content: UNITED STATES
                         SECURITIES AND EXCHANGE COMMISSION
                               Washington, D.C. 20549
  
                                      FORM 10-Q
  
                   (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR
                       15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
                    For the quarterly period ended June 30, 1996
  
                                         OR
  
                   ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR
                       15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
                  For the transition period from _______ to _______
  
                           Commission File Number 0-24860
  
                                PIERCING PAGODA, INC.
  
               (Exact Name of Registrant as Specified in its Charter)
  
          Delaware                                               23-1894725
  (State or Other Jurisdiction of                 (I.R.S. Employer Identification
  Incorporation or Organization)                                   Number)
  
             3910 Adler Place
               Bethlehem, PA                                     18017
  (Address of Principal Executive Offices)                     (Zip Code)
  
         Registrant's Telephone Number, Including Area Code: (610) 691-0437
  
                                         N/A
  (Former  Name,  Former  Address and Former  Fiscal Year,  if Changed  Since Last
  Report.)
  
  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 [ ]
  
  The number of shares  outstanding of the registrant's  common stock is 5,254,513
  (as of August 6, 1996)
  
  
  <PAGE>
  
                                PIERCING PAGODA, INC.
  
                                        INDEX
                                                                           PAGE
                                                                          NUMBER
                           PART I - FINANCIAL INFORMATION
  
  Item 1.   Financial Statements
  
            Consolidated balance sheets as of June 30, 1996
            and March 31, 1996                                               3
  
            Consolidated statements of operations for the
            three months ended June 30, 1996 and 1995                        4
  
            Consolidated statements of cash flows for the
            three months ended June 30, 1996 and 1995                        5
  
            Notes to Consolidated Financial Statements                       7
  
  
  Item 2.   Management's Discussion and Analysis of Financial
            Condition and Results of Operations                              8
  
  
                             PART II - OTHER INFORMATION
  
  Item 6.   Exhibits and Reports on Form 8-K                                11
  
            Signatures                                                      12
  
                                2
  
  <PAGE>
  
  
  PART I - FINANCIAL INFORMATION
  ITEM 1.  FINANCIAL STATEMENTS
  
                        PIERCING PAGODA, INC. AND SUBSIDIARY
                             CONSOLIDATED BALANCE SHEETS
                          (In thousands, except share data)
  <TABLE>
  <CAPTION>
                                                                          June 30,    March 31,
                                                                            1996        1996
                                                                              (Unaudited)
  <S>                                                                     <C>         <C>    
           Assets    
  Current assets:
       Cash                                                               $ 1,978     $ 1,864
       Accounts receivable                                                    788         794
       Inventory                                                           30,078      25,390
       Deposits for inventory purchases                                     2,297         361
       Prepaid expenses and other current assets                              295         468
       Prepaid income taxes                                                   965         883
       Deferred tax assets                                                    693         693
                                                                          -------     -------
  Total current assets                                                     37,094      30,453
                                                                          -------     -------
  
  Property, fixtures and equipment, net                                    17,570      15,806
  Other assets                                                              1,568       1,647
                                                                          -------     -------
                                                                          $56,232     $47,906
                                                                          =======     =======
  
           Liabilities and Stockholders' Equity
  
  Current liabilities:
       Accounts payable                                                   $ 7,124     $ 1,811
       Current installments of long-term debt and
          revolving line of credit                                          8,910       5,910
       Accrued expenses and taxes withheld                                  6,249       6,784
                                                                          -------     -------
  Total current liabilities                                                22,283      14,505
                                                                          -------     -------
  Long-term debt, less current installments                                 2,718       2,350
  Deferred tax liabilities                                                  1,259       1,259
  Unbilled rent                                                               273         213
                                                                          -------     -------
  Total liabilities                                                        26,533      18,327
                                                                          -------     -------
  
  Commitments and contingencies
  Stockholders' equity:
       Preferred stock, par value $.01 per share,
          authorized 3,000,000 shares. None issued                             --          --
       Common stock, par value $.01 per share, authorized
          15,000,000 shares. Issued 5,240,293 and 5,249,813 shares at
          March 31, 1996 and June 30, 1996, respectively                       53          53
       Additional paid-in capital                                          22,268      22,183
       Retained earnings                                                    7,378       7,343
                                                                          -------     -------
  Total stockholders' equity                                               29,699      29,579
                                                                          -------     -------
                                                                          $56,232     $47,906
                                                                          =======     =======
  </TABLE>
  
       See accompanying notes to consolidated financial statements.
  
                                         3
  
  <PAGE>
  
                        PIERCING PAGODA, INC. AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF OPERATIONS
                        (In thousands, except per share data)
                                     (Unaudited)
  <TABLE>
  <CAPTION>
                                                      Three months ended
                                                          June 30,
                                                      1996        1995
  <S>                                             <C>         <C>    
  Net sales                                         $30,244     $22,375
  Cost of goods sold and occupancy expenses,
       (excluding depreciation on kiosks)            17,463      13,080
                                                    -------     -------
  Gross profit                                       12,781       9,295
  
  Selling, general and administrative expenses,
       (including depreciation on kiosks)            12,421       8,927
                                                    -------     -------
  Income from operations                                360         368
  
  Interest and other income                              60          48
  Interest expense                                      361         140
                                                    -------     -------
  Earnings before income taxes                           59         276
  
  Income tax expense                                     24          11
                                                    -------     -------
  Net income                                        $    35     $   162
                                                    =======     =======
  Earnings per share                                $  0.01     $  0.03
                                                    =======     =======
  
  Weighted average common shares
       and common share equivalents outstanding       5,356       5,271
                                                    =======     =======
  </TABLE>
  
  See accompanying notes to consolidated financial statements.
  
