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 December 31, 1996
  
                                         OR
  
                 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR
                     15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
                   For the transition period from _______ 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
  5,269,898 (as of February 12, 1997)
  
  
  <PAGE>
  
  
                              PIERCING PAGODA, INC.
  
  
                                      INDEX
                                                                              PAGE
                          PART I - FINANCIAL INFORMATION               NUMBER
  
    Item 1.    Financial Statements
  
               Consolidated balance sheets as of
               December 31, 1996 and March 31, 1996                       3
  
               Consolidated statements of operations for the three
               months
               ended December 31, 1996 and 1995 and nine months           4
               ended
               December 31, 1996 and 1995
  
               Consolidated statements of cash flows for the  nine
               months ended December 31, 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 1.    Legal Proceedings                                         12
  
    Item 2.    Changes in Securities                                     12
  
    Item 3.    Defaults Upon Senior Securities                           12
  
    Item 4.    Submission of matters to a vote of security holders       12
  
    Item 5.    Other Information                                         12
  
    Item 6.    Exhibits and reports on Form 8-K                          13
  
               Signatures                                                14
  
                                         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>
                                                         December       March 31,
                                                            31,           1996
                                                           1996
                                                        ------------   ------------
     Assets                                             (Unaudited)
  <S>                                                      <C>          <C>
  Current assets:
     Cash ..............................................   $    4,082   $    1,864
     Accounts receivable ...............................        1,003          794
     Inventory .........................................       41,527       25,390
     Deposits for inventory purchases ..................          560          361
     Prepaid expenses and other current assets .........          313          468
     Prepaid income taxes ..............................         --            883
     Deferred tax assets ...............................        1,090          693
  
                                                           ----------   ----------
  Total current assets .................................       48,575       30,453
  
  Property, fixtures and equipment, net ................       20,774       15,806
  Other assets .........................................        2,731        1,647
  
                                                           ==========   ==========
                                                           $   72,080   $   47,906
                                                           ==========   ==========
     Liabilities and Stockholders' Equity
  
  Current liabilities
     Accounts payable ..................................   $   12,952   $    1,811
     Current installments of long-term debt and ........        1,646        5,910
     revolving line of credit
     Accrued expenses and taxes withheld ...............       11,493        6,784
     Income taxes payable ..............................        3,619         --
  
                                                           ----------   ----------
  Total current liabilities ............................       29,710       14,505
  
  Long-term debt, less current installments ............        2,697        2,350
  Deferred tax liabilities .............................        1,703        1,259
  Unbilled rent ........................................          306          213
  
                                                           ----------   ----------
  Total liabilities ....................................       34,416       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 5,266,798 shares and
        5,240,29 at December 31, 1996 and March 31, 1996,
        respectively ...................................           53           53
     Additional paid-in capital ........................       22,514       22,183
     Retained earnings .................................       15,097        7,343
  
                                                           ----------   ----------
  Total stockholders' equity ...........................       37,664       29,579
                                                           ----------   ----------
                                                           $   72,080   $   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     Nine months ended
                                           December 31,           December 31,
                                       ---------------------   -------------------
                                         1996        1995       1996       1995
                                       ----------  ---------   --------  ---------
  
  <S>                                    <C>        <C>        <C>        <C>
  Net sales ..........................   $ 66,339   $ 49,141   $129,022   $ 94,528
  Cost of goods sold and occupancy
  expenses,(excluding depreciation on
  kiosks) ............................     34,459     25,897     70,645     52,119
                                         --------   --------   --------   --------
  Gross profit .......................     31,880     23,244     58,377     42,409
  
  Selling, general and administrative
  expenses,(including depreciation on
  kiosks)                                  18,477     13,491     44,375     31,946
                                         --------   --------   --------   --------
  Income from operations .............     13,403      9,753     14,002     10,463
  
  Interest and other income ..........        110         66        244        174
  Interest expense ...................        747        535      1,595        986
                                         --------   --------   --------   --------
  Earnings before income taxes .......     12,766      9,284     12,651      9,651
  
  Income tax expense .................      4,942      3,584      4,897      3,744
                                         ========   ========   ========   ========
  Net income .........................   $  7,824   $  5,700   $  7,754   $  5,907
                                         ========   ========   ========   ========
  
  Earnings per share .................   $   1.45   $   1.07   $   1.44   $   1.11
                                         ========   ========   ========   ========
  
  Weighted average common shares and
      common share equivalents .......      5,413      5,350      5,381      5,319
                                         ========   ========   ========   ========
  </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>
                                                            Nine months ended
                                                               December 31,
                                                         -------------------------
                                                            1996          1995
                                                         ------------  -----------
  <S>                                                        <C>         <C>
  Cash flows from operating activities:
    Net income ...........................................   $  7,754    $  5,907
    Adjustments to reconcile net income to net cash
    provided
     by operating activities:
       Depreciation and amortization .....................      2,580       1,913
       Loss on disposal of property, fixtures and
       equipment .........................................         62          30
       Other changes in other assets .....................       (122)       (161)
       Deferred income taxes .............................         47        (110)
       Decrease (increase) in assets:
        Accounts receivable ..............................       (209)        166
        Inventory ........................................    (16,137)    (13,519)
        Deposits for inventory purchases .................       (199)       (682)
        Prepaid expenses and other current assets ........        155        (155)
        Prepaid income taxes .............................        883        --
       Increase (decrease) in liabilities:
        Accounts payable .................................     11,141       6,831
        Accrued expenses and taxes withheld ..............      4,709       4,128
        Tax indemnification payable ......................       --        (1,216)
        Income taxes payable .............................      3,619       1,835
        Unbilled rent ....................................         93          12
  
                                                             --------    --------
  Net cash provided by operating activities ..............     14,376       4,979
  
