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

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                                  FORM 10-K
      (Mark one)
           (X)    ANNUAL REPORT PURSUANT TO SECTION 13 OR
                 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended March 31, 1998

                                      or

           (  )   TRANSITION REPORT PURSUANT TO SECTION 13
                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
               Incorporation or Organization) Identification No.)

                    3910 Adler Place, Bethlehem, PA 18017
                   (Address of Principal Executive Offices)

      Registrant's Telephone Number, Including Area Code: (610) 691-0437

         Securities Registered Pursuant to Section 12(b) of the Act:

                                     None

         Securities Registered Pursuant to Section 12(g) of the Act:

                   Common Stock (par value $.01 per share)
                               (Title of Class)

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

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

The aggregate market value of Common Stock held by  non-affiliates of the
Registrant on June 22, 1998 was approximately $130,911,803.

The number of shares  outstanding  of the  Registrant's  common  stock is
6,068,570 (as of June 22, 1998).

                     DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement to be filed with the Commission
in  connection  with  its  1998  Annual  Meeting  of   Shareholders   are
incorporated by reference into Part III of this Form 10-K.
==============================================================================



<PAGE>



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


                            PIERCING PAGODA, INC.
                              TABLE OF CONTENTS

                                                                  PAGE
                                    PART I

      Item 1.  BUSINESS                                             3

      Item 2.  PROPERTIES                                           12

      Item 3.  LEGAL PROCEEDINGS                                    13

      Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  13

      Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT                 13

                                      PART II

      Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY
               AND RELATED STOCKHOLDER MATTERS                      15

      Item 6.  SELECTED FINANCIAL DATA                              15

      Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
               FINANCIAL CONDITION AND RESULTS OF OPERATIONS        18

      Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES             25
               ABOUT MARKET RISK

      Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY
               DATA                                                 26

      Item 9.  CHANGES IN AND DISAGREEMENTS WITH
               ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
               DISCLOSURE                                           47

                                      PART III

      Item 10. DIRECTORS AND EXECUTIVE OFFICERS
               OF REGISTRANT                                        47

      Item 11. EXECUTIVE COMPENSATION                               47

      Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
               OWNERS AND MANAGEMENT                                47

      Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS       47

                                      PART IV

      Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
               AND REPORTS ON FORM 8-K                              48



<PAGE>


                                     PART I

      Item 1.  BUSINESS

           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," in the
      following  "Business"  section and  elsewhere in this Annual Report
      are not  limited  to  historical  or  current  facts  and deal with
      potential  future   circumstances  and  developments.   Prospective
      investors are cautioned that such forward-looking statements, which
      may  be  identified  by  words  such  as  "anticipate,"  "believe,"
      "expect,"  "estimate,"  "intend," "plan," and similar  expressions,
      are only  predictions  and that actual events or results may differ
      materially.  Forward-looking  statements include those relating to:
      the ability of the Company to successfully  assimilate and increase
      the net sales  volume and  profitability  of recently  acquired and
      newly opened  stores,  anticipated  store  openings  and  closings,
      estimated capital expenditures, and the absence of material adverse
      impact expected from the possible loss of any current supplier, the
      possible   termination   of  any  current   consignment   agreement
      arrangement,   the  possible   enactment  of  new   legislation  or
      modification of existing legislation,  the possible purchase of the
      Company's  stores in Florida by a licensee of the Company and legal
      proceedings.  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,   including,   without
      limitation:  (i) the  Company's  ability to secure  suitable  store
      sites on a timely basis and on  satisfactory  terms,  the Company's
      ability  to  hire,  train  and  retain  qualified  personnel,   the
      availability  of  adequate  capital  resources  and the  successful
      integration of new stores into the Company's  existing  operations;
      (ii) the Company's  ability to  successfully  implement and improve
      management information systems, procedures and controls on a timely
      basis  and in such a manner  as is  necessary  to  accommodate  the
      increased  number of  transactions  and customers and the increased
      size of the Company's  operations;  (iii) fluctuations in quarterly
      net sales,  and,  in  particular,  third  quarter  net sales;  (iv)
      fluctuations  in gold  prices;  (v)  competitive  conditions;  (vi)
      economic conditions  affecting  disposable consumer income, such as
      employment,  business conditions,  interest rates and taxation,  as
      well as trends  with  respect to mall  shopping  generally  and the
      ability of mall anchor  tenants and other  attractions  to generate
      customer traffic in the vicinity of the Company's stores; and (vii)
      the   possibility   of  the  enactment  of   legislation,   or  the
      modification of existing or pending  legislation,  in jurisdictions
      in which the  Company  operates,  that would  adversely  affect the
      Company's ear piercing or other activities.