                                         4
  
  <PAGE>
  
                        PIERCING PAGODA, INC. AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (In thousands)
                                     (Unaudited)
  <TABLE>
  <CAPTION>
                                                                    Three months ended
                                                                         June 30,
                                                                     1996        1995
  
  <S>                                                             <C>          <C>    
  Cash flows from operating activities:
       Net income                                                 $    35      $   162
       Adjustments to reconcile net income to net cash
        used in operating activities:
         Depreciation and amortization                                781          520
         Loss on disposal of property, fixtures and equipment          --            5
         Other changes in other assets                                 (9)          19
         Deferred income taxes                                         --          (66)
         Decrease (increase) in assets:
            Accounts receivable                                         6          287
            Inventory                                              (4,688)      (6,803)
            Deposits for inventory purchases                       (1,936)      (3,024)
            Prepaid expenses and other current assets                  73          201
            Prepaid income taxes                                      (82)        (713)
         Increase (decrease) in liabilities:
            Accounts payable                                        5,313        2,691
            Income taxes payable                                       --          (20)
            Accrued expenses and taxes withheld                      (535)         117
            Tax indemnification payable                                --         (826)
            Unbilled rent                                              60            6
                                                                  -------      -------
  Net cash used in operating activities                              (882)      (7,444)
                                                                  -------      -------
  Cash flows from investing activities:
       Additions to property, fixtures and equipment               (2,518)      (1,389)
       Noncurrent deposits, net                                        81         (117)
                                                                  -------      -------
  Net cash used in investing activities                            (2,437)      (1,506)
                                                                  -------      -------
  Cash flows from financing activities:
       Revolving line of credit, net                                2,970        7,625
       Proceeds from issuance of long-term debt                       400           --
       Loan fees paid                                                 (20)          --
       Repayments of long-term debt                                    (2)          --
       Proceeds from issuance of common stock                          85           --
       Cash dividends paid                                             --          (45)
                                                                  -------      -------
  Net cash provided by financing activities                         3,433        7,580
                                                                  -------      -------
  Net increase (decrease) in cash                                     114       (1,370)
  
  Cash at beginning of period                                       1,864        2,320
                                                                  -------      -------
  Cash at end of period                                           $ 1,978      $   950
                                                                  =======      =======
  </TABLE>
  
                                         5
  
  <PAGE>
  
                        PIERCING PAGODA, INC. AND SUBSIDIARY
                  CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                                   (In thousands)
                                     (Unaudited)
  
                                                            Three months ended
                                                                 June 30,
                                                              1996     1995
  
  Supplemental disclosures of cash flow information:
  Cash paid during the period for:
  Interest                                                    $297     $152
                                                              ====     ====
  Income taxes, net                                           $106     $913
                                                              ====     ====
  
  See accompanying notes to consolidated financial statements.
  
                                         6
  
  <PAGE>
  
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
  Note 1 Summary of significant accounting policies
  
       The accompanying consolidated financial statements of Piercing Pagoda, Inc.
       and subsidiary  (the  "Company")  have been prepared in accordance with the
       instructions  to Form 10-Q and do not  include all of the  information  and
       footnotes required by generally accepted accounting principles for complete
       financial statements.  These consolidated  financial statements include the
       results of  operations  for  Piercing  Pagoda,  Inc.  and its wholly  owned
       subsidiary,   a  Delaware  investment  holding  company.  All  intercompany
       transactions  have been  eliminated in  consolidation.  These  consolidated
       financial  statements  should  be read in  conjunction  with the  Company's
       financial  statements  and notes thereto for the year ended March 31, 1996.
       The  financial  information  included  herein is  unaudited;  however,  the
       information reflects all adjustments (consisting solely of normal recurring
       adjustments)  that are, in the opinion of management,  necessary for a fair
       presentation  of the financial  position,  results of operations,  and cash
       flows for the interim periods.
  
       Operating  results for the three month  period  ended June 30, 1996 are not
       necessarily  indicative  of the results that may be expected for the entire
       fiscal year.
  
  Note 2 Property, Fixtures and Equipment
  
       A summary of major classes of property,  fixtures and equipment follows (in
       thousands):
  
                                                       June 30,    March 31,
                                                         1996        1996
  Land                                                 $   688     $   688
  Furniture and fixtures                                 2,221       2,077
  Kiosks                                                15,577      13,908
  Building and improvements                              3,837       3,822
  Computer equipment, software and other equipment       5,820       5,130
                                                       -------     -------
                                                        28,143      25,625
  Less accumulated depreciation and amortization        10,573       9,819
                                                       -------     -------
                                                       $17,570     $15,806
                                                       =======     =======
  
                                         7
  
  <PAGE>
  
  ITEM 2.
  