  Cash flows from investing activities:
    Additions to property, fixtures and equipment ........     (7,546)     (5,551)
    Payments for purchase of business ....................       --          (610)
    Proceeds from disposal of property, fixtures and
    equipment ............................................         19        --
    Noncurrent deposits, net .............................     (1,045)       (111)
  
                                                             --------    --------
  Net cash used in investing activities ..................     (8,572)     (6,272)
  
  Cash flows from financing activities:
    Repayments of long-term debt .........................        (18)       --
    Revolving line of credit, net ........................     (4,299)       --
    Proceeds from issuance of long-term debt .............        400       2,540
    Cash dividends paid ..................................       --           (45)
    Proceeds from issuance of common stock ...............        331        --
  
                                                             --------    --------
  Net cash provided by (used in) financing activities ....     (3,586)      2,495
  
                                                             --------    --------
  Net increase in cash ...................................      2,218       1,202
  
  Cash at beginning of period ............................      1,864       2,320
  
                                                             ========    ========
  Cash at end of period ..................................   $  4,082    $  3,522
                                                             ========    ========
  </TABLE>
  
                                         5
  
  <PAGE>
  
  
  
  
                        PIERCING PAGODA, INC. AND SUBSIDIARY
                  CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                                   (In thousands)
                                     (Unaudited)
  <TABLE>
  <CAPTION>
                                                           Nine months ended
                                                              December 31,
                                                      -------------------------
                                                          1996          1995
                                                      ------------  -----------
  <S>                                                    <C>            <C>
  Supplemental disclosures of cash flow information:
    Cash paid during the period for:
  Interest .................................             $1,464         $  912
                                                         ======         ======
  Income taxes, net ........................             $   62         $2,019
                                                         ======         ======
  </TABLE>
  
  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 a  wholly  owned
       subsidiary.   All  intercompany   transactions   have  been  eliminated  in
       consolidation.  These consolidated  financial  statements should be read in
       conjunction with the Company's  consolidated 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 and nine-month periods ended December
       31, 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):
  <TABLE>
  <CAPTION>
  
                                                            December 31,   March 31,
                                                                 1996         1996
                                                              -------       -------
  <S>                                                         <C>           <C>
  Land ...................................................    $   688       $   688
  Furniture and fixtures .................................      2,588         2,077
  Kiosks .................................................     18,417        13,908
  Building and improvements ..............................      4,018         3,822
  Computer  equipment,  software  and ....................      6,943         5,130
  other equipment
                                                              -------       -------
                                                               32,654        25,625
  Less  accumulated  depreciation and ....................     11,880         9,819
  amortization
                                                              =======       =======
                                                              $20,774       $15,806
                                                              =======       =======
  </TABLE>
  
  Note 3            Purchase of Business
  
       In  December  1996,  the  Company  entered  into an  agreement  to  acquire
       substantially  all the operations of Gemstone Jewelry and Weaver's Gems and
       Minerals ("Gemstone"), an independent kiosk retailer. Gemstone had operated
       approximately 100 kiosk locations as Gemstone's Jewelers,  Gold-N-Gifts and
       Facets of Nature.  The purchase  agreement provides for the payment of $2.0
       million for the kiosk  locations,  leases and store  fixtures.  The Company
       will also acquire all of Gemstone's  inventory,  the cost of which is to be
       determined  based upon a physical  inventory.  The cost of the inventory is
       estimated to be approximately $6.0 million.  In addition,  the Company will
       pay  $60,000  annually  for five  years to the  owner of  Gemstone  under a
       non-competition  agreement.  A $1.0  million  deposit  payment  towards the
       purchase of Gemstone is included in other assets at December 31, 1996.  The
       Company completed the purchase on January 29, 1997.
  
                                         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 December 31, 1996 and 1995
  
       Consolidated net sales increased $17.2 million,  or 35%, from $49.1 million
       for the three months ended December 31, 1995 to $66.3 million for the three
       months ended  December  31, 1996.  This  increase was  primarily  due to an
       increase in the average  number of stores open for the three  months  ended
       December 31, 1996 as compared to the three  months ended  December 31, 1995
       and a $3.9 million,  or 9%, increase in comparable  store net sales.  There
       were a total of 585 stores  open at December  31,  1996  compared to 463 at
       December 31, 1995,  an increase of 26%. The average  jewelry units sold per
       store  increased 13% to 4,500 for the three months ended  December 31, 1996
       compared to 4,000 at December 31, 1995.  The average price per jewelry unit
       sold was relatively unchanged at $25.71 for the three months ended December
       31, 1996 compared to $26.02 for the three months ended December 31, 1995.
  
       Gross profit  increased  $8.7  million,  or 38%, from $23.2 million for the
       three months ended  December 31, 1995 to $31.9 million for the three months
       ended December 31, 1996. The Company's  gross profit margin  increased from
       47.3% for the three months  ended  December 31, 1995 to 48.1% for the three
       months ended  December 31, 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 combined with decreases in rent and occupancy  expenses as
       a percentage of net sales. The increase in merchandise  gross profit is the
       result of lower merchandise  costs to the Company,  while at the same time,
       the Company  maintained  consistent  list prices charged to consumers.  The
       decrease in rent and  occupancy as a percentage  of net sales  reflects the
       fact that  despite the  increase  in net sales,  many stores were below the
       points at which  percentage  rents would have been required.  Additionally,
       relatively fixed common area maintenance,  mall advertising and other costs
       were spread over a higher level of net sales.
  
                                         8
  
  <PAGE>
  
  
       Selling,  general and administrative  expenses  increased $5.0 million,  or
       37%,  from $13.5  million for the three months  ended  December 31, 1995 to
       $18.5 million for the three months ended December 31, 1996. As a percentage
       of net sales, selling,  general and administrative  expenses increased from
       27.5% for the three months  ended  December 31, 1995 to 27.9% for the three
       months ended  December 31, 1996.  The increase in dollars was  attributable
       primarily  to the  increase in the number of stores and 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 a store management bonus program implemented
       during  the  current  fiscal  year  and  higher   administrative   expenses
       associated with new store openings.  Depreciation and amortization  expense
       increased 51% from $622,000 for the three months ended December 31, 1995 to
       $941,000  for the three months  ended  December  31, 1996 due  primarily to
       capital expenditures for new stores and the upgrading of kiosks in existing
       locations.
  
