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 September 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 5,261,095
  (as of November 12, 1996)
  
  
  <PAGE>
  
                                PIERCING PAGODA, INC.
  
  
                                        INDEX
                                                                             PAGE
                        PART I - FINANCIAL INFORMATION                      NUMBER
  
  Item 1.   Financial Statements
  
            Consolidated balance sheets as of
            September 30, 1996 and March 31, 1996                              3
  
            Consolidated statements of operations for the three months
            ended September 30, 1996 and 1995 and six months ended
            September 30, 1996 and 1995                                        4
  
            Consolidated statements of cash flows for the six months 
            ended September 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 4    Submission of matters to a vote of security holders               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>
                                                                             September, 30     March 31,
                                                                                 1996            1996
  Assets                                                                     (Unaudited)
  <S>                                                                            <C>            <C>    
  
  Current assets:
      Cash                                                                       $ 2,276        $ 1,864
      Accounts receivable                                                            877            794
      Inventory                                                                   37,383         25,390
      Deposits for inventory purchases                                             3,431            361
      Prepaid expenses and other current assets                                      298            468
      Prepaid income taxes                                                         1,138            883
      Deferred tax assets                                                            693            693
  
                                                                                 -------        -------
  Total current assets                                                            46,096         30,453
  
  Property, fixtures and equipment, net                                           19,223         15,806
  Other assets                                                                     1,664          1,647
  
                                                                                 =======        =======
                                                                                 $66,983        $47,906
                                                                                 =======        =======
      Liabilities and Stockholders' Equity
  
  Current liabilities
      Accounts payable                                                           $ 9,243        $ 1,811
      Current installments of long-term debt and revolving line of credit         17,388          5,910
      Accrued expenses and taxes withheld                                          6,436          6,784
  
                                                                                 -------        -------
  Total current liabilities                                                       33,067         14,505
  
  Long-term debt, less current installments                                        2,707          2,350
  Deferred tax liabilities                                                         1,259          1,259
  Unbilled rent                                                                      270            213
  
                                                                                 -------        -------
  Total liabilities                                                               37,303         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 5,258,952 shares and 5,240,293
           at September, 30, 1996 and March 31, 1996, respectively                    53             53
      Additional paid-in capital                                                  22,354         22,183
      Retained earnings                                                            7,273          7,343
  
                                                                                 -------        -------
  Total stockholders' equity                                                      29,680         29,579
                                                                                 -------        -------
                                                                                 $66,983        $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                Six months ended
                                                             September 30,                    September 30,
                                                         1996             1995            1996            1995
  <S>                                                 <C>              <C>             <C>              <C>     
  Net sales                                            $ 32,439         $ 23,012        $ 62,683         $ 45,387
  Cost of goods sold and occupancy expenses,
      (excluding depreciation on kiosks)                 18,723           13,142          36,186           26,222
                                                       --------         --------        --------         --------
  Gross profit                                           13,716            9,870          26,497           19,165
  
  Selling, general and administrative expenses,
      (including depreciation on kiosks)                 13,477            9,528          25,898           18,455
                                                       --------         --------        --------         --------
  Income from operations                                    239              342             599              710
  
  Interest and other income                                  74               60             134              108
  Interest expense                                          487              311             848              451
                                                       --------         --------        --------         --------
  Earnings (loss) before income taxes                      (174)              91            (115)             367
  
  Income tax expense (benefit)                              (69)              46             (45)             160
                                                       ========         ========        ========         ========
  Net income (loss)                                    ($   105)        $     45        ($    70)        $    207
                                                       ========         ========        ========         ========
  
  Earnings (loss) per share                            ($  0.02)        $   0.01        ($  0.01)        $   0.04
                                                       ========         ========        ========         ========
  
  Weighted average common shares and
      common share equivalents                            5,370            5,315           5,369            5,294
                                                       ========         ========        ========         ========
  </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>
                                                                           Six-months ended
                                                                             September 30,
                                                                         1996             1995
  <S>                                                                  <C>              <C>     
  Cash flows from operating activities:
     Net income (loss)                                                 ($    70)        $    207
     Adjustments to reconcile net income to net cash used
       in operating activities:
         Depreciation and amortization                                    1,639            1,291
         Loss on disposal of property, fixtures and equipment                48               27
         Other changes in other assets                                      (85)            (189)
         Deferred income taxes                                               --             (126)
         Decrease (increase) in assets:
           Accounts receivable                                              (83)             264
           Inventory                                                    (11,993)         (13,169)
           Deposits for inventory purchases                              (3,070)          (2,730)
           Prepaid expenses and other current assets                        170           (1,420)
           Prepaid income taxes                                            (255)              --
         Increase (decrease) in liabilities:
           Accounts payable                                               7,432            4,545
           Tax indemnification payable                                       --           (1,202)
           Income taxes payable                                              --              (20)
           Accrued expenses and taxes withheld                             (348)             658
           Unbilled rent                                                     57              (12)
  