  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
  CONDITION AND RESULTS OF OPERATIONS
  
  Background
  
       The  Company's  consolidated  net sales are  comprised  primarily  of sales
       generated by the Company's  stores and, to a much lesser extent,  wholesale
       sales  primarily to an  independent  store operator in Florida to which the
       Company  licenses  the use of its  store  name and  concept  (the  "Florida
       Licensee").  Cost of goods sold and occupancy  expenses include the cost of
       merchandise,  rent and occupancy and the cost of preparing  merchandise for
       sale.  Selling,  general  and  administrative  expenses  include  store and
       supervisory  payroll,  corporate overhead and non-occupancy  store expenses
       including depreciation of kiosks.
  
  Results of operations
  
  Three months ended June 30, 1996 and June 30, 1995
  
       Consolidated  net sales  increased $7.8 million,  or 35% from $22.4 million
       for the three  months  ended June 30,  1995 to $30.2  million for the three
       months ended June 30, 1996.  This increase was primarily due to an increase
       in the average  number of stores open for the three  months  ended June 30,
       1996 as  compared  to the  three  months  ended  June  30,  1995 and a $1.2
       million,  or 6%, increase in comparable store net sales. There were a total
       of 535 stores open at June 30, 1996  compared to 401 at June 30,  1995,  an
       increase of 33%. The average  jewelry units sold per store  increased 9% to
       2,500 for the three  months  ended June 30, 1996  compared to 2,300 at June
       30, 1995. The average price per jewelry unit sold was relatively  unchanged
       at $24.52 for the three months  ended June 30, 1996  compared to $24.47 for
       the three months ended June 30, 1995.
  
       Gross profit  increased  $3.5  million,  or 38%,  from $9.3 million for the
       three  months  ended June 30, 1995 to $12.8  million  for the three  months
       ended June 30, 1996. The Company's  gross profit margin  improved  slightly
       from 41.5% for the three  months ended June 30, 1995 to 42.3% for the three
       months  ended June 30,  1996.  The  increase  in gross  profit  dollars was
       attributable primarily to the Company's increase in net sales. The increase
       in the  Company's  gross  profit  margin  reflects a higher gross profit on
       merchandise  sold,  partially  offset by an increase in rent and  occupancy
       expense as a percentage of net sales. Gross profit on merchandise increased
       due to the Company's decision to maintain retail price levels despite lower
       costs for merchandise from vendors. The increase in rent and occupancy as a
       percentage of net sales reflects the impact of newer stores which typically
       have lower net sales in their  earlier  years of operation  compared to the
       Company's  mature stores.  At June 30, 1996,  242, or 45%, of the Company's
       535 stores had been open less than two years.
  
                                         8
  
  <PAGE>
  
       Selling,  general and administrative  expenses  increased $3.5 million,  or
       39%,  from $8.9  million for the three  months ended June 30, 1995 to $12.4
       million for the three months ended June 30,  1996.  As a percentage  of net
       sales,  selling,  general and administrative  expenses increased from 39.9%
       for the three  months  ended  June 30,  1995 to 41.1% for the three  months
       ended June 30, 1996. The increase in dollars was attributable  primarily to
       the  increase  in the  number of stores and the  pre-opening  costs for new
       stores,  as well as  higher  supervisory  and  administrative  expenses  to
       support the current and  expected  growth in stores.  Selling,  general and
       administrative  expenses  increased  as a  percentage  of net  sales due to
       higher expenses  associated with new store growth and an improved incentive
       package for store  personnel  implemented in the third quarter of the prior
       fiscal year.  Depreciation  and  amortization  expense  increased  50% from
       $520,000 for the three months ended June 30, 1995 to $781,000 for the three
       months ended June 30, 1996 due  primarily to capital  expenditures  for new
       stores and the upgrading of kiosks in existing locations.
  
       Interest expense increased  $221,000,  or 158%, from $140,000 for the three
       months  ended June 30, 1995 to $361,000 for the three months ended June 30,
       1996,  and as a percentage of net sales  increased  from 0.6% for the three
       months  ended  June 30,  1995 to 1.2% for the three  months  ended June 30,
       1996. The increase in interest  expense was due primarily to higher average
       balances on the Company's  revolving line of credit agreement,  outstanding
       long-term debt of $2.5 million issued in the  third-quarter  of fiscal 1995
       and an additional  $400,000 of long-term debt issued in the current quarter
       in connection  with the expansion of the Company's  corporate  headquarters
       and distribution facility in the prior fiscal year.
  
       As a result of the foregoing,  the Company's net income decreased $127,000,
       or 78%,  from  $162,000 for the three months ended June 30, 1995 to $35,000
       for the three months ended June 30, 1996.
  