       Interest expense  increased  $212,000,  or 40%, from $535,000 for the three
       months  ended  December  31, 1995 to $747,000  for the three  months  ended
       December  31, 1996,  but was  relatively  unchanged as a percentage  of net
       sales. The increase in interest expense was due primarily to higher average
       balances on the Company's  revolving line of credit agreement,  an increase
       in fees paid under the Company's  gold  consignment  arrangements  due to a
       greater number of ounces consigned and higher gold consignment rates.
  
       As a result of the foregoing,  the Company's net income increased from $5.7
       million for the three  months  ended  December 31, 1995 to $7.8 million for
       the three months ended December 31, 1996.
  
  Nine months ended December 31, 1996 and 1995
  
       Consolidated net sales increased $34.5 million,  or 37%, from $94.5 million
       for the nine months ended  December 31, 1995 to $129.0 million for the nine
       months ended  December  31, 1996.  This  increase was  primarily  due to an
       increase  in the average  number of stores  open for the nine months  ended
       December  31, 1996 as compared to the nine months  ended  December 31, 1995
       and a $6.3 million,  or 8%, increase in comparable  store net sales.  There
       were a total of 585 stores  open at December  31,  1996  compared to 463 at
       December 31, 1995,  an increase of 26%. The average  jewelry units sold per
       store  increased  9% to 9,500 for the nine months  ended  December 31, 1996
       compared to 8,700 for the nine months ended  December 31, 1995. The average
       price per jewelry unit sold was relatively unchanged at $24.63 for the nine
       months ended December 31, 1996 compared to $24.81 for the nine months ended
       December 31, 1995.
  
       Gross profit  increased  $16.0 million,  or 38%, from $42.4 million for the
       nine months ended  December  31, 1995 to $58.4  million for the nine months
       ended  December 31, 1996.  The  Company's  gross  profit  margin  increased
       slightly  from 44.9% for the nine months  ended  December 31, 1995 to 45.3%
       for the nine months ended  December 31, 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 reduction in
       rent and occupancy as a percentage of sales and lower sales to the Florida
  
                                         9
  
  <PAGE>
  
  
       licensee  relative to the total sales of the Company.  The decrease in rent
       and occupancy  expenses as a percentage of net sales resulted from the fact
       that,  despite the increase in net sales, many stores' net sales were still
       below the  points  at which  percentage  rents  would  have been  required.
       Additionally,  relatively fixed common area  maintenance,  mall advertising
       and other  occupancy  charges  were spread over the higher net sales level.
       The decrease in sales to the Florida  licensee had a positive impact on the
       Company's gross margin as these sales  contribute a lower gross margin than
       the Company's own retail sales.
  
       Selling,  general and administrative  expenses increased $12.5 million,  or
       39%,  from $31.9  million for the nine months  ended  December  31, 1995 to
       $44.4 million for the nine months ended  December 31, 1996. As a percentage
       of net sales, selling,  general and administrative  expenses increased from
       33.8% for the nine  months  ended  December  31, 1995 to 34.4% for the nine
       months ended  December 31, 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 openings and a store  management
       bonus program implemented during the current fiscal year.  Depreciation and
       amortization  expense  increased  37% from $1.9 million for the nine months
       ended  December 31, 1995 to $2.6 million for the nine months ended December
       31,  1996 due  primarily  to  capital  expenditures  for new stores and the
       upgrading of kiosks in existing locations.
  
       Interest  expense  increased  $609,000,  or 62%, from $986,000 for the nine
       months  ended  December  31, 1995 to  $1,595,000  for the nine months ended
       December 31, 1996, and as a percentage of net sales increased from 1.0% for
       the nine months  ended  December 31, 1995 to 1.2% for the nine months ended
       December 31, 1996.  The increase in interest  expense was due  primarily to
       higher  average  balances  on  the  Company's   revolving  line  of  credit
       agreement,  an increase in fees paid under the Company's  gold  consignment
       arrangements  due to a greater  number of ounces  consigned and higher gold
       consignment rates.
  
       As a result of the  foregoing,  the  Company's  net income  increased  $1.9
       million,  or 32%, from $5.9 million for the nine months ended  December 31,
       1995 to $7.8 million for the nine months ended December 31, 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 year-end holiday  shopping season.  At December
       31, 1996, the Company had outstanding  borrowings of $1.4 million under its
       revolving
  
                                         10
  
  <PAGE>
  
  
       line of credit and $2.7 million of long-term  debt  outstanding,  excluding
       $225,000  classified as a current liability.  In addition,  the Company had
       consigned 82,000 ounces of gold under its gold  consignment  program valued
       at approximately $30.3 million.
  
       Net cash  provided by operating  activities  was $14.4 million for the nine
       months ended December 31, 1996 compared to $5.0 million for the same period
       in the prior year.  Net cash  provided by  operating  activities  primarily
       reflects  the results of the year-end  holiday  shopping  season,  non-cash
       charges for  depreciation  and amortization as well as increases in current
       liabilities.  These were  partially  offset by  increases  in  inventory to
       support newly opened stores and future scheduled store openings.  A portion
       of the  increase  in  inventory  was in  anticipation  of the  purchase  of
       approximately  100 locations  from  Gemstone.  The Company  entered into an
       agreement to acquire these locations  during the quarter ended December 31,
       1996. The Company completed the purchase on January 29, 1997.
  
       Net cash used in  investing  activities  was $8.6  million  during the nine
       months  ended  December 31, 1996  compared to $6.3 million  during the nine
       months  ended  December 31,  1995.  Net cash used in  investing  activities
       primarily  reflects  the addition of  property,  fixtures and  equipment in
       connection  with the  opening of new stores and an  increase  in  deposits,
       primarily a $1.0 million deposit towards with the purchase of Gemstone.
  