           General

            Piercing  Pagoda  is the  largest  retailer  of gold  jewelry
      through kiosk stores in the United  States.  At March 31, 1998, the
      Company operated 789 stores in 43 states and Puerto Rico, including
      762 kiosk  stores  and 27 in-line  stores.  The  Company  offers an
      extensive  selection of  popular-priced  14 karat and 10 karat gold
      chains,  bracelets,  earrings,  charms  and  rings,  as  well  as a
      selection  of silver  jewelry,  all in basic styles at everyday low
      prices.  The Company's stores are generally located in high traffic
      concourses of regional  shopping  malls and are primarily  operated
      under the  names  Piercing  Pagoda,  Plumb  Gold and  Silver & Gold
      Connection.  The Company's kiosk stores average  approximately  170
      square  feet in size,  typically  carry  approximately  3,800 SKUs,
      require a low  initial  investment,  can be opened  quickly and are
      easily accessible and visible within malls. During fiscal 1998, the
      average   price  of  a  jewelry   item  sold  by  the  Company  was
      approximately $25 and average  comparable kiosk store net sales per
      square foot were $1,731.  The Company  believes  that its low price
      points and  focused  merchandise  selection  differentiate  it from
      other mall-based jewelry retailers.

                                     3
<PAGE>


           Operating Strategies

            Piercing Pagoda's  objective is to maintain its leadership of
      the gold jewelry kiosk market and increase its penetration in malls
      throughout the United States while enhancing the  profitability  of
      its  overall  operations.   Principal  elements  of  the  Company's
      strategy to achieve this objective are as follows:

            Focused Merchandise Selection. The Company differentiates its
      merchandise  selection from other jewelry  retailers by focusing on
      basic styles of  lower-priced  14 karat and 10 karat gold  jewelry,
      comprised  primarily  of chains,  bracelets,  earrings,  charms and
      rings.  The  Company  offers an  extensive  selection  within  each
      merchandise category,  and its stores typically carry approximately
      3,800 SKUs. The average price of a jewelry item sold by the Company
      in  fiscal  1998  was  approximately  $25.  Approximately  56% of a
      typical  store's  merchandise  is  common  to all  stores,  and the
      remaining products are selected based upon the  characteristics and
      local preferences of the particular store's customer base.

            Easy-to-Shop  Environment.  The  Company  seeks to locate its
      kiosk stores in high traffic areas of regional malls and emphasizes
      strong visual  presentations  of its stores and its  merchandise to
      appeal to both  destination  customers and impulse  shoppers.  Each
      item has a clearly visible price tag that facilitates  browsing and
      comparison  shopping  while  minimizing the need for sales support.
      The  merchandise  is displayed on specially  designed pads in glass
      showcases which maximize the number of items shown.

            Competitive  Everyday Low Pricing.  Piercing Pagoda's pricing
      policy is to maintain everyday low prices complemented by selective
      promotions.  The  Company's  goal is to be the value  leader in the
      popular-priced gold jewelry business in the markets that it serves.
      The Company  regularly  monitors price levels at its competitors in
      order to ensure  that its prices are  competitive  and the  Company
      believes that its volume  purchasing and established  relationships
      with suppliers contribute to its ability to remain competitive.

            Customer   Service.    The   Company   emphasizes   providing
      knowledgeable  and  responsive   customer  service  to  distinguish
      Piercing  Pagoda  from  its  competition  and  to  create  customer
      loyalty.  Accordingly,  the Company has developed  and  implemented
      extensive  employee  training and incentive  programs.  The Company
      believes  that its  commitment  to customer  service,  along with a
      lifetime  guarantee  for its  merchandise,  its  complimentary  ear
      piercing   service   with  the   purchase  of   earrings   and  its
      "buy-five-get-one-free" jewelry club, enhance the Company's ability
      to generate repeat business and to attract new customers.

            Sophisticated  Management Information Systems. The Company is
      committed  to  maintaining   sophisticated  management  information
      systems.  Currently,  the Company utilizes a customized  management
      information system that incorporates point-of-sale computers in its
      stores with an inventory management and replenishment system. These
      proprietary  systems  allow the  Company  to  monitor  and  control
      effectively the merchandise at its stores and enable the Company to
      identify  and react  promptly to sales  trends.  Based on the sales
      data, the Company tailors  individual stores'  merchandise  levels,
      plans its  purchasing  in order to benefit  from volume  purchasing
      discounts   from  its  suppliers  and   prioritizes   the  in-house
      preparation  of  merchandise.  The  Company  completed  a  thorough
      evaluation of its  inventory  management  software  needs in fiscal
      1998 and  determined  that,  with minor  modification,  its current
      proprietary  system can  accommodate  expected future growth for at
      least the next two fiscal years.  Accordingly,  implementation of a
      new inventory  management  system is not expected to begin until at
      least  fiscal  2000.  The  Company is  presently  in the process of
      upgrading its financial  accounting  and  reporting.  A new Windows
      NT-based  client/server  financial and  accounting  system has been
      selected and is expected to be  operational in the first quarter of
      fiscal 1999.  See  "Management's  Discussion  and  Analysis"  for a
      discussion of Year 2000 issues.

                                     4
<PAGE>




           Growth Strategy

            Over the last three  fiscal  years the  Company has sought to
      increase   its  market  share  and  mall   penetration   through  a
      combination  of new store  openings and stores  acquired from third
      parties.  Of the 454  stores  the  Company  has  opened  since  the
      beginning of fiscal 1996, 203 were acquired from independent  third
      parties through asset purchase  arrangements.  The Company believes
      that  acquiring  locations  from third  parties  can be a favorable
      method of expanding its operations  when the seller has a portfolio
      of desirable store locations.  Acquisitions completed over the last
      three fiscal years include 67 locations  acquired from Earring Tree
      in fiscal 1996,  93 locations  acquired  from  Gemstone  Jewelry in
      fiscal 1997 and 43 locations acquired from Silver & Gold Connection
      in fiscal 1998.