  Liquidity and capital resources
  
       The Company's primary on-going capital requirements are to fund an increase
       in inventory and to fund capital  expenditures  and working capital (mostly
       inventory) for new stores.  The Company's  primary sources of liquidity are
       funds  provided  by  operations,  its  gold  consignment  program  and bank
       borrowings.   Due  to  the  seasonal  nature  of  the  Company's  business,
       outstanding  borrowings under its credit  facilities  generally peak during
       the second and third  fiscal  quarters  as the Company  finances  inventory
       purchases in advance of the holiday shopping season.  At June 30, 1996, the
       Company had outstanding borrowings of $8.7 million under its revolving line
       of credit and $2.9 million of long-term debt outstanding.  In addition, the
       Company  had  consigned  56,000  ounces of gold under its gold  consignment
       program valued at approximately $21.4 million.
  
       Net cash used in  operating  activities  was  $882,000 for the three months
       ended June 30,  1996  compared  to $7.4  million for the same period in the
       prior  year.  Net cash  used in  operating  activities  primarily  reflects
       increases in inventory  and deposits for  merchandise  purchases to support
       newly opened stores and future scheduled store openings.
  
                                         9
  
  <PAGE>
  
       Net cash used in investing  activities  was $2.4  million  during the three
       months ended June 30, 1996 compared to $1.5 million during the three months
       ended  June 30,  1995.  Net cash  used in  investing  activities  primarily
       reflects  the addition of property,  fixtures and  equipment in  connection
       with the opening of new stores.
  
       Net cash  provided by financing  activities  was $3.4 million for the three
       months  ended June 30,  1996  versus $7.6  million  provided  by  financing
       activities  during the three months ended June 30, 1995.  Cash  provided by
       financing  activities during the three months ended June 30, 1996 primarily
       reflects an increase in borrowings  under the Company's  revolving  line of
       credit  agreement  to  support  the  increased  number of stores  currently
       operating and anticipated new store openings. Also, the Company obtained an
       additional  $400,000 long term loan in connection with the expansion of the
       Company's  corporate  headquarters and  distribution  facility in the prior
       fiscal year. The loan requires  monthly  payments of principal and interest
       of  approximately  $4,000  through  June  of 2006  at an  effective  annual
       interest rate of 4.59%.
  
       At June 30,  1996,  the Company had $9.1  million  available to be borrowed
       under its existing  revolving  credit  facility and was in compliance  with
       covenants contained in the revolving credit facility.  The Company believes
       that the expected cash flows from operations, its gold consignment program,
       and bank  borrowings  will be sufficient  to fund the  Company's  currently
       anticipated capital and liquidity needs.
  
  Seasonality
  
       The  Company's  business  is  highly  seasonal.  Due to the  impact  of the
       year-end  holiday shopping  season,  the Company  experiences a substantial
       portion  of its  annual  net sales and  profitability  in its third  fiscal
       quarter (ending December 31st). The Company has generally experienced lower
       net sales in each of the first,  second and fourth  quarters  and lower net
       income or net losses in each of those quarters.
  
       The Company's  results of  operations  may also  fluctuate  from quarter to
       quarter as a result of a variety of factors,  including fluctuations in the
       price of gold or gold consignment rates, the amount and timing of new store
       openings,  the  integration  of such new stores into the  operations of the
       Company  and the net sales  contributed  by new stores.  The  addition of a
       large number of new stores significantly affects results of operations on a
       quarter-to-quarter basis.
  
                                         10
  
  <PAGE>
  
  PART II - OTHER INFORMATION
  
  ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
            None
  
  ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
  
            a)   Exhibits
  
                 3.1  Restated  Certificate  of  Incorporation  of the  Registrant
                      (incorporated   by   reference   to   Exhibit   3.1  to  the
                      Registrant's  Registration  Statement on Form S-1,  File No.
                      33-80200,  initially  filed with the Securities and Exchange
                      Commission on June 14, 1994).
  
                 3.2  Amended and Restated By-Laws of the Registrant (incorporated
                      by reference to Exhibit 3.2 to the Registrant's Registration
                      Statement on Form S-1, File No.  33-80200,  initially  filed
                      with the  Securities  and  Exchange  Commission  on June 14,
                      1994).
  
                 4    Specimen Common Stock Certificate (incorporated by reference
                      to Exhibit 4 to the Registrant's  Registration  Statement on
                      Form  S-1,  File  No.  33-80200,  initially  filed  with the
                      Securities and Exchange Commission on June 14, 1994).
  
                 11   Statement  regarding  computation  of net  income per common
                      share and common share equivalent.
  
            b)   Reports on Form 8K
  
                 During the quarter  ended June 30,  1996,  no reports on Form 8-K
                 were filed.
  
                                         11
  
  <PAGE>
  
  SIGNATURES
  
       Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
       Registrant  has duly  caused  this report to be signed on its behalf by the
       undersigned thereunto duly authorized.
  