       Net cash used in financing  activities was $3.6 million for the nine months
       ended  December  31,  1996  versus  $2.5  million   provided  by  financing
       activities  during the nine months ended  December  31, 1995.  Cash used in
       financing  activities  during  the nine  months  ended  December  31,  1996
       primarily reflects a reduction in borrowings under the Company's  revolving
       line of credit partially offset by an additional $400,000 long term loan in
       connection with the expansion of the Company's  corporate  headquarters and
       distribution  facility  and  $331,000  provided by  transactions  under the
       Company's employee stock option and employee stock purchase plans.
  
       The Company's  revolving  credit  provides for maximum  borrowings of $60.0
       million  with a cash  advance  sub-limit  of  $36.0  million.  This  credit
       facility  was  amended  on  December  17,  1996 to  extend  the term of the
       agreement to February 28, 1997. At December 31, 1996, the Company had $27.8
       million  available to be borrowed under its then existing  revolving credit
       facility and was in compliance  with covenants  contained in the agreement.
       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.
  
                                         11
  
  <PAGE>
  
  
  
       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.
  
  Forward-Looking Statements
  
       The Private Securities Litigation Reform Act of 1995 provides a safe harbor
       for forward-looking  statements.  A number of the matters and subject areas
       discussed in "Management's  Discussion and Analysis of Financial  Condition
       and Results of  Operations"  are not limited to historical or current facts
       and  deal   with   potential   future   circumstances   and   developments.
       Forward-looking  statements  include those related to the Company's ability
       to fund anticipated capital and liquidity needs. A variety of factors could
       cause the Company's  actual results to differ  materially from the expected
       results expressed in the Company's  forward-looking  statements.  The risks
       and  uncertainties  which may  affect  the  operation  and  results  of the
       Company's  business  include,  but are not  limited  to,  general  economic
       conditions and the impact on discretionary spending in the geographic areas
       where  a  significant   number  of  the   Company's   stores  are  located,
       fluctuations  in the price of gold,  the  Company's  ability to finance its
       gold  merchandise  and  the  cost  of  such  financing,  future  regulation
       regarding ear piercing  activities,  the ability to obtain  favorable store
       locations on  satisfactory  lease terms,  the Company's  ability to finance
       expansion  plans and changes in the  competitive  environment  in which the
       Company operates.
  
  PART II - OTHER INFORMATION
  
  ITEM 1.   LEGAL PROCEEDINGS
  
           There are no material legal proceedings against the Company
  
  ITEM 2.     CHANGES IN SECURITIES
  
           None
  
  ITEM 3.     DEFAULTS UPON SENIOR SECURITIES
  
           None
  
  ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
           None.
  
  ITEM 5.     OTHER INFORMATION
  
           None.
  
  
                                         12
  
  <PAGE>
  
  
  
  ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K
  
        a)    Exhibits
  
  
              10.1  Fifth  Amendment to Third  Amended and  Restated  Loan
                    Agreement  and Twelfth  Replacement  Revolving  Credit
                    Note dated  December 17, 1996  between the  Registrant
                    and Summit Bank.
  
              10.2  Sixth  Amendment And Agreement To Consignment  Agreement dated
                    October 31, 1996  between the  Registrant  and Fleet  Precious
                    Metals Inc.
  
              10.3  Third Amendment to Amended and Restated Consignment  Agreement
                    dated July 26,  1994,  dated  December  26,  1996  between the
                    Registrant and Rhode Island Hospital Trust National Bank.
  
              10.4  Asset  Purchase   Agreement  dated  January  29,  1997
                    Between  Piercing Pagoda,  Inc., EARS, Inc.,  Weaver's
                    Gems and Minerals, Inc. and Gemstone Jewelry, Inc.
  
              11    Statement regarding computation of net income per common share
                    and common share equivalent.
  
              27    Financial Data Schedule.
  
        b)    Reports on Form 8-K
  
              During the quarter  ended  December 31, 1996, no reports on Form 8-K
              were filed.
  
  
                                         13
  
  <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:  February 12, 1997             /s/ John F. Eureyecko
                                            John F. Eureyecko
                                            President,
                                            Chief Operating Officer
                                            (Principal Financial Officer)
  
  
  
       Date:  February 12, 1997             /s/ Brandon R. Lehman
                                            Brandon R. Lehman
                                            Treasurer
                                            (Principal Accounting Officer)
  
  
  
                                         14
  
  <PAGE>
  
  
  
                                INDEX TO EXHIBITS
                                                                      Sequentially
    Exhibit                                                           Numbered
     Number                                                             Page
  
      10.1     Fifth Amendment to Third Amended and Restated Loan
               Agreement and Twelfth Replacement Revolving Credit
               Note dated December 17, 1996 between the Registrant       16
               and Summit Bank.
  
      10.2     Sixth Amendment And Agreement To Consignment
               Agreement dated October 31, 1996 between the
               Registrant and Fleet Precious Metals Inc.                 19
  
      10.3     Third Amendment To Amended And Restated Consignment
               Agreement Dated July 26, 1994 dated December 26,
               1996 between the Registrant and Rhode Island
               Hospital Trust National Bank                              21
  
      10.4     Asset Purchase Agreement dated January 29, 1997
               Between Piercing Pagoda, Inc., EARS, Inc., Weaver's
               Gems and Minerals, Inc. and Gemstone Jewelry, Inc.        22
  
       11      Statement regarding computation of net income per
               common share and common share equivalent                  35
  
       27      Financial Data Schedule                                   36
  
  
                                         15
metadata_documents: [{"type": "10-Q", "sequence": "1", "description": "THIRD QUARTER 10-Q", "secsgml_size_bytes": 39648}]
metadata_filer: {"company-data": {"conformed-name": "PIERCING PAGODA INC", "cik": "0000925544", "assigned-sic": "5944", "irs-number": "231894725", "state-of-incorporation": "DE", "fiscal-year-end": "0331"}, "filing-values": {"form-type": "10-Q", "act": "34", "file-number": "033-80200", "film-number": "97529491"}, "business-address": {"street1": "3910 ADLER PL", "city": "BETHLEHEM", "state": "PA", "zip": "18002-5007", "phone": "6106910437"}, "mail-address": {"street1": "3910 ADLER PL", "city": "BETHLEHEM", "state": "PA", "zip": "18002"}}
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 December 31, 1996
  
                                         OR
  
                 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR
                     15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
                   For the transition period from _______ 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
  5,269,898 (as of February 12, 1997)
  PIERCING PAGODA, INC.
  
