $10,664,577      $15,399,563
                                                                       ===========      ===========
</TABLE>


                                      F-16
<PAGE>   36

                    PCA INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998;
                     FEBRUARY 2, 1997; AND JANUARY 28, 1996


6.       Employee Benefits:

         The Company has a profit sharing plan with annual contributions by the
         Company as directed by the Board of Directors for all employees who
         meet certain eligibility requirements. For fiscal 1997, the
         contribution was equal to 10% of consolidated income before income
         taxes and profit sharing less expenses associated with the plan.
         Company contributions, net of forfeitures, are as follows:

<TABLE>
<CAPTION>
                                        For the Fiscal Years Ended
                               ----------------------------------------------
                               February 1,       February 2,      January 28,
                                   1998             1997             1996
                               -----------       ---------       -----------
<S>                            <C>               <C>             <C>        
         Contributions ..      $ 1,653,000       $ 421,000       $ 1,429,000

         Forfeitures ....         (146,000)       (212,000)         (172,000)
                               -----------       ---------       -----------

         Net Contribution      $ 1,507,000       $ 209,000       $ 1,257,000
                               ===========       =========       ===========
</TABLE>


         The Company provides health and life insurance benefits to those
         persons already retired on February 1, 1992 and to those employees who
         were 55 years of age with 5 years of service on February 1, 1992. The
         plan provides for annual benefits of $2,000 (single) or $4,000
         (married) toward the purchase of supplemental health care coverage. An
         eligible employee who retires after February 1, 1992 can receive
         benefits after attaining the age of 65.

         The weighted average discount rate used in determining the accumulated
         postretirement benefit obligation was 7% at February 1, 1998; February
         2, 1997; and January 28, 1996. There were no assumptions for trends
         since the Company's obligation was limited to the dollar amounts
         previously stated.

         The Company's net periodic cost of this program, not included in the
         accumulated obligation, including service cost and interest-related
         cost for the most recent three years is:

<TABLE>
<CAPTION>
                                         For the Fiscal Years Ended
                                   ---------------------------------------
                                   February 1,   February 2,   January 28,
                                      1998          1997          1996
                                    --------      --------      --------
<S>                                 <C>           <C>           <C>   
         Service Cost ........      $   --        $   --        $   --

         Interest Related Cost       140,000       140,000       154,000
                                    --------      --------      --------

         Net Periodic Cost ...      $140,000      $140,000      $154,000
                                    ========      ========      ========
</TABLE>


         On February 1, 1998, the accrued cost was $2.5 million, of which
         $250,000 was classified as current liabilities.


                                      F-17
<PAGE>   37

                    PCA INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998;
                     FEBRUARY 2, 1997; AND JANUARY 28, 1996


7.       Commitments and Contingencies:

         The Company is obligated under operating leases with initial or
         remaining noncancelable terms in excess of one year which provide, in
         some instances, for the payment of taxes, insurance, and maintenance.
         The future minimum rental payments are not material.

         Certain of the Company's operating lease agreements have renewal
         options. Rental expense for all operating leases was $296,567;
         $237,923; and $249,444 for the fiscal years ended February 1, 1998;
         February 2, 1997; and January 28, 1996, respectively.

         The Company is involved in various claims and legal actions arising in
         the ordinary course of business. In the opinion of management, the
         ultimate disposition of these matters will not have a materially
         adverse effect on the Company's consolidated financial position,
         results of operations, or liquidity.