  
  
                                                PIERCING PAGODA, INC.
                                                   (Registrant)
  
  
       Date: August 9, 1996                     /s/ John F. Eureyecko
                                                ---------------------------------
                                                John F. Eureyecko
                                                President,
                                                Chief Operating Officer
                                                (Principal Financial Officer)
  
       Date: August 9, 1996                     /s/ Brandon R. Lehman
                                                ---------------------------------
                                                Brandon R. Lehman
                                                Treasurer
                                                (Principal Accounting Officer)
  
  <PAGE>
  
                                  INDEX TO EXHIBITS
  
                                                                     Sequentially
  Exhibit                                                              Numbered
  Number                                                                Page
  
       11   Statement  regarding  computation  of net  income per
            common share and common share equivalent.                    14
  
  
  
                                    13
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text: UNITED STATES
                         SECURITIES AND EXCHANGE COMMISSION
                               Washington, D.C. 20549
  
                                      FORM 10-Q
  
                   (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR
                       15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
                    For the quarterly period ended June 30, 1996
  
                                         OR
  
                   ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR
                       15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
                  For the transition period from _______ to _______
  
                           Commission File Number 0-24860
  
                                PIERCING PAGODA, INC.
  
               (Exact Name of Registrant as Specified in its Charter)
  
          Delaware                                               23-1894725
  (State or Other Jurisdiction of                 (I.R.S. Employer Identification
  Incorporation or Organization)                                   Number)
  
             3910 Adler Place
               Bethlehem, PA                                     18017
  (Address of Principal Executive Offices)                     (Zip Code)
  
         Registrant's Telephone Number, Including Area Code: (610) 691-0437
  
                                         N/A
  (Former  Name,  Former  Address and Former  Fiscal Year,  if Changed  Since Last
  Report.)
  
  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 [ ]
  
  The number of shares  outstanding of the registrant's  common stock is 5,254,513
  (as of August 6, 1996)
  PIERCING PAGODA, INC.
  
                                        INDEX
                                                                           PAGE
                                                                          NUMBER
                           PART I - FINANCIAL INFORMATION
  
  Item 1.   Financial Statements
  
            Consolidated balance sheets as of June 30, 1996
            and March 31, 1996                                               3
  
            Consolidated statements of operations for the
            three months ended June 30, 1996 and 1995                        4
  
            Consolidated statements of cash flows for the
            three months ended June 30, 1996 and 1995                        5
  
            Notes to Consolidated Financial Statements                       7
  
  Item 2.   Management's Discussion and Analysis of Financial
            Condition and Results of Operations                              8
  
                             PART II - OTHER INFORMATION
  
  Item 6.   Exhibits and Reports on Form 8-K                                11
  
            Signatures                                                      12
  
                                2
  PART I - FINANCIAL INFORMATION
  ITEM 1.  FINANCIAL STATEMENTS
  
                        PIERCING PAGODA, INC. AND SUBSIDIARY
                             CONSOLIDATED BALANCE SHEETS
                          (In thousands, except share data)
  June 30,    March 31,
                                                                            1996        1996
                                                                              (Unaudited)
  Assets    
  Current assets:
       Cash                                                               $ 1,978     $ 1,864
       Accounts receivable                                                    788         794
       Inventory                                                           30,078      25,390
       Deposits for inventory purchases                                     2,297         361
       Prepaid expenses and other current assets                              295         468
       Prepaid income taxes                                                   965         883
       Deferred tax assets                                                    693         693
                                                                          -------     -------
  Total current assets                                                     37,094      30,453
                                                                          -------     -------
  
  Property, fixtures and equipment, net                                    17,570      15,806
  Other assets                                                              1,568       1,647
                                                                          -------     -------
                                                                          $56,232     $47,906
                                                                          =======     =======
  
           Liabilities and Stockholders' Equity
  
  Current liabilities:
       Accounts payable                                                   $ 7,124     $ 1,811
       Current installments of long-term debt and
          revolving line of credit                                          8,910       5,910
       Accrued expenses and taxes withheld                                  6,249       6,784
                                                                          -------     -------
  Total current liabilities                                                22,283      14,505
                                                                          -------     -------
  Long-term debt, less current installments                                 2,718       2,350
  Deferred tax liabilities                                                  1,259       1,259
  Unbilled rent                                                               273         213
                                                                          -------     -------
  Total liabilities                                                        26,533      18,327
                                                                          -------     -------
  
  Commitments and contingencies
  Stockholders' equity:
       Preferred stock, par value $.01 per share,
          authorized 3,000,000 shares. None issued                             --          --
       Common stock, par value $.01 per share, authorized
          15,000,000 shares. Issued 5,240,293 and 5,249,813 shares at
          March 31, 1996 and June 30, 1996, respectively                       53          53
       Additional paid-in capital                                          22,268      22,183
       Retained earnings                                                    7,378       7,343
                                                                          -------     -------
  Total stockholders' equity                                               29,699      29,579
                                                                          -------     -------
                                                                          $56,232     $47,906
                                                                          =======     =======
  See accompanying notes to consolidated financial statements.
  