                                      INDEX
                                                                              PAGE
                          PART I - FINANCIAL INFORMATION               NUMBER
  
    Item 1.    Financial Statements
  
               Consolidated balance sheets as of
               December 31, 1996 and March 31, 1996                       3
  
               Consolidated statements of operations for the three
               months
               ended December 31, 1996 and 1995 and nine months           4
               ended
               December 31, 1996 and 1995
  
               Consolidated statements of cash flows for the  nine
               months ended December 31, 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 1.    Legal Proceedings                                         12
  
    Item 2.    Changes in Securities                                     12
  
    Item 3.    Defaults Upon Senior Securities                           12
  
    Item 4.    Submission of matters to a vote of security holders       12
  
    Item 5.    Other Information                                         12
  
    Item 6.    Exhibits and reports on Form 8-K                          13
  
               Signatures                                                14
  
                                         2
  PART I - FINANCIAL INFORMATION
  
  ITEM 1. FINANCIAL STATEMENTS
  
                        PIERCING PAGODA, INC. AND SUBSIDIARY
                             CONSOLIDATED BALANCE SHEETS
                          (In thousands, except share data)
  December       March 31,
                                                            31,           1996
                                                           1996
                                                        ------------   ------------
     Assets                                             (Unaudited)
  Current assets:
     Cash ..............................................   $    4,082   $    1,864
     Accounts receivable ...............................        1,003          794
     Inventory .........................................       41,527       25,390
     Deposits for inventory purchases ..................          560          361
     Prepaid expenses and other current assets .........          313          468
     Prepaid income taxes ..............................         --            883
     Deferred tax assets ...............................        1,090          693
  
                                                           ----------   ----------
  Total current assets .................................       48,575       30,453
  
  Property, fixtures and equipment, net ................       20,774       15,806
  Other assets .........................................        2,731        1,647
  
                                                           ==========   ==========
                                                           $   72,080   $   47,906
                                                           ==========   ==========
     Liabilities and Stockholders' Equity
  
  Current liabilities
     Accounts payable ..................................   $   12,952   $    1,811
     Current installments of long-term debt and ........        1,646        5,910
     revolving line of credit
     Accrued expenses and taxes withheld ...............       11,493        6,784
     Income taxes payable ..............................        3,619         --
  
                                                           ----------   ----------
  Total current liabilities ............................       29,710       14,505
  
  Long-term debt, less current installments ............        2,697        2,350
  Deferred tax liabilities .............................        1,703        1,259
  Unbilled rent ........................................          306          213
  
                                                           ----------   ----------
  Total liabilities ....................................       34,416       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 5,266,798 shares and
        5,240,29 at December 31, 1996 and March 31, 1996,
        respectively ...................................           53           53
     Additional paid-in capital ........................       22,514       22,183
     Retained earnings .................................       15,097        7,343
  
                                                           ----------   ----------
  Total stockholders' equity ...........................       37,664       29,579
                                                           ----------   ----------
                                                           $   72,080   $   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     Nine months ended
                                           December 31,           December 31,
                                       ---------------------   -------------------
                                         1996        1995       1996       1995
                                       ----------  ---------   --------  ---------
  Net sales ..........................   $ 66,339   $ 49,141   $129,022   $ 94,528
  Cost of goods sold and occupancy
  expenses,(excluding depreciation on
  kiosks) ............................     34,459     25,897     70,645     52,119
                                         --------   --------   --------   --------
  Gross profit .......................     31,880     23,244     58,377     42,409
  
  Selling, general and administrative
  expenses,(including depreciation on
  kiosks)                                  18,477     13,491     44,375     31,946
                                         --------   --------   --------   --------
  Income from operations .............     13,403      9,753     14,002     10,463
  
  Interest and other income ..........        110         66        244        174
  Interest expense ...................        747        535      1,595        986
                                         --------   --------   --------   --------
  Earnings before income taxes .......     12,766      9,284     12,651      9,651
  
  Income tax expense .................      4,942      3,584      4,897      3,744
                                         ========   ========   ========   ========
  Net income .........................   $  7,824   $  5,700   $  7,754   $  5,907
                                         ========   ========   ========   ========
  
  Earnings per share .................   $   1.45   $   1.07   $   1.44   $   1.11
                                         ========   ========   ========   ========
  
  Weighted average common shares and
      common share equivalents .......      5,413      5,350      5,381      5,319
                                         ========   ========   ========   ========
  See accompanying notes to consolidated financial statements.
  