           Upon completing the purchase of store locations, the Company's
      strategy  to  increase  the  net  sales  and  profitability  of the
      acquired  locations has been to convert the acquired  stores to the
      Company's   format  and  implement   the  Company's   merchandising
      strategies.  This has been accomplished by revising the merchandise
      mix of the acquired stores and by retraining  sales  associates and
      store  management  personnel  to provide the same level of customer
      service  emphasized  in the  Company's  other  stores.  The Company
      believes  that its ability to execute these  strategies  has been a
      key element in the successful assimilation of these acquired stores
      into the Company's operations.

           In May 1998, the Company announced its largest  acquisition of
      approximately   107  locations   from  Sedgwick   Sales,   Inc.,  a
      kiosk-based retailer of primarily  gold-plated jewelry. The seller,
      which operates under the names Golden Chain Gang, Golden Chain Gang
      International, Grand Illusions and Sedgwick Gold International will
      retain  rights to these  names.  This  acquisition  will add 51 new
      malls  to  the  Company's   portfolio  as  well  as  expanding  its
      operations  into three new  states.  The  Company  believes  it can
      successfully  apply its prior  experience  opening  new  stores and
      integrating the previous  acquisitions  to this purchase.  However,
      there  can be no  assurance  that  the  Company  will  be  able  to
      successfully  integrate  these acquired stores and failure to do so
      could have a material  adverse  effect on the Company's  results of
      operations and financial condition.

            Opening new stores will  continue to be an important  part of
      the  Company's   growth   strategy.   The  Company  plans  to  open
      approximately  70 to 90 new stores in fiscal  1999 and 60 to 80 new
      stores in fiscal 2000  (excluding  any  acquisitions)  and to close
      approximately  25 existing stores during that two-year  period.  In
      selecting sites for new stores,  the Company  generally seeks malls
      that have at least  500,000  square feet, a high volume of shopping
      traffic,  strong anchor  tenants and sites  available in the higher
      traffic areas of the mall. Opening a new store generally requires a
      total investment of approximately $107,000, including approximately
      $70,000 of  inventory  (a portion  of which is  generally  financed
      through consignment arrangements),  $30,000 for construction of the
      kiosk,  fixtures,  point-of-sale  register and other  equipment and
      supplies  and $7,000 for  pre-opening  expenses  which are expensed
      when  incurred.  New stores can  typically  be opened  within eight
      weeks after obtaining a lease commitment. In addition to evaluating
      malls in which it does not operate stores, the Company  continually
      evaluates  malls where its stores are located to determine  whether
      net sales volumes warrant another kiosk in such malls. At March 31,
      1998 there were 395 stores  operating  in malls  where the  Company
      operated more than one location. The Company believes that Piercing
      Pagoda's  strong  national  retailing  reputation,  along  with the
      flexibility of its kiosk store format,  make its stores  attractive
      to mall developers and managers.

            As part of its ongoing  operations,  the Company  continually
      evaluates the performance of its stores and the malls in which they
      are located.  Since kiosks  require a relatively  low investment to
      open and can be moved relatively  easily,  the Company's  expansion
      strategy includes closing kiosks

                                     5
<PAGE>


      when appropriate and relocating the kiosks to new locations. During
      the past three fiscal years, the Company has closed 31 stores.

            The Company's  expansion may also include retail concepts and
      locations  other than the  Company's  standard  kiosks in  regional
      malls.  As of March 31,  1998,  the  Company  operated  27  in-line
      stores,  most of which were  acquired as part of the  Earring  Tree
      acquisition.  The Company  continues  to  evaluate  and develop its
      in-line  store  concept.  In fiscal 1998,  the Company  opened four
      in-line stores and expects to open less than five in-line stores in
      fiscal  1999.  The  in-line  store  format may allow the Company to
      expand  into malls  where  kiosks are not  utilized,  as well as to
      increase its presence in malls where it already operates kiosks; to
      offer a larger  selection of  merchandise,  including  higher price
      points;   and  to  take  advantage  of  certain   favorable   lease
      opportunities  if and when  they  are  presented.  During  the 1997
      holiday season, the Company operated 45 seasonal retail mall carts,
      selling  primarily  silver jewelry under the name Silver Station or
      Gold  Station.  In  addition,  the  Company  may  consider  limited
      expansion into outlet malls or less  traditional  retail  locations
      such as airport terminals. In appropriate  situations,  the Company
      will continue to evaluate potential acquisitions of existing stores
      or store sites from third parties.