                                         3
  PIERCING PAGODA, INC. AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF OPERATIONS
                        (In thousands, except per share data)
                                     (Unaudited)
  Three months ended
                                                          June 30,
                                                      1996        1995
  Net sales                                         $30,244     $22,375
  Cost of goods sold and occupancy expenses,
       (excluding depreciation on kiosks)            17,463      13,080
                                                    -------     -------
  Gross profit                                       12,781       9,295
  
  Selling, general and administrative expenses,
       (including depreciation on kiosks)            12,421       8,927
                                                    -------     -------
  Income from operations                                360         368
  
  Interest and other income                              60          48
  Interest expense                                      361         140
                                                    -------     -------
  Earnings before income taxes                           59         276
  
  Income tax expense                                     24          11
                                                    -------     -------
  Net income                                        $    35     $   162
                                                    =======     =======
  Earnings per share                                $  0.01     $  0.03
                                                    =======     =======
  
  Weighted average common shares
       and common share equivalents outstanding       5,356       5,271
                                                    =======     =======
  See accompanying notes to consolidated financial statements.
  
                                         4
  PIERCING PAGODA, INC. AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (In thousands)
                                     (Unaudited)
  Three months ended
                                                                         June 30,
                                                                     1996        1995
  Cash flows from operating activities:
       Net income                                                 $    35      $   162
       Adjustments to reconcile net income to net cash
        used in operating activities:
         Depreciation and amortization                                781          520
         Loss on disposal of property, fixtures and equipment          --            5
         Other changes in other assets                                 (9)          19
         Deferred income taxes                                         --          (66)
         Decrease (increase) in assets:
            Accounts receivable                                         6          287
            Inventory                                              (4,688)      (6,803)
            Deposits for inventory purchases                       (1,936)      (3,024)
            Prepaid expenses and other current assets                  73          201
            Prepaid income taxes                                      (82)        (713)
         Increase (decrease) in liabilities:
            Accounts payable                                        5,313        2,691
            Income taxes payable                                       --          (20)
            Accrued expenses and taxes withheld                      (535)         117
            Tax indemnification payable                                --         (826)
            Unbilled rent                                              60            6
                                                                  -------      -------
  Net cash used in operating activities                              (882)      (7,444)
                                                                  -------      -------
  Cash flows from investing activities:
       Additions to property, fixtures and equipment               (2,518)      (1,389)
       Noncurrent deposits, net                                        81         (117)
                                                                  -------      -------
  Net cash used in investing activities                            (2,437)      (1,506)
                                                                  -------      -------
  Cash flows from financing activities:
       Revolving line of credit, net                                2,970        7,625
       Proceeds from issuance of long-term debt                       400           --
       Loan fees paid                                                 (20)          --
       Repayments of long-term debt                                    (2)          --
       Proceeds from issuance of common stock                          85           --
       Cash dividends paid                                             --          (45)
                                                                  -------      -------
  Net cash provided by financing activities                         3,433        7,580
                                                                  -------      -------
  Net increase (decrease) in cash                                     114       (1,370)
  
  Cash at beginning of period                                       1,864        2,320
                                                                  -------      -------
  Cash at end of period                                           $ 1,978      $   950
                                                                  =======      =======
  5
  PIERCING PAGODA, INC. AND SUBSIDIARY
                  CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                                   (In thousands)
                                     (Unaudited)
  
                                                            Three months ended
                                                                 June 30,
                                                              1996     1995
  
  Supplemental disclosures of cash flow information:
  Cash paid during the period for:
  Interest                                                    $297     $152
                                                              ====     ====
  Income taxes, net                                           $106     $913
                                                              ====     ====
  
  See accompanying notes to consolidated financial statements.
  
                                         6
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  
  Note 1 Summary of significant accounting policies
  
       The accompanying consolidated financial statements of Piercing Pagoda, Inc.
       and subsidiary  (the  "Company")  have been prepared in accordance with the
       instructions  to Form 10-Q and do not  include all of the  information  and
       footnotes required by generally accepted accounting principles for complete
       financial statements.  These consolidated  financial statements include the
       results of  operations  for  Piercing  Pagoda,  Inc.  and its wholly  owned
       subsidiary,   a  Delaware  investment  holding  company.  All  intercompany
       transactions  have been  eliminated in  consolidation.  These  consolidated
       financial  statements  should  be read in  conjunction  with the  Company's
       financial  statements  and notes thereto for the year ended March 31, 1996.
       The  financial  information  included  herein is  unaudited;  however,  the
       information reflects all adjustments (consisting solely of normal recurring
       adjustments)  that are, in the opinion of management,  necessary for a fair
       presentation  of the financial  position,  results of operations,  and cash
       flows for the interim periods.
  
       Operating  results for the three month  period  ended June 30, 1996 are not
       necessarily  indicative  of the results that may be expected for the entire
       fiscal year.
  