                                                                       --------         --------
  Net cash used in operating activities                                  (6,558)         (11,876)
  
  Cash flows from investing activities:
     Additions to property, fixtures and equipment                       (5,070)          (3,764)
     Proceeds from disposal of property, fixtures and equipment              19               --
     Noncurrent deposits, net                                                15              (49)
  
                                                                       --------         --------
  Net cash used in investing activities                                  (5,036)          (3,813)
  
  Cash flows from financing activities:
     Repayments of long-term debt                                           (10)              --
     Revolving line of credit, net                                       11,445           14,300
     Proceeds from issuance of long-term debt                               400               --
     Cash dividends paid                                                     --              (45)
     Proceeds from issuance of common stock                                 171               --
  
                                                                       --------         --------
  Net cash provided by financing activities                              12,006           14,255
  
                                                                       --------         --------
  Net increase (decrease) in cash                                           412           (1,434)
  
  Cash at beginning of period                                             1,864            2,320
  
                                                                       ========         ========
  Cash at end of period                                                $  2,276         $    886
                                                                       ========         ========
  </TABLE>
  
                                         5
  <PAGE>
                        PIERCING PAGODA, INC. AND SUBSIDIARY
                  CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                                   (In thousands)
                                     (Unaudited)
  
  <TABLE>
  <CAPTION>
                                                              Six months ended
                                                                September 30,
                                                              1996          1995
  <S>                                                        <C>           <C>   
  Supplemental  disclosures of cash flow information:
    Cash paid during the period for:
       Interest                                              $  801        $  433
                                                             ======        ======
       Income taxes, net                                     $  210        $1,763
                                                             ======        ======
  </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 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  six-month  periods  ended
         September 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):
  
  <TABLE>
  <CAPTION>
                                                                  September 30,   March 31,
                                                                      1996          1996
  <S>                                                               <C>            <C>    
            Land                                                    $   688        $   688
            Furniture and fixtures                                    2,352          2,077
            Kiosks                                                   16,523         13,908
            Building and improvements                                 4,005          3,822
            Computer equipment, software and other equipment          6,700          5,130
                                                                    -------        -------
                                                                     30,268         25,625
            Less accumulated depreciation and amortization           11,045          9,819
                                                                    =======        =======
                                                                    $19,223        $15,806
                                                                    =======        =======
  </TABLE>
  
                                         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 September 30, 1996 and 1995
  
         Consolidated net sales increased $9.4 million, or 41%, from $23.0 million
         for the three months ended  September  30, 1995 to $32.4  million for the
         three months ended September 30, 1996. This increase was primarily due to
         an  increase in the  average  number of stores open for the three  months
         ended  September 30, 1996 as compared to the three months ended September
         30, 1995 and a $2.1  million,  or 9%,  increase in  comparable  store net
         sales.  There  were a total of 565  stores  open at  September  30,  1996
         compared to 416 at September  30,  1995,  an increase of 36%. The average
         jewelry  units sold per store  increased 4% to 2,500 for the three months
         ended  September 30, 1996  compared to 2,400 at September  30, 1995.  The
         average  price per jewelry unit sold was  relatively  unchanged at $22.72
         for the three months ended  September 30, 1996 compared to $22.90 for the
         three months ended September 30, 1995.
  
         Gross profit  increased  $3.8 million,  or 38%, from $9.9 million for the
         three  months  ended  September  30, 1995 to $13.7  million for the three
         months  ended  September  30, 1996.  The  Company's  gross profit  margin
         decreased  from 42.9% for the three  months ended  September  30, 1995 to
         42.3% for the three months  ended  September  30,  1996.  The increase in
         gross profit dollars was attributable primarily to the Company's increase
         in net sales.  The decrease in the Company's gross profit margin reflects
         a lower gross profit on merchandise  sold,  partially offset by decreases
         in rent and occupancy expenses as a percentage of net sales. The decrease
         in gross profit margin  reflects the Company's  efforts to provide better
         customer value and increase  dollar and unit sales.  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.
  