                                          4
  PIERCING PAGODA, INC. AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (In thousands)
                                     (Unaudited)
  Nine months ended
                                                               December 31,
                                                         -------------------------
                                                            1996          1995
                                                         ------------  -----------
  Cash flows from operating activities:
    Net income ...........................................   $  7,754    $  5,907
    Adjustments to reconcile net income to net cash
    provided
     by operating activities:
       Depreciation and amortization .....................      2,580       1,913
       Loss on disposal of property, fixtures and
       equipment .........................................         62          30
       Other changes in other assets .....................       (122)       (161)
       Deferred income taxes .............................         47        (110)
       Decrease (increase) in assets:
        Accounts receivable ..............................       (209)        166
        Inventory ........................................    (16,137)    (13,519)
        Deposits for inventory purchases .................       (199)       (682)
        Prepaid expenses and other current assets ........        155        (155)
        Prepaid income taxes .............................        883        --
       Increase (decrease) in liabilities:
        Accounts payable .................................     11,141       6,831
        Accrued expenses and taxes withheld ..............      4,709       4,128
        Tax indemnification payable ......................       --        (1,216)
        Income taxes payable .............................      3,619       1,835
        Unbilled rent ....................................         93          12
  
                                                             --------    --------
  Net cash provided by operating activities ..............     14,376       4,979
  
  Cash flows from investing activities:
    Additions to property, fixtures and equipment ........     (7,546)     (5,551)
    Payments for purchase of business ....................       --          (610)
    Proceeds from disposal of property, fixtures and
    equipment ............................................         19        --
    Noncurrent deposits, net .............................     (1,045)       (111)
  
                                                             --------    --------
  Net cash used in investing activities ..................     (8,572)     (6,272)
  
  Cash flows from financing activities:
    Repayments of long-term debt .........................        (18)       --
    Revolving line of credit, net ........................     (4,299)       --
    Proceeds from issuance of long-term debt .............        400       2,540
    Cash dividends paid ..................................       --           (45)
    Proceeds from issuance of common stock ...............        331        --
  
                                                             --------    --------
  Net cash provided by (used in) financing activities ....     (3,586)      2,495
  
                                                             --------    --------
  Net increase in cash ...................................      2,218       1,202
  
  Cash at beginning of period ............................      1,864       2,320
  
                                                             ========    ========
  Cash at end of period ..................................   $  4,082    $  3,522
                                                             ========    ========
  5
  PIERCING PAGODA, INC. AND SUBSIDIARY
                  CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                                   (In thousands)
                                     (Unaudited)
  Nine months ended
                                                              December 31,
                                                      -------------------------
                                                          1996          1995
                                                      ------------  -----------
  Supplemental disclosures of cash flow information:
    Cash paid during the period for:
  Interest .................................             $1,464         $  912
                                                         ======         ======
  Income taxes, net ........................             $   62         $2,019
                                                         ======         ======
  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 a  wholly  owned
       subsidiary.   All  intercompany   transactions   have  been  eliminated  in
       consolidation.  These consolidated  financial  statements should be read in
       conjunction with the Company's  consolidated 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 and nine-month periods ended December
       31, 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):
  December 31,   March 31,
                                                                 1996         1996
                                                              -------       -------
  Land ...................................................    $   688       $   688
  Furniture and fixtures .................................      2,588         2,077
  Kiosks .................................................     18,417        13,908
  Building and improvements ..............................      4,018         3,822
  Computer  equipment,  software  and ....................      6,943         5,130
  other equipment
                                                              -------       -------
                                                               32,654        25,625
  Less  accumulated  depreciation and ....................     11,880         9,819
  amortization
                                                              =======       =======
                                                              $20,774       $15,806
                                                              =======       =======
  Note 3            Purchase of Business
  
       In  December  1996,  the  Company  entered  into an  agreement  to  acquire
       substantially  all the operations of Gemstone Jewelry and Weaver's Gems and
       Minerals ("Gemstone"), an independent kiosk retailer. Gemstone had operated
       approximately 100 kiosk locations as Gemstone's Jewelers,  Gold-N-Gifts and
       Facets of Nature.  The purchase  agreement provides for the payment of $2.0
       million for the kiosk  locations,  leases and store  fixtures.  The Company
       will also acquire all of Gemstone's  inventory,  the cost of which is to be
       determined  based upon a physical  inventory.  The cost of the inventory is
       estimated to be approximately $6.0 million.  In addition,  the Company will
       pay  $60,000  annually  for five  years to the  owner of  Gemstone  under a
       non-competition  agreement.  A $1.0  million  deposit  payment  towards the
       purchase of Gemstone is included in other assets at December 31, 1996.  The
       Company completed the purchase on January 29, 1997.
  
                                         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 December 31, 1996 and 1995
  
       Consolidated net sales increased $17.2 million,  or 35%, from $49.1 million
       for the three months ended December 31, 1995 to $66.3 million for the three
       months ended  December  31, 1996.  This  increase was  primarily  due to an
       increase in the average  number of stores open for the three  months  ended
       December 31, 1996 as compared to the three  months ended  December 31, 1995
       and a $3.9 million,  or 9%, increase in comparable  store net sales.  There
       were a total of 585 stores  open at December  31,  1996  compared to 463 at
       December 31, 1995,  an increase of 26%. The average  jewelry units sold per
       store  increased 13% to 4,500 for the three months ended  December 31, 1996
       compared to 4,000 at December 31, 1995.  The average price per jewelry unit
       sold was relatively unchanged at $25.71 for the three months ended December
       31, 1996 compared to $26.02 for the three months ended December 31, 1995.
  
       Gross profit  increased  $8.7  million,  or 38%, from $23.2 million for the
       three months ended  December 31, 1995 to $31.9 million for the three months
       ended December 31, 1996. The Company's  gross profit margin  increased from
       47.3% for the three months  ended  December 31, 1995 to 48.1% for the three
       months ended  December 31, 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 combined with decreases in rent and occupancy  expenses as
       a percentage of net sales. The increase in merchandise  gross profit is the
       result of lower merchandise  costs to the Company,  while at the same time,
       the Company  maintained  consistent  list prices charged to consumers.  The
       decrease in rent and  occupancy as a percentage  of net sales  reflects the
       fact that  despite the  increase  in net sales,  many stores were below the
       points at which  percentage  rents would have been required.  Additionally,
       relatively fixed common area maintenance,  mall advertising and other costs
       were spread over a higher level of net sales.
  