  Note 2 Property, Fixtures and Equipment
  
       A summary of major classes of property,  fixtures and equipment follows (in
       thousands):
  
                                                       June 30,    March 31,
                                                         1996        1996
  Land                                                 $   688     $   688
  Furniture and fixtures                                 2,221       2,077
  Kiosks                                                15,577      13,908
  Building and improvements                              3,837       3,822
  Computer equipment, software and other equipment       5,820       5,130
                                                       -------     -------
                                                        28,143      25,625
  Less accumulated depreciation and amortization        10,573       9,819
                                                       -------     -------
                                                       $17,570     $15,806
                                                       =======     =======
  
                                         7
  ITEM 2.
  
  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
  CONDITION AND RESULTS OF OPERATIONS
  
  Background
  
       The  Company's  consolidated  net sales are  comprised  primarily  of sales
       generated by the Company's  stores and, to a much lesser extent,  wholesale
       sales  primarily to an  independent  store operator in Florida to which the
       Company  licenses  the use of its  store  name and  concept  (the  "Florida
       Licensee").  Cost of goods sold and occupancy  expenses include the cost of
       merchandise,  rent and occupancy and the cost of preparing  merchandise for
       sale.  Selling,  general  and  administrative  expenses  include  store and
       supervisory  payroll,  corporate overhead and non-occupancy  store expenses
       including depreciation of kiosks.
  
  Results of operations
  
  Three months ended June 30, 1996 and June 30, 1995
  
       Consolidated  net sales  increased $7.8 million,  or 35% from $22.4 million
       for the three  months  ended June 30,  1995 to $30.2  million for the three
       months ended June 30, 1996.  This increase was primarily due to an increase
       in the average  number of stores open for the three  months  ended June 30,
       1996 as  compared  to the  three  months  ended  June  30,  1995 and a $1.2
       million,  or 6%, increase in comparable store net sales. There were a total
       of 535 stores open at June 30, 1996  compared to 401 at June 30,  1995,  an
       increase of 33%. The average  jewelry units sold per store  increased 9% to
       2,500 for the three  months  ended June 30, 1996  compared to 2,300 at June
       30, 1995. The average price per jewelry unit sold was relatively  unchanged
       at $24.52 for the three months  ended June 30, 1996  compared to $24.47 for
       the three months ended June 30, 1995.
  
       Gross profit  increased  $3.5  million,  or 38%,  from $9.3 million for the
       three  months  ended June 30, 1995 to $12.8  million  for the three  months
       ended June 30, 1996. The Company's  gross profit margin  improved  slightly
       from 41.5% for the three  months ended June 30, 1995 to 42.3% for the three
       months  ended June 30,  1996.  The  increase  in gross  profit  dollars was
       attributable primarily to the Company's increase in net sales. The increase
       in the  Company's  gross  profit  margin  reflects a higher gross profit on
       merchandise  sold,  partially  offset by an increase in rent and  occupancy
       expense as a percentage of net sales. Gross profit on merchandise increased
       due to the Company's decision to maintain retail price levels despite lower
       costs for merchandise from vendors. The increase in rent and occupancy as a
       percentage of net sales reflects the impact of newer stores which typically
       have lower net sales in their  earlier  years of operation  compared to the
       Company's  mature stores.  At June 30, 1996,  242, or 45%, of the Company's
       535 stores had been open less than two years.
  
                                         8
  Selling,  general and administrative  expenses  increased $3.5 million,  or
       39%,  from $8.9  million for the three  months ended June 30, 1995 to $12.4
       million for the three months ended June 30,  1996.  As a percentage  of net
       sales,  selling,  general and administrative  expenses increased from 39.9%
       for the three  months  ended  June 30,  1995 to 41.1% for the three  months
       ended June 30, 1996. The increase in dollars was attributable  primarily to
       the  increase  in the  number of stores and the  pre-opening  costs for new
       stores,  as well as  higher  supervisory  and  administrative  expenses  to
       support the current and  expected  growth in stores.  Selling,  general and
       administrative  expenses  increased  as a  percentage  of net  sales due to
       higher expenses  associated with new store growth and an improved incentive
       package for store  personnel  implemented in the third quarter of the prior
       fiscal year.  Depreciation  and  amortization  expense  increased  50% from
       $520,000 for the three months ended June 30, 1995 to $781,000 for the three
       months ended June 30, 1996 due  primarily to capital  expenditures  for new
       stores and the upgrading of kiosks in existing locations.
  
       Interest expense increased  $221,000,  or 158%, from $140,000 for the three
       months  ended June 30, 1995 to $361,000 for the three months ended June 30,
       1996,  and as a percentage of net sales  increased  from 0.6% for the three
       months  ended  June 30,  1995 to 1.2% for the three  months  ended June 30,
       1996. The increase in interest  expense was due primarily to higher average
       balances on the Company's  revolving line of credit agreement,  outstanding
       long-term debt of $2.5 million issued in the  third-quarter  of fiscal 1995
       and an additional  $400,000 of long-term debt issued in the current quarter
       in connection  with the expansion of the Company's  corporate  headquarters
       and distribution facility in the prior fiscal year.
  
       As a result of the foregoing,  the Company's net income decreased $127,000,
       or 78%,  from  $162,000 for the three months ended June 30, 1995 to $35,000
       for the three months ended June 30, 1996.
  
  Liquidity and capital resources
  
       The Company's primary on-going capital requirements are to fund an increase
       in inventory and to fund capital  expenditures  and working capital (mostly
       inventory) for new stores.  The Company's  primary sources of liquidity are
       funds  provided  by  operations,  its  gold  consignment  program  and bank
       borrowings.   Due  to  the  seasonal  nature  of  the  Company's  business,
       outstanding  borrowings under its credit  facilities  generally peak during
       the second and third  fiscal  quarters  as the Company  finances  inventory
       purchases in advance of the holiday shopping season.  At June 30, 1996, the
       Company had outstanding borrowings of $8.7 million under its revolving line
       of credit and $2.9 million of long-term debt outstanding.  In addition, the
       Company  had  consigned  56,000  ounces of gold under its gold  consignment
       program valued at approximately $21.4 million.
  