         Selling,  general and administrative  expenses increased $4.0 million, or
         42%,  from $9.5 million for the three 
  
                                         8
  <PAGE>
  
         months  ended  September  30, 1995 to $13.5  million for the three months
         ended September 30, 1996. As a percentage of net sales, selling,  general
         and  administrative  expenses  increased  from 41.4% for the three months
         ended  September  30, 1995 to 41.5% for the three months ended  September
         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
         fiscal 1996.  Depreciation  and amortization  expense  increased 11% from
         $771,000 for the three months  ended  September  30, 1995 to $858,000 for
         the three  months  ended  September  30,  1996 due  primarily  to capital
         expenditures  for  new  stores,  the  upgrading  of  kiosks  in  existing
         locations and the expansion of the Company's  corporate  headquarters and
         distribution center completed in fiscal 1996.
  
         Interest expense increased $176,000,  or 57%, from $311,000 for the three
         months  ended  September  30, 1995 to $487,000 for the three months ended
         September 30, 1996, and as a percentage of net sales  increased from 1.4%
         for the  three  months  ended  September  30,  1995 to 1.5% for the three
         months ended September 30, 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,
         outstanding  long-term debt of $2.9 million issued 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 fell from $45,000
         for the three months ended  September  30, 1995 to a net loss of $105,000
         for the three months ended September 30, 1996.
  
  Six months ended September 30, 1996 and 1995
  
         Consolidated  net sales  increased  $17.3  million,  or 38%,  from  $45.4
         million for the six months ended  September 30, 1995 to $62.7 million for
         the six months ended  September 30, 1996. This increase was primarily due
         to an increase  in the  average  number of stores open for the six months
         ended  September  30, 1996 as compared to the six months ended  September
         30, 1995 and a $3.0  million,  or 7%,  increase in  comparable  store net
         sales.  There  were a total of 565  stores  open at  September  30,  1996
         compared to 416 at September  30,  1995,  an increase of 36%. The average
         jewelry  units  sold per store  increased  4% to 4,900 for the six months
         ended  September  30,  1996  compared  to 4,700 for the six months  ended
         September 30, 1995.  The average price per jewelry unit sold increased 3%
         to $23.60 for the six months ended  September 30, 1996 compared to $22.90
         for the six months ended September 30, 1995.
  
         Gross profit  increased $7.3 million,  or 38%, from $19.2 million for the
         six months ended  September  30, 1995 to $26.5 million for the six months
         ended  September  30, 1996.  The Company's  gross profit margin  improved
         slightly from 42.2% for the six months ended  September 30, 1995 to 42.3%
         for the six months ended September 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
         slightly lower
  
                                         9
  <PAGE>
  
         gross profit on merchandise  sold,  offset by a reduction in sales to the
         Florida licensee relative to the total sales of the Company. Sales to the
         Florida  licensee  provide a lower gross  margin than the  Company's  own
         retail sales.
  
         Selling,  general and administrative  expenses increased $7.4 million, or
         40%,  from $18.5  million for the six months ended  September 30, 1995 to
         $25.9  million  for  the  six  months  ended  September  30,  1996.  As a
         percentage of net sales,  selling,  general and  administrative  expenses
         increased from 40.7% for the six months ended September 30, 1995 to 41.3%
         for the six months ended  September 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 fiscal  1996.  Depreciation  and  amortization
         expense  increased  23%  from  $1.3  million  for  the six  months  ended
         September 30, 1995 to $1.6 million for the six months ended September 30,
         1996 due primarily to capital  expenditures for new stores, the upgrading
         of  kiosks in  existing  locations  and the  expansion  of the  Company's
         corporate headquarters and distribution center completed in fiscal 1996.
  
         Interest expense  increased  $397,000,  or 88%, from $451,000 for the six
         months  ended  September  30, 1995 to $848,000  for the six months  ended
         September 30, 1996, and as a percentage of net sales  increased from 1.0%
         for the six months  ended  September  30, 1995 to 1.4% for the six months
         ended  September  30,  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,
         outstanding  long-term debt of $2.9 million issued 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  from
         $207,000  for the six months  ended  September  30, 1995 to a net loss of
         $70,000 for the six months ended September 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 year-end  holiday shopping season.
         At September 30, 1996,  the Company had  outstanding  borrowings of $17.2
         million under its revolving  line of credit and $2.9 million of long-term
         debt outstanding. In addition, the Company had consigned 65,000 ounces of
         gold under its gold  consignment  program valued at  approximately  $24.6
         million.
  