           Merchandising and Marketing

           Merchandising

            The Company offers an extensive  selection of  popular-priced
      14 karat and 10 karat gold chains, bracelets,  earrings, charms and
      rings,  as well as a  selection  of  silver  jewelry.  The  Company
      focuses its merchandise  selection,  approximately  94% of which is
      gold jewelry,  on basic styles at everyday low prices.  The Company
      believes that, by offering a broad  assortment of basic styles,  it
      provides  its  customers  with  a wide  variety  of  choices  while
      limiting  merchandising  risks associated with fashion trends.  The
      Company  maintains  a balance  between new  merchandise  and proven
      successful  styles.  Prior to  introducing  new items in all of its
      stores,  the Company usually tests the items in approximately 50 of
      its highest volume stores.  The Company's  stores  typically  carry
      approximately  3,800  SKUs,  approximately  70% of which  have list
      prices  between $10 and $80,  and during  fiscal 1998  generated an
      average  jewelry  item  selling  price of  approximately  $25.  The
      Company also offers a selection  of non- jewelry  items such as ear
      care products and jewelry cleaners.  Approximately 56% of a typical
      store's  merchandise  is common to all  stores,  and the  remaining
      products  are  selected  based upon the  characteristics  and local
      preferences of the particular store's customer base.



                                     6
<PAGE>


           During  fiscal  1998,   the  Company's   store  net  sales  by
      merchandise  category as a percentage of total store net sales were
      as follows:
<TABLE>
<CAPTION>

                                                              Percent
                                                              of Total
             Merchandise Category                              Store
                                                              Sales (1)
       ------------------------------------------------------------------
<S>                                                              <C>
         Gold
           Chains and bracelets                                  36%
           Charms and rings                                      27
           Earrings                                              24
           Miscellaneous items                                    1
       ------------------------------------------------------------------
            Total gold                                           88
         Silver jewelry and other items                          12
       ------------------------------------------------------------------
            Total net store sales                               100.0%
</TABLE>

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

           (1) Excludes  $4.3 million of wholesale  sales to the Florida
      Licensee. See "Properties."


           Marketing

            Piercing  Pagoda's pricing policy is to maintain everyday low
      prices complemented by selective  promotions.  The Company seeks to
      be the value leader for popular-priced gold jewelry in the malls in
      which  its  stores  are  located.   The  Company's  stores  display
      merchandise  on pads  in  glass  enclosed  showcases  with  clearly
      visible  price  tags  that   facilitate   browsing  and  comparison
      shopping,  while minimizing the need for sales support. The modular
      merchandise  display  trays in which the  merchandise  pads fit are
      configured  so as to maximize the number of items  displayed and to
      minimize unused space in the showcases. Generally, gold merchandise
      is priced  based on the price the Company  paid its  suppliers  for
      such  merchandise,  and the items are not repriced  based on normal
      fluctuations in the price of gold. The Company  regularly  monitors
      price levels at its  competitors in order to ensure that its prices
      are   competitive,   and  the  Company  believes  that  its  volume
      purchasing and established supplier relationships contribute to its
      ability to remain competitive.  In addition to everyday low prices,
      the Company has a "buy-five-get-one-free" jewelry club. The Company
      also utilizes promotional events such as "Buy Two Get One Free" and
      "Buy One Get One at Half Off",  in  addition  to other  promotional
      events and  clearance  sales.  The  Company  intends to continue to
      emphasize  these  promotions and to monitor them in order to assess
      their relative success.

            In addition to emphasizing lower prices, extensive selection,
      789  nationwide  locations and over 20 years of retail  experience,
      the Company promotes the following:

            Complimentary  ear  piercing.  With the purchase of earrings,
      the Company offers  complimentary  ear piercing and a free check-up
      after four  weeks.  The  Company  utilizes a  state-of-the-art  ear
      piercing system and requires all employees  performing ear piercing
      services to be trained and recertified by the Company annually. The
      Company  limits  its ear  piercing  service to the ear and will not
      pierce  any  other   part  of  the  body.   During   fiscal   1998,
      approximately  10% of the Company's net sales were derived from the
      sale of earrings in connection with complimentary ear piercing.

            Lifetime  guarantee  on all jewelry  items.  The Company will
      repair or replace,  at no cost, all merchandise with  manufacturing
      defects.

            Membership in the  "buy-five-get-one-free"  jewelry club. The
      Company  offers a customer  incentive  program  pursuant  to which,
      after five  purchases,  a customer  is  entitled to a credit on the
      next  purchase  equal  to the  average  price  paid  for  the  five
      purchased items. During fiscal 1998,


                                     7
<PAGE>


      customers  applied  approximately  $5.4 million of credits received
      under the jewelry club to purchases.

            Free layaway.  The Company will hold items for up to 90 days,
      with a deposit,  for  customers  until the full  purchase  price is
      paid.

            Piercing  Pagoda  relies  primarily on highly  visible  store
      locations,   attractive   store  designs  and  an  inviting  visual
      presentation of merchandise to attract  prospective  customers.  In
      addition,  it  occasionally  utilizes  fliers,  brochures and other
      point-of-sale  materials to educate  potential  consumers about the
      features and benefits of shopping at the Company's stores.