8.       Stock Options:

         The 1996 Omnibus Long-Term Compensation Plan (the "1996 Plan") provides
         for the issuance of up to 811,550 shares of the Company's common stock
         (the same number that had been available for issuance under the
         Company's 1990 Non-Qualified Stock Option Plan [the "1990 Plan"] and
         the 1992 Non-Qualified Stock Option Plan [the "1992 Plan"]). The 1996
         Plan replaced and superseded the 1990 Plan and the 1992 Plan, except
         with respect to options and shares of common stock issued and
         outstanding under those plans which will continue to be governed by the
         terms of such plans. The 1996 Plan is designed to give the Board of
         Directors flexibility to adapt the long-term incentive compensation of
         key employees to changing business conditions through a variety of
         long-term incentive awards. Under the 1996 Plan, the Compensation
         Committee may approve the grant of employee Stock Options, Stock
         Appreciation Rights (SARs), Performance Restricted Stock Awards,
         Performance Awards, and performance units ("Awards") to senior level
         employees of the Company. In addition, the 1996 Plan provides for the
         grant of stock options to nonemployee directors upon their election to
         the Board and allows nonemployee directors to elect to take their
         compensation as directors in the form of options. The exercise price
         for stock options and stock Awards may not be less than the fair market
         value of the common stock on the date of grant with terms up to 10
         years. As of February 1, 1998 and February 2, 1997, options for 271,250
         shares and 342,850 shares were available for future grant under the
         1996 Plan, and 287,300 shares and 200,000 shares were exercisable,
         respectively.

         The 1990 Plan provides for the grant of non-qualified stock options to
         key employees and nonemployee directors. As of February 1, 1998;
         February 2, 1997; and January 28, 1996, options for 498,400; 588,450;
         and 403,350 shares, respectively, were exercisable.

         The 1992 Plan provides for the grant of non-qualified stock options to
         key employees and nonemployee directors of the Company. As of February
         1, 1998; February 2, 1997; and January 28, 1996, options for 303,800;
         297,900; and 0 shares, respectively, were exercisable.


                                      F-18
<PAGE>   38

                    PCA INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998;
                     FEBRUARY 2, 1997; AND JANUARY 28, 1996


8.       Stock Options (continued)

         The Company applies APB Opinion No. 25 in accounting for its stock
         option plans and, accordingly, no compensation cost has been recognized
         for its stock options in the financial statements. Had the Company
         determined compensation cost based on the fair value at the grant date
         for its stock options under SFAS No. 123, the Company's net income
         would have been reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                For the Fiscal Years Ended
                                                      -------------------------------------------------
                                                       February 1,       February 2,      January 28,
                                                          1998              1997               1996
                                                      -----------      -------------      -------------
<S>                                                   <C>              <C>                <C>          
         Net income....................As reported    $ 8,734,852      $   2,993,854      $   7,617,169
                                                      ===========      =============      =============
                                       Pro forma      $ 8,365,608      $   2,374,079      $   7,556,540
                                                      ===========      =============      =============

         Basic earnings per share......As reported    $      1.12      $        0.40       $       1.00
                                                      ===========      =============      =============
                                       Pro forma      $      1.08      $        0.32      $        0.99
                                                      ===========      =============      =============

         Diluted earnings per share....As reported    $      1.07      $        0.38      $        0.96
                                                      ===========      =============      =============
                                       Pro forma      $      1.02      $        0.30      $        0.96
                                                      ===========      =============      =============
</TABLE>


         The following table sets forth information regarding the 1990, 1992,
         and 1996 Plans with respect to the exercise, cancellation, expiration,
         and grant of options during the previous three fiscal years:

<TABLE>
<CAPTION>
                                                                    Weighted
                                                   Number of         Average
                                                     Shares       Option Price
                                                   ----------       ------
<S>                                                <C>             <C>      
         Options outstanding January 29, 1995       1,880,550       $   9.49
             Exercised ......................         (66,200)      $   4.49
             Canceled .......................        (109,700)      $  10.70
             Granted ........................         199,800       $  11.25
                                                   ----------
         Options outstanding January 28, 1996       1,904,450       $   9.76
             Exercised ......................        (434,300)      $   7.79
             Canceled .......................         (15,800)      $  10.10
             Expired ........................         (87,000)      $  16.22
             Granted ........................         468,700       $  17.10
                                                   ----------
         Options outstanding February 2, 1997       1,836,050       $  11.80
             Exercised ......................        (294,450)      $  10.86
             Canceled .......................         (72,200)      $  12.71
             Granted ........................          71,600       $  16.87
                                                   ----------
         Options outstanding February 1, 1998       1,541,000       $  12.17
                                                   ==========
</TABLE>