                                         10
  <PAGE>
  
         Net cash used in operating activities was $6.6 million for the six months
         ended September 30, 1996 compared to $11.9 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.
  
         Net cash used in investing  activities  was $5.0  million  during the six
         months ended  September 30, 1996 compared to $3.8 million  during the six
         months ended  September 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 $12.0 million for the six
         months  ended  September  30,  1996  versus  $14.3  million  provided  by
         financing activities during the six months ended September 30, 1995. Cash
         provided by financing  activities  during the six months ended  September
         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.
  
         On September 5, 1996, the Company's revolving credit facility was amended
         to extend the term of the  agreement  to October 31, 1996 and to increase
         the amount of funds available. The amended agreement provided for maximum
         borrowings  of  $50.0  million  with a cash  advance  sub-limit  of $30.0
         million.  This credit facility was further amended on October 18, 1996 to
         extend the term of the agreement to December 31, 1996 and to increase the
         borrowing  limit to $60.0  million,  with a $36.0  million  cash  advance
         sub-limit.  At September 30, 1996, the Company had $7.6 million available
         to be borrowed under its then existing  revolving credit facility and was
         in compliance  with covenants  contained in the agreement or had obtained
         appropriate  waivers.  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.
  
                                         11
  
  <PAGE>
  
  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 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
         On  September  18,  1996,  the  Registrant  held its  Annual  Meeting  of
         Stockholders. The stockholders approved the following proposals:
  
         To elect one  director  to hold office  until the 1999 Annual  Meeting of
         Stockholders and until his successor has been duly elected and qualified.
  
                    Director                  For                        Against
  
                John F. Eureyecko            4,660,816                     2,942
  
         To approve the Piercing Pagoda, Inc. Employee Stock Purchase Plan.
  
                    For                       Against                    Abstain
  
                   4,644,883                     9,522                     5,399
  
         To ratify  the  appointment  of KPMG Peat  Marwick  LLP as the  Company's
         independent auditors for the 1997 fiscal year.
  
                    For                       Against                    Abstain
  
                   4,662,358                       100                     1,300
  
                                         12
  <PAGE>
  
  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).
  
            10.1 Third  Amendment  to Third  Amended and Restated  Loan  Agreement
                 dated September 5, 1996 between the Registrant and Summit Bank.
  
            10.2 Eleventh Replacement  Revolving Loan Note dated September 5, 1996
                 between the Registrant and Summit Bank.
  
            10.3 Fourth  Amendment to Third  Amended and Restated  Loan  Agreement
                 dated October 18, 1996 between the Registrant and Summit Bank.
  
            10.4 Twelfth  Replacement  Revolving  Loan Note dated October 18, 1996
                 between the Registrant and Summit Bank.
  
            11   Statement  regarding  computation  of net income per common share
                 and common share equivalent.
  
       b)   Reports on Form 8-K
  
            During the quarter  ended  September  30, 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:      November 12, 1996                /s/ John F. Eureyecko
                                                    ---------------------
                                                    John F. Eureyecko
                                                    President,
                                                    Chief Operating Officer
                                                    (Principal Financial Officer)
  
  
  
        Date:      November 12, 1996                /s/ Brandon R. Lehman
                                                    ---------------------
                                                    Brandon R. Lehman
                                                    Treasurer
                                                    (Principal Accounting Officer)
  
  
                                         14
  <PAGE>
  
  
  
                                  INDEX TO EXHIBITS
  
                                                                      Sequentially
       Exhibit                                                          Numbered
        Number                                                            Page
  
          10.1    Third Amendment to Third Amended and Restated Loan
                  Agreement dated September 5, 1996 between the
                  Registrant and Summit Bank.                               16
  
          10.2    Eleventh Replacement Revolving Loan Note dated
                  September 5, 1996 between the Registrant and Summit
                  Bank.                                                     20
  
          10.3    Fourth Amendment to Third Amended and Restated Loan
                  Agreement dated October 18, 1996 between the
                  Registrant and Summit Bank.                               23
  
          10.4    Twelfth Replacement Revolving Loan Note dated October
                  18, 1996 between the Registrant and Summit Bank.          27
  
          11      Statement regarding computation of net income per
                  common share and common share equivalent                  30
  
                                    15
metadata_documents: [{"type": "10-Q", "sequence": "1", "secsgml_size_bytes": 41094}]
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": "96661320"}, "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 September 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 5,261,095
  (as of November 12, 1996)
  PIERCING PAGODA, INC.
  