            The Company generally does not advertise  independently,  but
      does  participate  in programs  sponsored by the malls in which the
      Company   operates,   including   local  and   regional   newspaper
      advertising,  advertising circulars, seasonal full-color catalogues
      and  radio  and  television  commercials.  In  almost  all  of  the
      Company's  locations,  the Company is obligated by the terms of its
      lease to  contribute  to the cost of the  mall's  advertising.  The
      Company  also   participates  in  national   discount  coupon  book
      programs,   mall-sponsored  promotions  and  a  variety  of  public
      relations activities.

            Unlike many  jewelry  retailers,  the Company does not extend
      credit  to its  customers,  thereby  minimizing  bad debt  expense.
      Approximately 75% of all purchases are cash transactions (including
      personal  checks) with the  remaining  purchases  being credit card
      sales.

           Stores

            At March 31,  1998,  the  Company  operated  789 stores in 43
      states and Puerto Rico,  including  762 kiosk stores and 27 in-line
      stores,  primarily under the names Piercing Pagoda,  Plumb Gold and
      Silver  & Gold  Connection.  The  Company's  kiosk  stores  average
      approximately 170 square feet, with approximately 37 linear feet of
      display  cases.  The  Company  generally  seeks to locate its kiosk
      stores in high traffic  areas of mall  concourses,  and has created
      several  standard  kiosk  store  designs  that can be  adapted to a
      particular  store's  location or to the design  requirements of the
      mall. The kiosks are  manufactured to the Company's  specifications
      by third party kiosk  suppliers  and  typically can be completed so
      that new stores can be opened within eight weeks after  obtaining a
      lease commitment. At March 31, 1998, the Company operated stores in
      573 malls,  and  operated  more than one  location  in 180 of those
      malls.  Of the stores  operated,  27 were in-line  stores,  most of
      which were acquired from Earring Tree.



                                      8
<PAGE>


      The  following  table sets forth the Company's  store  openings and
      closings for the periods indicated:
<TABLE>
<CAPTION>

                                            Fiscal year ended March 31,
                                            -----------------------------

                                              1995    1996  1997   1998

       ------------------------------------------------------------------
<S>                                           <C>     <C>     <C>   <C>
       Number of stores:
         Beginning of period                  295     366     513   682

         Opened/acquired:

            Piercing Pagoda(1)                 63     121     108    61

            Plumb Gold(2)                      14      34      66    24
            Silver & Gold Connection(3)
                                               --      --      --    38

            Other                              --      --       2    --
       ------------------------------------------------------------------

                 Total opened(4)               77     155     176   123
       ------------------------------------------------------------------

            Total closed(5)                     6       8       7    16
       ------------------------------------------------------------------

            Total at end of period            366     513     682   789
</TABLE>

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


      (1)   Includes 6 stores in fiscal  1995,  42 stores in fiscal 1996,
            41  stores in  fiscal  1997 and 10  stores  in  fiscal  1998,
            respectively,  that  were  acquired  and  reopened  under the
            Piercing Pagoda name. Includes stores operated under the name
            Piercing  Pagoda Too in malls where a store is operated under
            the name Piercing Pagoda.  Other than the acquisitions noted,
            stores that change names are not included as new openings.

      (2)   Includes 7 stores in fiscal  1995,  24 stores in fiscal 1996,
            55  stores  in  fiscal  1997 and 3  stores  in  fiscal  1998,
            respectively, that were acquired and reopened under the Plumb
            Gold name.  Other than the  acquisitions  noted,  stores that
            change names are not included as new openings.

      (3)   Includes 34 stores that were acquired and reopened  under the
            Silver & Gold Connection name.


      (4)   Includes 1 in-line store in fiscal 1995, 14 in-line stores in
            fiscal  1996,  7 in-line  stores in fiscal 1997 and 4 in-line
            stores in fiscal 1998.

      (5)   Includes  1 store  sold to  the Florida  Licensee in each of
            fiscal  1995 and  fiscal  1997, and 3 stores  sold in fiscal
            1998. See "Properties."

      Store Operations

            Store operations are divided into nine regions, each of which
      is  supervised  by  a  regional  manager.   The  regional  managers
      supervise  the  Company's  district  managers,   each  of  whom  is
      responsible  for an average of  approximately  ten stores  within a
      specific  geographic  area.  Each  of the  Company's  stores  has a
      full-time manager and a full-time  assistant manager in addition to
      hourly sales associates, most of whom work part-time. The number of
      hourly sales associates  fluctuates  greatly  depending on seasonal
      needs.

            The  Company  believes  that  providing   knowledgeable   and
      responsive  customer  service is a crucial  element to its  success
      and, accordingly,  has developed and implemented extensive employee
      training and incentive programs. In addition to training during the
      first few weeks of  employment  and frequent  field  training,  the
      Company produces training videos for sales associates.  The Company
      monitors its training program by having sales  associates  complete
      worksheets  after viewing each video.  Additionally,  every August,
      all sales personnel complete  "Piercing  University" where they are
      retrained  in the  state-of-the-art,  safe,  sterile  ear  piercing
      method utilized by the Company.  Store  managers,  most of whom are
      promoted from within the Company,  also complete extensive training
      programs  during which they receive  training in management  skills
      and employee  relations  as well as in sales and customer  service.
      The Company  regularly  monitors  customer service at its stores by
      using  "secret  shoppers"  who  complete   evaluation  forms  after
      visiting  stores  as  customers.  Regional  managers  and  district
      managers generally spend  approximately one week, two to four times
      per year,

                                     9
<PAGE>


      in the Company's corporate  headquarters where they receive ongoing
      administrative and operational training.