       Net cash used in  operating  activities  was  $882,000 for the three months
       ended June 30,  1996  compared  to $7.4  million for the same period in the
       prior  year.  Net cash  used in  operating  activities  primarily  reflects
       increases in inventory  and deposits for  merchandise  purchases to support
       newly opened stores and future scheduled store openings.
  
                                         9
  Net cash used in investing  activities  was $2.4  million  during the three
       months ended June 30, 1996 compared to $1.5 million during the three months
       ended  June 30,  1995.  Net cash  used in  investing  activities  primarily
       reflects  the addition of property,  fixtures and  equipment in  connection
       with the opening of new stores.
  
       Net cash  provided by financing  activities  was $3.4 million for the three
       months  ended June 30,  1996  versus $7.6  million  provided  by  financing
       activities  during the three months ended June 30, 1995.  Cash  provided by
       financing  activities during the three months ended June 30, 1996 primarily
       reflects an increase in borrowings  under the Company's  revolving  line of
       credit  agreement  to  support  the  increased  number of stores  currently
       operating and anticipated new store openings. Also, the Company obtained an
       additional  $400,000 long term loan in connection with the expansion of the
       Company's  corporate  headquarters and  distribution  facility in the prior
       fiscal year. The loan requires  monthly  payments of principal and interest
       of  approximately  $4,000  through  June  of 2006  at an  effective  annual
       interest rate of 4.59%.
  
       At June 30,  1996,  the Company had $9.1  million  available to be borrowed
       under its existing  revolving  credit  facility and was in compliance  with
       covenants contained in the revolving credit facility.  The Company believes
       that the expected cash flows from operations, its gold consignment program,
       and bank  borrowings  will be sufficient  to fund the  Company's  currently
       anticipated capital and liquidity needs.
  
  Seasonality
  
       The  Company's  business  is  highly  seasonal.  Due to the  impact  of the
       year-end  holiday shopping  season,  the Company  experiences a substantial
       portion  of its  annual  net sales and  profitability  in its third  fiscal
       quarter (ending December 31st). The Company has generally experienced lower
       net sales in each of the first,  second and fourth  quarters  and lower net
       income or net losses in each of those quarters.
  
       The Company's  results of  operations  may also  fluctuate  from quarter to
       quarter as a result of a variety of factors,  including fluctuations in the
       price of gold or gold consignment rates, the amount and timing of new store
       openings,  the  integration  of such new stores into the  operations of the
       Company  and the net sales  contributed  by new stores.  The  addition of a
       large number of new stores significantly affects results of operations on a
       quarter-to-quarter basis.
  
                                         10
  PART II - OTHER INFORMATION
  
  ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
            None
  
  ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
  
            a)   Exhibits
  
                 3.1  Restated  Certificate  of  Incorporation  of the  Registrant
                      (incorporated   by   reference   to   Exhibit   3.1  to  the
                      Registrant's  Registration  Statement on Form S-1,  File No.
                      33-80200,  initially  filed with the Securities and Exchange
                      Commission on June 14, 1994).
  
                 3.2  Amended and Restated By-Laws of the Registrant (incorporated
                      by reference to Exhibit 3.2 to the Registrant's Registration
                      Statement on Form S-1, File No.  33-80200,  initially  filed
                      with the  Securities  and  Exchange  Commission  on June 14,
                      1994).
  
                 4    Specimen Common Stock Certificate (incorporated by reference
                      to Exhibit 4 to the Registrant's  Registration  Statement on
                      Form  S-1,  File  No.  33-80200,  initially  filed  with the
                      Securities and Exchange Commission on June 14, 1994).
  
                 11   Statement  regarding  computation  of net  income per common
                      share and common share equivalent.
  
            b)   Reports on Form 8K
  
                 During the quarter  ended June 30,  1996,  no reports on Form 8-K
                 were filed.
  
                                         11
  SIGNATURES
  
       Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
       Registrant  has duly  caused  this report to be signed on its behalf by the
       undersigned thereunto duly authorized.
  
                                                PIERCING PAGODA, INC.
                                                   (Registrant)
  
       Date: August 9, 1996                     /s/ John F. Eureyecko
                                                ---------------------------------
                                                John F. Eureyecko
                                                President,
                                                Chief Operating Officer
                                                (Principal Financial Officer)
  
       Date: August 9, 1996                     /s/ Brandon R. Lehman
                                                ---------------------------------
                                                Brandon R. Lehman
                                                Treasurer
                                                (Principal Accounting Officer)
  INDEX TO EXHIBITS
  
                                                                     Sequentially
  Exhibit                                                              Numbered
  Number                                                                Page
  
       11   Statement  regarding  computation  of net  income per
            common share and common share equivalent.                    14
  
                                    13