                                        INDEX
                                                                             PAGE
                        PART I - FINANCIAL INFORMATION                      NUMBER
  
  Item 1.   Financial Statements
  
            Consolidated balance sheets as of
            September 30, 1996 and March 31, 1996                              3
  
            Consolidated statements of operations for the three months
            ended September 30, 1996 and 1995 and six months ended
            September 30, 1996 and 1995                                        4
  
            Consolidated statements of cash flows for the six months 
            ended September 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 4    Submission of matters to a vote of security holders               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)
  September, 30     March 31,
                                                                                 1996            1996
  Assets                                                                     (Unaudited)
  Current assets:
      Cash                                                                       $ 2,276        $ 1,864
      Accounts receivable                                                            877            794
      Inventory                                                                   37,383         25,390
      Deposits for inventory purchases                                             3,431            361
      Prepaid expenses and other current assets                                      298            468
      Prepaid income taxes                                                         1,138            883
      Deferred tax assets                                                            693            693
  
                                                                                 -------        -------
  Total current assets                                                            46,096         30,453
  
  Property, fixtures and equipment, net                                           19,223         15,806
  Other assets                                                                     1,664          1,647
  
                                                                                 =======        =======
                                                                                 $66,983        $47,906
                                                                                 =======        =======
      Liabilities and Stockholders' Equity
  
  Current liabilities
      Accounts payable                                                           $ 9,243        $ 1,811
      Current installments of long-term debt and revolving line of credit         17,388          5,910
      Accrued expenses and taxes withheld                                          6,436          6,784
  
                                                                                 -------        -------
  Total current liabilities                                                       33,067         14,505
  
  Long-term debt, less current installments                                        2,707          2,350
  Deferred tax liabilities                                                         1,259          1,259
  Unbilled rent                                                                      270            213
  
                                                                                 -------        -------
  Total liabilities                                                               37,303         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 5,258,952 shares and 5,240,293
           at September, 30, 1996 and March 31, 1996, respectively                    53             53
      Additional paid-in capital                                                  22,354         22,183
      Retained earnings                                                            7,273          7,343
  
                                                                                 -------        -------
  Total stockholders' equity                                                      29,680         29,579
                                                                                 -------        -------
                                                                                 $66,983        $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                Six months ended
                                                             September 30,                    September 30,
                                                         1996             1995            1996            1995
  Net sales                                            $ 32,439         $ 23,012        $ 62,683         $ 45,387
  Cost of goods sold and occupancy expenses,
      (excluding depreciation on kiosks)                 18,723           13,142          36,186           26,222
                                                       --------         --------        --------         --------
  Gross profit                                           13,716            9,870          26,497           19,165
  
  Selling, general and administrative expenses,
      (including depreciation on kiosks)                 13,477            9,528          25,898           18,455
                                                       --------         --------        --------         --------
  Income from operations                                    239              342             599              710
  
  Interest and other income                                  74               60             134              108
  Interest expense                                          487              311             848              451
                                                       --------         --------        --------         --------
  Earnings (loss) before income taxes                      (174)              91            (115)             367
  
  Income tax expense (benefit)                              (69)              46             (45)             160
                                                       ========         ========        ========         ========
  Net income (loss)                                    ($   105)        $     45        ($    70)        $    207
                                                       ========         ========        ========         ========
  
  Earnings (loss) per share                            ($  0.02)        $   0.01        ($  0.01)        $   0.04
                                                       ========         ========        ========         ========
  
  Weighted average common shares and
      common share equivalents                            5,370            5,315           5,369            5,294
                                                       ========         ========        ========         ========
  See accompanying notes to consolidated financial statements.
  