            The Company seeks to instill enthusiasm and dedication in its
      store management  personnel and sales associates  through incentive
      programs and  regularly  solicits  employee  suggestions  regarding
      store operations.  Management  believes that its  employee-oriented
      culture  creates  a sense  of  personal  accountability  among  its
      employees,  as well as pride in the  Company  and its  merchandise,
      resulting in a higher level of customer service.  Sales associates,
      as well as store management  personnel,  receive base  compensation
      plus  incentive  compensation  and are  entitled  to  discounts  on
      purchases.  The Company  seeks to motivate  its store  personnel to
      focus on team  success  by having  the  incentive  portion of their
      compensation related primarily to store performance and to a lesser
      extent  to  individual  performance.  District  managers  and their
      supervisors are eligible for stock options and stock purchases on a
      discounted  basis  pursuant to the Company's  1995  Employee  Stock
      Purchase Plan, as well as for commissions and bonuses.  The Company
      experiences a significant  amount of turnover  among its personnel,
      especially among its sales associates,  that it believes is typical
      of its industry.

      Purchasing and Distribution

            The Company's  centralized  purchasing department selects and
      test markets its merchandise, develops relationships with suppliers
      and monitors the  merchandise  levels at the  Company's  stores and
      corporate  distribution center.  Target merchandise levels for each
      store are  calculated  according to the  individual  store's  sales
      volume  of  each  item.  Merchandise  is  delivered  in bulk to the
      Company's  headquarters  where the Company's  in-house  merchandise
      staff prepares all items for display on merchandise  pads,  thereby
      eliminating supplier display preparation charges.  Items are tagged
      with a price and stickered with a bar code label for tracking.

            The Company utilizes approximately 150 vendors,  primarily in
      the  United  States,  Italy and Asia,  who supply  various  jewelry
      products.  The Company's purchase agreements with its suppliers are
      all denominated in U.S. dollars.  During fiscal 1998, the Company's
      five  largest  suppliers  accounted  for  approximately  38% of the
      merchandise  purchased  by  the  Company.  None  of  these  vendors
      accounted for more than 10% of the Company's  merchandise purchases
      during  fiscal 1998.  The Company does not believe that the loss of
      any current  supplier would adversely  affect its  operations.  The
      Company has no long-term contracts for the purchase of merchandise.
      Management   believes  that  the   relationships  the  Company  has
      established  with its  suppliers  are  good.  The  Company  has not
      experienced  any  difficulty in obtaining  satisfactory  sources of
      supply and believes  that  adequate  alternative  sources of supply
      exist  for  substantially  all  types  of  merchandise  sold in its
      stores.

            The Company  maintains a quality  control  program,  with all
      shipments  from  suppliers  being  counted or weighed and  visually
      inspected upon receipt at the Company's offices.  In addition,  the
      Company regularly assays a portion of gold merchandise shipments to
      assure  that the  merchandise  is of the karat  represented  by the
      supplier.

      Management Information Systems

            The  Company   currently  uses  a   proprietary,   customized
      UNIX-based  system for both its inventory  management and financial
      and  accounting  systems.   Through  nightly  polling  of  in-store
      registers,   the  Company  monitors  sell-through  information  and
      inventory  levels,  enhancing  the  Company's  ability  to  control
      effectively the merchandise at its stores and to identify and react
      promptly  to sales  trends.  Based on the sales  data,  the Company
      tailors individual stores' merchandise levels, plans its purchasing
      in order to  benefit  from  volume  purchasing  discounts  from its
      suppliers and prioritizes the in-house preparation of merchandise.

                                     10
<PAGE>



            After a  thorough  review  of its  inventory  management  and
      financial  and  accounting  systems  completed in fiscal 1998,  the
      Company concluded that its current proprietary inventory management
      and  replenishment  system  would,  with  minor  modification,   be
      adequate to meet the Company's  needs at least through fiscal 2000.
      The  Company has begun  making the  required  modifications  and is
      currently  running the modified system in parallel with its current
      system. The modified inventory  management and replenishment system
      is expected to be fully in use by the third quarter of fiscal 1999.
      The Company  anticipates  that subsequent to fiscal 2000 it will be
      necessary  to upgrade  its  inventory  management  software.  It is
      expected that new inventory management software will be modified to
      replicate certain custom elements of the Company's  existing system
      and will utilize the SQL relational database and a Windows NT-based
      client/server  architecture.  Additionally,  the  Company has begun
      implementation  of new financial and  accounting  systems.  The new
      financial  and  accounting   software   system   utilizes  the  SQL
      relational   database   and  a   Windows   NT-based   client/server
      architecture.  The Company believes that the combination of the new
      software and client/server technology will provide the Company with
      better   analytical  tools  and  enhance  the   information-sharing
      capabilities of the Company's  management  information systems. The
      new  financial  and  accounting  systems  are  expected to be fully
      implemented in the first quarter of fiscal 1999. See  "Management's
      Discussion and Analysis" for a discussion of Year 2000 issues.