                                         8
  Selling,  general and administrative  expenses  increased $5.0 million,  or
       37%,  from $13.5  million for the three months  ended  December 31, 1995 to
       $18.5 million for the three months ended December 31, 1996. As a percentage
       of net sales, selling,  general and administrative  expenses increased from
       27.5% for the three months  ended  December 31, 1995 to 27.9% for the three
       months ended  December 31, 1996.  The increase in dollars was  attributable
       primarily  to the  increase in the number of stores and 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 a store management bonus program implemented
       during  the  current  fiscal  year  and  higher   administrative   expenses
       associated with new store openings.  Depreciation and amortization  expense
       increased 51% from $622,000 for the three months ended December 31, 1995 to
       $941,000  for the three months  ended  December  31, 1996 due  primarily to
       capital expenditures for new stores and the upgrading of kiosks in existing
       locations.
  
       Interest expense  increased  $212,000,  or 40%, from $535,000 for the three
       months  ended  December  31, 1995 to $747,000  for the three  months  ended
       December  31, 1996,  but was  relatively  unchanged as a percentage  of net
       sales. The increase in interest expense was due primarily to higher average
       balances on the Company's  revolving line of credit agreement,  an increase
       in fees paid under the Company's  gold  consignment  arrangements  due to a
       greater number of ounces consigned and higher gold consignment rates.
  
       As a result of the foregoing,  the Company's net income increased from $5.7
       million for the three  months  ended  December 31, 1995 to $7.8 million for
       the three months ended December 31, 1996.
  
  Nine months ended December 31, 1996 and 1995
  
       Consolidated net sales increased $34.5 million,  or 37%, from $94.5 million
       for the nine months ended  December 31, 1995 to $129.0 million for the nine
       months ended  December  31, 1996.  This  increase was  primarily  due to an
       increase  in the average  number of stores  open for the nine months  ended
       December  31, 1996 as compared to the nine months  ended  December 31, 1995
       and a $6.3 million,  or 8%, increase in comparable  store net sales.  There
       were a total of 585 stores  open at December  31,  1996  compared to 463 at
       December 31, 1995,  an increase of 26%. The average  jewelry units sold per
       store  increased  9% to 9,500 for the nine months  ended  December 31, 1996
       compared to 8,700 for the nine months ended  December 31, 1995. The average
       price per jewelry unit sold was relatively unchanged at $24.63 for the nine
       months ended December 31, 1996 compared to $24.81 for the nine months ended
       December 31, 1995.
  
       Gross profit  increased  $16.0 million,  or 38%, from $42.4 million for the
       nine months ended  December  31, 1995 to $58.4  million for the nine months
       ended  December 31, 1996.  The  Company's  gross  profit  margin  increased
       slightly  from 44.9% for the nine months  ended  December 31, 1995 to 45.3%
       for the nine months ended  December 31, 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 reduction in
       rent and occupancy as a percentage of sales and lower sales to the Florida
  
                                         9
  licensee  relative to the total sales of the Company.  The decrease in rent
       and occupancy  expenses as a percentage of net sales resulted from the fact
       that,  despite the increase in net sales, many stores' net sales were still
       below the  points  at which  percentage  rents  would  have been  required.
       Additionally,  relatively fixed common area  maintenance,  mall advertising
       and other  occupancy  charges  were spread over the higher net sales level.
       The decrease in sales to the Florida  licensee had a positive impact on the
       Company's gross margin as these sales  contribute a lower gross margin than
       the Company's own retail sales.
  
       Selling,  general and administrative  expenses increased $12.5 million,  or
       39%,  from $31.9  million for the nine months  ended  December  31, 1995 to
       $44.4 million for the nine months ended  December 31, 1996. As a percentage
       of net sales, selling,  general and administrative  expenses increased from
       33.8% for the nine  months  ended  December  31, 1995 to 34.4% for the nine
       months ended  December 31, 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 openings and a store  management
       bonus program implemented during the current fiscal year.  Depreciation and
       amortization  expense  increased  37% from $1.9 million for the nine months
       ended  December 31, 1995 to $2.6 million for the nine months ended December
       31,  1996 due  primarily  to  capital  expenditures  for new stores and the
       upgrading of kiosks in existing locations.
  
       Interest  expense  increased  $609,000,  or 62%, from $986,000 for the nine
       months  ended  December  31, 1995 to  $1,595,000  for the nine months ended
       December 31, 1996, and as a percentage of net sales increased from 1.0% for
       the nine months  ended  December 31, 1995 to 1.2% for the nine months ended
       December 31, 1996.  The increase in interest  expense was due  primarily to
       higher  average  balances  on  the  Company's   revolving  line  of  credit
       agreement,  an increase in fees paid under the Company's  gold  consignment
       arrangements  due to a greater  number of ounces  consigned and higher gold
       consignment rates.
  
       As a result of the  foregoing,  the  Company's  net income  increased  $1.9
       million,  or 32%, from $5.9 million for the nine months ended  December 31,
       1995 to $7.8 million for the nine months ended December 31, 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 year-end holiday  shopping season.  At December
       31, 1996, the Company had outstanding  borrowings of $1.4 million under its
       revolving
  
                                         10
  line of credit and $2.7 million of long-term  debt  outstanding,  excluding
       $225,000  classified as a current liability.  In addition,  the Company had
       consigned 82,000 ounces of gold under its gold  consignment  program valued
       at approximately $30.3 million.
  
       Net cash  provided by operating  activities  was $14.4 million for the nine
       months ended December 31, 1996 compared to $5.0 million for the same period
       in the prior year.  Net cash  provided by  operating  activities  primarily
       reflects  the results of the year-end  holiday  shopping  season,  non-cash
       charges for  depreciation  and amortization as well as increases in current
       liabilities.  These were  partially  offset by  increases  in  inventory to
       support newly opened stores and future scheduled store openings.  A portion
       of the  increase  in  inventory  was in  anticipation  of the  purchase  of
       approximately  100 locations  from  Gemstone.  The Company  entered into an
       agreement to acquire these locations  during the quarter ended December 31,
       1996. The Company completed the purchase on January 29, 1997.
  