                                         4
  PIERCING PAGODA, INC. AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (In thousands)
                                     (Unaudited)
  Six-months ended
                                                                             September 30,
                                                                         1996             1995
  Cash flows from operating activities:
     Net income (loss)                                                 ($    70)        $    207
     Adjustments to reconcile net income to net cash used
       in operating activities:
         Depreciation and amortization                                    1,639            1,291
         Loss on disposal of property, fixtures and equipment                48               27
         Other changes in other assets                                      (85)            (189)
         Deferred income taxes                                               --             (126)
         Decrease (increase) in assets:
           Accounts receivable                                              (83)             264
           Inventory                                                    (11,993)         (13,169)
           Deposits for inventory purchases                              (3,070)          (2,730)
           Prepaid expenses and other current assets                        170           (1,420)
           Prepaid income taxes                                            (255)              --
         Increase (decrease) in liabilities:
           Accounts payable                                               7,432            4,545
           Tax indemnification payable                                       --           (1,202)
           Income taxes payable                                              --              (20)
           Accrued expenses and taxes withheld                             (348)             658
           Unbilled rent                                                     57              (12)
  
                                                                       --------         --------
  Net cash used in operating activities                                  (6,558)         (11,876)
  
  Cash flows from investing activities:
     Additions to property, fixtures and equipment                       (5,070)          (3,764)
     Proceeds from disposal of property, fixtures and equipment              19               --
     Noncurrent deposits, net                                                15              (49)
  
                                                                       --------         --------
  Net cash used in investing activities                                  (5,036)          (3,813)
  
  Cash flows from financing activities:
     Repayments of long-term debt                                           (10)              --
     Revolving line of credit, net                                       11,445           14,300
     Proceeds from issuance of long-term debt                               400               --
     Cash dividends paid                                                     --              (45)
     Proceeds from issuance of common stock                                 171               --
  
                                                                       --------         --------
  Net cash provided by financing activities                              12,006           14,255
  
                                                                       --------         --------
  Net increase (decrease) in cash                                           412           (1,434)
  
  Cash at beginning of period                                             1,864            2,320
  
                                                                       ========         ========
  Cash at end of period                                                $  2,276         $    886
                                                                       ========         ========
  5
  PIERCING PAGODA, INC. AND SUBSIDIARY
                  CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                                   (In thousands)
                                     (Unaudited)
  Six months ended
                                                                September 30,
                                                              1996          1995
  Supplemental  disclosures of cash flow information:
    Cash paid during the period for:
       Interest                                              $  801        $  433
                                                             ======        ======
       Income taxes, net                                     $  210        $1,763
                                                             ======        ======
  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 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  six-month  periods  ended
         September 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):
  September 30,   March 31,
                                                                      1996          1996
  Land                                                    $   688        $   688
            Furniture and fixtures                                    2,352          2,077
            Kiosks                                                   16,523         13,908
            Building and improvements                                 4,005          3,822
            Computer equipment, software and other equipment          6,700          5,130
                                                                    -------        -------
                                                                     30,268         25,625
            Less accumulated depreciation and amortization           11,045          9,819
                                                                    =======        =======
                                                                    $19,223        $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 September 30, 1996 and 1995
  
         Consolidated net sales increased $9.4 million, or 41%, from $23.0 million
         for the three months ended  September  30, 1995 to $32.4  million for the
         three months ended September 30, 1996. This increase was primarily due to
         an  increase in the  average  number of stores open for the three  months
         ended  September 30, 1996 as compared to the three months ended September
         30, 1995 and a $2.1  million,  or 9%,  increase in  comparable  store net
         sales.  There  were a total of 565  stores  open at  September  30,  1996
         compared to 416 at September  30,  1995,  an increase of 36%. The average
         jewelry  units sold per store  increased 4% to 2,500 for the three months
         ended  September 30, 1996  compared to 2,400 at September  30, 1995.  The
         average  price per jewelry unit sold was  relatively  unchanged at $22.72
         for the three months ended  September 30, 1996 compared to $22.90 for the
         three months ended September 30, 1995.
  
         Gross profit  increased  $3.8 million,  or 38%, from $9.9 million for the
         three  months  ended  September  30, 1995 to $13.7  million for the three
         months  ended  September  30, 1996.  The  Company's  gross profit  margin
         decreased  from 42.9% for the three  months ended  September  30, 1995 to
         42.3% for the three months  ended  September  30,  1996.  The increase in
         gross profit dollars was attributable primarily to the Company's increase
         in net sales.  The decrease in the Company's gross profit margin reflects
         a lower gross profit on merchandise  sold,  partially offset by decreases
         in rent and occupancy expenses as a percentage of net sales. The decrease
         in gross profit margin  reflects the Company's  efforts to provide better
         customer value and increase  dollar and unit sales.  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.
  