                                      F-19
<PAGE>   39

                    PCA INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998;
                     FEBRUARY 2, 1997; AND JANUARY 28, 1996


8.       Stock Options (continued)


         At February 1, 1998, the range of exercise prices, the weighted average
         exercise price, and the weighted average contractual remaining life of
         options outstanding are as follows:


<TABLE>
<CAPTION>
                                     Options outstanding                        Options exercisable
                      ---------------------------------------------------   ----------------------------
                                            Wgt. avg.         Wgt. avg.                      Wgt. avg.
     Range of             Number            remaining         exercise         Number        exercise
  exercise prices      outstanding      contractual life        price       exercisable        price
--------------------  ---------------   ------------------   ------------   -------------   ------------

<S>                   <C>               <C>                  <C>          <C>               <C>
$  1.67 to $ 4.92          172,400         2.1 years           $  1.68         172,400         $  1.68
$  9.25 to $12.88          685,500         4.0 years           $ 10.46         478,000         $ 10.51
$ 14.12 to $18.50          683,100         5.8 years           $ 16.53         439,100         $ 16.31
                      ------------                                        -------------
$  1.67 to $18.50        1,541,000         5.4 years           $ 12.17       1,089,500         $ 11.45
                      ============                                        =============
                                                                      
</TABLE>


         Options outstanding with exercise price above market price:

<TABLE>
<CAPTION>
                                        FOR THE FISCAL YEARS ENDED
                         ----------------------------------------------------------
                            FEBRUARY 1,          FEBRUARY 2,         JANUARY 28,
                               1998                 1997                1996
                         ------------------    ----------------    ----------------

<S>                      <C>                   <C>                 <C>
Number................            -                     470,200           1,257,700
                         ==================    ================    ================

Price range..........             -               $16.25-$17.12       $10.00-$17.00
                         ==================    ================    ================
</TABLE>


9.       Common Stock:

         On March 20, 1996, the Company's Board of Directors increased the
         number of shares authorized for repurchase by 744,300, bringing the
         total number of shares authorized for repurchase to 1,000,000. During
         fiscal 1996, the Company purchased, in various transactions, 309,242
         shares. The credit agreement dated February 28, 1997 restricts the
         Company from repurchasing any shares of the Company's stock.


                                      F-20
<PAGE>   40

                    PCA INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998;
                     FEBRUARY 2, 1997; AND JANUARY 28, 1996

10.      Earnings Per Share:

         The following table sets forth a reconciliation of the numerators and
         denominators of the basic and diluted EPS computations for the previous
         three fiscal years:

<TABLE>
<CAPTION>
                                                                                  FOR THE FISCAL YEARS ENDED
                                                                          --------------------------------------------
                                                                          FEBRUARY 1,      FEBRUARY 2,     JANUARY 28,
                                                                              1998            1997            1996
                                                                           ----------      ----------      ----------
<S>                                                                        <C>             <C>             <C>       
         BASIC EARNINGS PER COMMON SHARE:

              EARNINGS APPLICABLE TO COMMON STOCK:

                 Net income .........................................      $8,734,852      $2,993,854      $7,617,169
                                                                           ==========      ==========      ==========

                 Weighted average number of common shares ...........       7,779,176       7,522,188       7,632,297
                                                                           ==========      ==========      ==========

                 Basic earnings per common share ....................      $     1.12      $     0.40      $     1.00
                                                                           ==========      ==========      ==========


         DILUTED EARNINGS PER COMMON SHARE:

              EARNINGS APPLICABLE TO COMMON STOCK:

                 Net Income .........................................      $8,734,852      $2,993,854      $7,617,169
                                                                           ==========      ==========      ==========

              COMPUTATION OF DILUTED COMMON SHARES:

                 Weighted average number of common shares outstanding       7,779,176       7,522,188       7,632,297
                 Dilutive effect of stock options ...................         398,784         313,425         262,359
                 Dilutive effect of warrants ........................          17,148            --              --
                                                                           ----------      ----------      ----------
                 Weighted average number of common shares outstanding
                     as adjusted ....................................       8,195,108       7,835,613       7,894,656
                                                                           ==========      ==========      ==========

              DILUTED EARNINGS PER COMMON SHARE:

                 Net income .........................................      $     1.07      $     0.38      $     0.96
                                                                           ==========      ==========      ==========
</TABLE>

                                      F-21
<PAGE>   41

                    PCA INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  FOR THE FISCAL YEARS ENDED FEBRUARY 1, 1998;
                     FEBRUARY 2, 1997; AND JANUARY 28, 1996



11.      Unaudited Quarterly Financial Data:

<TABLE>
<CAPTION>
                                                     For the Fiscal Year Ended February 1, 1998
                                          ----------------------------------------------------------------
                                          February 1,      November 2,        August 3,          May 4,
                                             1998             1997              1997              1997
                                          -----------      -----------      ------------       -----------
<S>                                       <C>              <C>              <C>              <C>        
         Sales .....................      $75,834,923      $61,235,465      $ 47,136,830       $58,691,809

         Gross Profit* .............      $25,569,922      $14,295,372      $  7,376,925       $13,690,889

         Net Income (Loss) .........      $ 7,811,302      $ 1,919,844      $ (1,639,620)      $   643,326

         Basic Earnings Per Common
             Share .................      $      0.99      $      0.24      $      (0.21)      $      0.08

         Diluted Earnings Per Common
             Share .................      $      0.94      $      0.23      $      (0.20)      $      0.08



<CAPTION>
                                                    For the Fiscal Year Ended February 2, 1997
                                          --------------------------------------------------------------
                                          February 2,      October 27,        July 28,        April 28,
                                              1997             1996             1996             1996
                                          -----------      -----------      -----------      -----------
<S>                                       <C>              <C>              <C>              <C>        
         Sales .....................      $51,801,203      $37,093,025      $31,116,836      $36,087,986

         Gross Profit* .............      $15,250,619      $ 7,165,823      $ 5,773,728      $ 8,802,429

         Net Income ................      $   981,667      $   641,112      $   232,297      $ 1,138,778

         Basic Earnings Per Common
             Share .................      $      0.13      $      0.08      $      0.03      $      0.15

         Diluted Earnings Per Common
             Share .................      $      0.12      $      0.08      $      0.03      $      0.15
</TABLE>






* Sales less advertising and promotional costs, costs of photographic sales, and
  store commissions and selling costs.


                                      F-22
<PAGE>   42

                    PCA INTERNATIONAL, INC. AND SUBSIDIARIES


Schedule II.      Valuation and Qualifying Accounts


<TABLE>
<CAPTION>
Column A                                Column B         Column C     Column D         Column E
------------------------------------    -------------    -----------  -----------      ------------
                                        Balance at       Charged to   Write-offs       Balance at
                                        Beginning of     Costs and    Net of           End of
Classification                          Period           Expenses     Recoveries       Period
------------------------------------    -------------    -----------  -----------      ------------

<S>                                      <C>             <C>           <C>             <C>       
FISCAL YEAR ENDED FEBRUARY 1, 1998:

    Allowance for doubtful accounts      $  867,961      $472,805      $ (25,100)      $1,315,666
                                         ==========      ========      =========       ==========

FISCAL YEAR ENDED FEBRUARY 2, 1997:

    Allowance for doubtful accounts      $1,011,350      $129,563      $(272,952)      $  867,961
                                         ==========      ========      =========       ==========

FISCAL YEAR ENDED JANUARY 28, 1996:

    Allowance for doubtful accounts      $  845,843      $193,715      $ (28,208)      $1,011,350
                                         ==========      ========      =========       ==========
</TABLE>


                                       S-1