       Net cash used in  investing  activities  was $8.6  million  during the nine
       months  ended  December 31, 1996  compared to $6.3 million  during the nine
       months  ended  December 31,  1995.  Net cash used in  investing  activities
       primarily  reflects  the addition of  property,  fixtures and  equipment in
       connection  with the  opening of new stores and an  increase  in  deposits,
       primarily a $1.0 million deposit towards with the purchase of Gemstone.
  
       Net cash used in financing  activities was $3.6 million for the nine months
       ended  December  31,  1996  versus  $2.5  million   provided  by  financing
       activities  during the nine months ended  December  31, 1995.  Cash used in
       financing  activities  during  the nine  months  ended  December  31,  1996
       primarily reflects a reduction in borrowings under the Company's  revolving
       line of credit partially offset by an additional $400,000 long term loan in
       connection with the expansion of the Company's  corporate  headquarters and
       distribution  facility  and  $331,000  provided by  transactions  under the
       Company's employee stock option and employee stock purchase plans.
  
       The Company's  revolving  credit  provides for maximum  borrowings of $60.0
       million  with a cash  advance  sub-limit  of  $36.0  million.  This  credit
       facility  was  amended  on  December  17,  1996 to  extend  the term of the
       agreement to February 28, 1997. At December 31, 1996, the Company had $27.8
       million  available to be borrowed under its then existing  revolving credit
       facility and was in compliance  with covenants  contained in the agreement.
       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.
  
                                         11
  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.
  
  Forward-Looking Statements
  
       The Private Securities Litigation Reform Act of 1995 provides a safe harbor
       for forward-looking  statements.  A number of the matters and subject areas
       discussed in "Management's  Discussion and Analysis of Financial  Condition
       and Results of  Operations"  are not limited to historical or current facts
       and  deal   with   potential   future   circumstances   and   developments.
       Forward-looking  statements  include those related to the Company's ability
       to fund anticipated capital and liquidity needs. A variety of factors could
       cause the Company's  actual results to differ  materially from the expected
       results expressed in the Company's  forward-looking  statements.  The risks
       and  uncertainties  which may  affect  the  operation  and  results  of the
       Company's  business  include,  but are not  limited  to,  general  economic
       conditions and the impact on discretionary spending in the geographic areas
       where  a  significant   number  of  the   Company's   stores  are  located,
       fluctuations  in the price of gold,  the  Company's  ability to finance its
       gold  merchandise  and  the  cost  of  such  financing,  future  regulation
       regarding ear piercing  activities,  the ability to obtain  favorable store
       locations on  satisfactory  lease terms,  the Company's  ability to finance
       expansion  plans and changes in the  competitive  environment  in which the
       Company operates.
  
  PART II - OTHER INFORMATION
  
  ITEM 1.   LEGAL PROCEEDINGS
  
           There are no material legal proceedings against the Company
  
  ITEM 2.     CHANGES IN SECURITIES
  
           None
  
  ITEM 3.     DEFAULTS UPON SENIOR SECURITIES
  
           None
  
  ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
           None.
  
  ITEM 5.     OTHER INFORMATION
  
           None.
  
                                         12
  ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K
  
        a)    Exhibits
  
              10.1  Fifth  Amendment to Third  Amended and  Restated  Loan
                    Agreement  and Twelfth  Replacement  Revolving  Credit
                    Note dated  December 17, 1996  between the  Registrant
                    and Summit Bank.
  
              10.2  Sixth  Amendment And Agreement To Consignment  Agreement dated
                    October 31, 1996  between the  Registrant  and Fleet  Precious
                    Metals Inc.
  
              10.3  Third Amendment to Amended and Restated Consignment  Agreement
                    dated July 26,  1994,  dated  December  26,  1996  between the
                    Registrant and Rhode Island Hospital Trust National Bank.
  
              10.4  Asset  Purchase   Agreement  dated  January  29,  1997
                    Between  Piercing Pagoda,  Inc., EARS, Inc.,  Weaver's
                    Gems and Minerals, Inc. and Gemstone Jewelry, Inc.
  
              11    Statement regarding computation of net income per common share
                    and common share equivalent.
  
              27    Financial Data Schedule.
  
        b)    Reports on Form 8-K
  
              During the quarter  ended  December 31, 1996, no reports on Form 8-K
              were filed.
  
                                         13
  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:  February 12, 1997             /s/ John F. Eureyecko
                                            John F. Eureyecko
                                            President,
                                            Chief Operating Officer
                                            (Principal Financial Officer)
  
       Date:  February 12, 1997             /s/ Brandon R. Lehman
                                            Brandon R. Lehman
                                            Treasurer
                                            (Principal Accounting Officer)
  
                                         14
  INDEX TO EXHIBITS
                                                                      Sequentially
    Exhibit                                                           Numbered
     Number                                                             Page
  
      10.1     Fifth Amendment to Third Amended and Restated Loan
               Agreement and Twelfth Replacement Revolving Credit
               Note dated December 17, 1996 between the Registrant       16
               and Summit Bank.
  
      10.2     Sixth Amendment And Agreement To Consignment
               Agreement dated October 31, 1996 between the
               Registrant and Fleet Precious Metals Inc.                 19
  
      10.3     Third Amendment To Amended And Restated Consignment
               Agreement Dated July 26, 1994 dated December 26,
               1996 between the Registrant and Rhode Island
               Hospital Trust National Bank                              21
  
      10.4     Asset Purchase Agreement dated January 29, 1997
               Between Piercing Pagoda, Inc., EARS, Inc., Weaver's
               Gems and Minerals, Inc. and Gemstone Jewelry, Inc.        22
  
       11      Statement regarding computation of net income per
               common share and common share equivalent                  35
  
       27      Financial Data Schedule                                   36
  
                                         15