         Selling,  general and administrative  expenses increased $4.0 million, or
         42%,  from $9.5 million for the three 
  
                                         8
  months  ended  September  30, 1995 to $13.5  million for the three months
         ended September 30, 1996. As a percentage of net sales, selling,  general
         and  administrative  expenses  increased  from 41.4% for the three months
         ended  September  30, 1995 to 41.5% for the three months ended  September
         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
         fiscal 1996.  Depreciation  and amortization  expense  increased 11% from
         $771,000 for the three months  ended  September  30, 1995 to $858,000 for
         the three  months  ended  September  30,  1996 due  primarily  to capital
         expenditures  for  new  stores,  the  upgrading  of  kiosks  in  existing
         locations and the expansion of the Company's  corporate  headquarters and
         distribution center completed in fiscal 1996.
  
         Interest expense increased $176,000,  or 57%, from $311,000 for the three
         months  ended  September  30, 1995 to $487,000 for the three months ended
         September 30, 1996, and as a percentage of net sales  increased from 1.4%
         for the  three  months  ended  September  30,  1995 to 1.5% for the three
         months ended September 30, 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,
         outstanding  long-term debt of $2.9 million issued 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 fell from $45,000
         for the three months ended  September  30, 1995 to a net loss of $105,000
         for the three months ended September 30, 1996.
  
  Six months ended September 30, 1996 and 1995
  
         Consolidated  net sales  increased  $17.3  million,  or 38%,  from  $45.4
         million for the six months ended  September 30, 1995 to $62.7 million for
         the six months ended  September 30, 1996. This increase was primarily due
         to an increase  in the  average  number of stores open for the six months
         ended  September  30, 1996 as compared to the six months ended  September
         30, 1995 and a $3.0  million,  or 7%,  increase in  comparable  store net
         sales.  There  were a total of 565  stores  open at  September  30,  1996
         compared to 416 at September  30,  1995,  an increase of 36%. The average
         jewelry  units  sold per store  increased  4% to 4,900 for the six months
         ended  September  30,  1996  compared  to 4,700 for the six months  ended
         September 30, 1995.  The average price per jewelry unit sold increased 3%
         to $23.60 for the six months ended  September 30, 1996 compared to $22.90
         for the six months ended September 30, 1995.
  
         Gross profit  increased $7.3 million,  or 38%, from $19.2 million for the
         six months ended  September  30, 1995 to $26.5 million for the six months
         ended  September  30, 1996.  The Company's  gross profit margin  improved
         slightly from 42.2% for the six months ended  September 30, 1995 to 42.3%
         for the six months ended September 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
         slightly lower
  
                                         9
  gross profit on merchandise  sold,  offset by a reduction in sales to the
         Florida licensee relative to the total sales of the Company. Sales to the
         Florida  licensee  provide a lower gross  margin than the  Company's  own
         retail sales.
  
         Selling,  general and administrative  expenses increased $7.4 million, or
         40%,  from $18.5  million for the six months ended  September 30, 1995 to
         $25.9  million  for  the  six  months  ended  September  30,  1996.  As a
         percentage of net sales,  selling,  general and  administrative  expenses
         increased from 40.7% for the six months ended September 30, 1995 to 41.3%
         for the six months ended  September 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 fiscal  1996.  Depreciation  and  amortization
         expense  increased  23%  from  $1.3  million  for  the six  months  ended
         September 30, 1995 to $1.6 million for the six months ended September 30,
         1996 due primarily to capital  expenditures for new stores, the upgrading
         of  kiosks in  existing  locations  and the  expansion  of the  Company's
         corporate headquarters and distribution center completed in fiscal 1996.
  
         Interest expense  increased  $397,000,  or 88%, from $451,000 for the six
         months  ended  September  30, 1995 to $848,000  for the six months  ended
         September 30, 1996, and as a percentage of net sales  increased from 1.0%
         for the six months  ended  September  30, 1995 to 1.4% for the six months
         ended  September  30,  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,
         outstanding  long-term debt of $2.9 million issued 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  from
         $207,000  for the six months  ended  September  30, 1995 to a net loss of
         $70,000 for the six months ended September 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 year-end  holiday shopping season.
         At September 30, 1996,  the Company had  outstanding  borrowings of $17.2
         million under its revolving  line of credit and $2.9 million of long-term
         debt outstanding. In addition, the Company had consigned 65,000 ounces of
         gold under its gold  consignment  program valued at  approximately  $24.6
         million.
  