      Competition

            The retail  jewelry  business is highly  competitive  and the
      Company  believes that the primary  elements of  competition in the
      popular-priced  jewelry  business  are price,  selection,  customer
      service, quality and the appeal and convenience of store locations.
      The Company  competes  with national and regional  jewelry  chains,
      department  stores,  local  independently  owned jewelry stores and
      chains, catalogue showrooms, discounters, direct mail suppliers and
      televised  home  shopping   networks.   Certain  of  the  Company's
      competitors  have   significantly   greater   financial  and  other
      resources than the Company.  The retailing  business is affected by
      changes in consumer taste,  demographic trends and the type, number
      and location of competing stores. The Company also believes that it
      competes  for  store  locations  and for  consumers'  discretionary
      spending dollars with retailers that offer  merchandise  other than
      jewelry.

      Employees

            As of March 31,  1998,  the Company had  approximately  1,651
      full-time and approximately  2,186 part-time  employees.  Of these,
      201 were  employed  full-time  and 25  part-time  at the  Company's
      corporate offices and distribution  facility while the balance were
      employed as part of the Company's field sales force.  The number of
      employees fluctuates depending on seasonal needs. During the fiscal
      1998  peak  holiday   season,   the  Company  had  3,808  part-time
      employees.  None  of  the  Company's  employees  is  covered  by  a
      collective   bargaining   agreement,   and  the  Company  considers
      relations with its employees to be good.

      Trademarks

            The Company  believes  its  registered  trademarks  "Piercing
      Pagoda  and   Design,"   "Silver   Station"   and  "Silver  &  Gold
      Connection," along with the Company logo and "Plumb Gold" name, are
      important  elements  of  the  Company's  marketing   strategy.   In
      addition,  the  Company  has a  trademark  application  pending for
      "Piercing  Pagoda the Gold  Company."  The Company is not otherwise
      dependent on any patent, trademark, service mark or copyright.


                                     11
<PAGE>


      Government Regulation

            The  Company's  ear  piercing  service  is not  regulated  by
      federal  statute.  Currently,  Minnesota  and  Oregon  are the only
      states in which the Company  operates  that  regulate  ear piercing
      activities.  In  Minnesota,  legislation  in a single  municipality
      imposes  various  restrictions  upon  ear  piercing  that  make  it
      impractical  for the  Company to comply.  Accordingly,  the Company
      does not perform ear piercing in the one  location  affected by the
      regulation.  Legislation in Oregon requires the Company, and any of
      its  employees  administering  ear  piercing  services in stores in
      Oregon, to be licensed by the State. The legislation also deems ear
      piercing  through  anywhere  but  the  lobe  of the  ear to be body
      piercing,  which is subject to additional  restrictions,  including
      that it must be  performed  in a separate  room.  Accordingly,  the
      Company  limits its ear  piercing  to the ear lobe in  Oregon.  The
      Company  is  aware  of  approximately  15  jurisdictions  in  which
      legislation  to regulate  ear piercing  establishments  is pending,
      including  Ohio  and  Massachusetts  where  the  Company  currently
      operates 52 stores and 29 stores,  respectively.  The proposed Ohio
      legislation  would require the use of germicidal wipes to sterilize
      equipment used in the ear piercing  process.  The Company currently
      plans to implement the use of germicidal wipes in all its locations
      and expects to be in compliance with the Ohio  legislation when and
      if  approved.  The  proposed   Massachusetts   legislation  directs
      regulators to develop procedures applicable to body piercing, which
      the proposed legislation  currently defines to exclude the ear lobe
      but to  include  all other  parts of the ear.  Generally,  however,
      pending  legislation  proposes requiring the consent of a parent or
      guardian in order to pierce the ears of a minor  (which the Company
      requires  even in the  absence  of  legislation),  the  posting  of
      certain  notices and the  obtaining  of certain  registrations  and
      licenses,  but does not require special  procedures for piercing of
      portions of the ear other than the lobe.  Management  believes that
      the  Company  complies in all  material  respects  with  applicable
      legislation. While the Company does not expect existing or proposed
      legislation  to have a  material  adverse  effect on the  Company's
      business,  there is no assurance that governmental  bodies will not
      modify   existing   legislation   in  such  a  way,  or  enact  new
      legislation,  that would  restrict  or prohibit  the  Company  from
      providing  ear  piercing   services  in  its  stores  or  otherwise
      continuing to conduct its business as presently operated.

            In April  1993,  after  an  investigation,  the  Occupational
      Safety and Health  Administration  ("OSHA")  issued an opinion that
      establishments  which use an ear  piercing  system  such as the one
      utilized by the Company and which  maintain an ear piercing  policy
      such  as the  Company's  do not  expose  employees  to  blood  and,
      therefore,  are not subject to OSHA regulations concerning employee
      exposure to blood.