                                         10
  Net cash used in operating activities was $6.6 million for the six months
         ended September 30, 1996 compared to $11.9 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.
  
         Net cash used in investing  activities  was $5.0  million  during the six
         months ended  September 30, 1996 compared to $3.8 million  during the six
         months ended  September 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 $12.0 million for the six
         months  ended  September  30,  1996  versus  $14.3  million  provided  by
         financing activities during the six months ended September 30, 1995. Cash
         provided by financing  activities  during the six months ended  September
         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.
  
         On September 5, 1996, the Company's revolving credit facility was amended
         to extend the term of the  agreement  to October 31, 1996 and to increase
         the amount of funds available. The amended agreement provided for maximum
         borrowings  of  $50.0  million  with a cash  advance  sub-limit  of $30.0
         million.  This credit facility was further amended on October 18, 1996 to
         extend the term of the agreement to December 31, 1996 and to increase the
         borrowing  limit to $60.0  million,  with a $36.0  million  cash  advance
         sub-limit.  At September 30, 1996, the Company had $7.6 million available
         to be borrowed under its then existing  revolving credit facility and was
         in compliance  with covenants  contained in the agreement or had obtained
         appropriate  waivers.  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.
  
                                         11
  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 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
         On  September  18,  1996,  the  Registrant  held its  Annual  Meeting  of
         Stockholders. The stockholders approved the following proposals:
  
         To elect one  director  to hold office  until the 1999 Annual  Meeting of
         Stockholders and until his successor has been duly elected and qualified.
  
                    Director                  For                        Against
  
                John F. Eureyecko            4,660,816                     2,942
  
         To approve the Piercing Pagoda, Inc. Employee Stock Purchase Plan.
  
                    For                       Against                    Abstain
  
                   4,644,883                     9,522                     5,399
  
         To ratify  the  appointment  of KPMG Peat  Marwick  LLP as the  Company's
         independent auditors for the 1997 fiscal year.
  
                    For                       Against                    Abstain
  
                   4,662,358                       100                     1,300
  
                                         12
  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).
  
            10.1 Third  Amendment  to Third  Amended and Restated  Loan  Agreement
                 dated September 5, 1996 between the Registrant and Summit Bank.
  
            10.2 Eleventh Replacement  Revolving Loan Note dated September 5, 1996
                 between the Registrant and Summit Bank.
  
            10.3 Fourth  Amendment to Third  Amended and Restated  Loan  Agreement
                 dated October 18, 1996 between the Registrant and Summit Bank.
  
            10.4 Twelfth  Replacement  Revolving  Loan Note dated October 18, 1996
                 between the Registrant and Summit Bank.
  
            11   Statement  regarding  computation  of net income per common share
                 and common share equivalent.
  
       b)   Reports on Form 8-K
  
            During the quarter  ended  September  30, 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:      November 12, 1996                /s/ John F. Eureyecko
                                                    ---------------------
                                                    John F. Eureyecko
                                                    President,
                                                    Chief Operating Officer
                                                    (Principal Financial Officer)
  
        Date:      November 12, 1996                /s/ Brandon R. Lehman
                                                    ---------------------
                                                    Brandon R. Lehman
                                                    Treasurer
                                                    (Principal Accounting Officer)
  
                                         14
  INDEX TO EXHIBITS
  
                                                                      Sequentially
       Exhibit                                                          Numbered
        Number                                                            Page
  
          10.1    Third Amendment to Third Amended and Restated Loan
                  Agreement dated September 5, 1996 between the
                  Registrant and Summit Bank.                               16
  
          10.2    Eleventh Replacement Revolving Loan Note dated
                  September 5, 1996 between the Registrant and Summit
                  Bank.                                                     20
  
          10.3    Fourth Amendment to Third Amended and Restated Loan
                  Agreement dated October 18, 1996 between the
                  Registrant and Summit Bank.                               23
  
          10.4    Twelfth Replacement Revolving Loan Note dated October
                  18, 1996 between the Registrant and Summit Bank.          27
  
          11      Statement regarding computation of net income per
                  common share and common share equivalent                  30
  
                                    15