      Item 2.  PROPERTIES

            The Company leases all of its store  locations,  but owns the
      kiosks and other  fixtures.  The  Company's  typical lease is for a
      period of five years and includes a minimum base rent, a percentage
      rent based on store  sales,  a common area  maintenance  charge and
      payments to a merchants'  association.  In addition,  substantially
      all of the  Company's  leases  require the Company to contribute to
      the cost of advertising  for the mall in which the store subject to
      the lease is located.  The Company is generally  required under the
      terms of its leases to  maintain  and  conform its stores to agreed
      upon  standards.  Of the Company's  store leases at March 31, 1998,
      123 expire before March 31, 1999.

            The  Company  also  licenses  the use of its store  names and
      concept to an  independent  store operator with 22 stores and three
      retail mall carts in Florida (the "Florida  Licensee"). In order to
      reach a negotiated resolution of rights of the Florida Licensee who
      had been a franchisee of the Company,  the Company  entered into an
      agreement with the Florida  Licensee  pursuant to which the Florida
      Licensee generally has the right to acquire, at prices favorable to
      the Florida  Licensee,  the Company's stores operating in the state
      of Florida and has the right of first  refusal  with respect to new
      locations  in  that  state.  The  Florida  Licensee  purchases  its
      inventory  from the  Company  and pays the Company a royalty on its
      net sales. In fiscal 1998, the Florida  Licensee  purchased a total
      of three 

                                     12
<PAGE>


      stores fromthe Company. In each of fiscal 1995 and fiscal 1997, the
      Florida Licensee  exercised its right to acquire one store from the
      Company.  Recently,  the Florida Licensee has expressed interest in
      acquiring additional stores from the Company. Of the 42 stores that
      the Company currently operates in Florida, 2 were acquired from the
      Florida  Licensee.  See  "Management's  Discussion  and Analysis of
      Financial Condition and Results of Operations."

            The Company owns a 73,000  square foot building in Bethlehem,
      Pennsylvania   that  serves  as  its  corporate   headquarters  and
      distribution  center.  As a  result  of  recent  acquisitions,  the
      Company's distribution  facilities are near capacity.  Accordingly,
      it has begun  construction of an  approximately  71,000 square foot
      facility  on  approximately  five  acres  of  vacant  land  it owns
      adjacent to the Bethlehem property. This new facility is planned to
      be used  primarily  for  additional  distribution  and  warehousing
      functions and should become operational in fiscal 1999.


      Item 3.  LEGAL PROCEEDINGS

           Piercing   Pagoda  is  not  a  party  to  any  material  legal
      proceedings,  other than  certain  actions  arising in the ordinary
      course of  business.  The Company  does not  believe  that any such
      claims and lawsuits,  either individually or in the aggregate, will
      have a material  adverse  effect on  Piercing  Pagoda's  results of
      operations or financial condition.

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

           No  matters  were  submitted  to a vote of  security  holders,
      through a solicitation  of proxies or otherwise,  during the fourth
      quarter of the fiscal year ended March 31, 1998.

      Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

           The following table sets forth certain information  concerning
      the  executive  officers of the Company as of March 31,  1998.  All
      executive  officers  serve  at  the  discretion  of  the  Board  of
      Directors of the Company.



       ------------------------------------------------------------------
               Name          Age          Position with Company
       ------------------------------------------------------------------

        Richard H. Penske     55  Chairman of the Board and Chief
                                  Executive Officer
        John F. Eureyecko     49  President, Chief Operating Officer,
                                  Secretary and Director
        Barry R. Clauser      44  Senior Vice President -- Merchandise
                                  Operations
        Sharon J. Zondag      43  Senior Vice President -- Store
                                  Operations
        Brandon R. Lehman     46  Treasurer

        Lisa E. Sankovsky     37  Vice President -- Real Estate

        Richard J. McKeon     40  Director of Management Information
                                  Systems

        Christopher J.        33  Corporate Controller
        Barone
        -----------------------------------------------------------------



                                     13
<PAGE>


           Richard H. Penske has served the Company and its  predecessor
      in various  capacities  for more than 25 years.  Mr. Penske served
      as  President  of the  Company  from  1980 to June  1996,  and has
      served as the Chief  Executive  Officer since 1986. Mr. Penske has
      served as a director of the Company since 1978.

           John F.  Eureyecko  joined the Company in October 1991 and has
      served as President  and Chief  Operating  Officer since June 1996.
      Mr.  Eureyecko had  previously  served as Executive  Vice President
      from January 1992 to June 1996 and as Chief Financial  Officer from
      February 1994 to June 1996. Mr.  Eureyecko was elected as Secretary
      in January  1992 and as a director  in March  1994.  Mr.  Eureyecko
      joined the Company with 18 years  experience  at Triangle  Building
      Supplies and Lumber Co., a building  materials  retailer,  where he
      last served as Senior Vice President and General Manager.

           Barry R.  Clauser  joined the  Company in October  1976 as an
      assistant to the Executive  Vice  President.  He has served as the
      Company's  Senior Vice President -- Merchandise  Operations  since
      April 1988.

           Sharon J.  Zondag  joined the  Company in October  1976 as an
      Assistant  Store  Manager.  Ms. Zondag served as Vice President --
      Store  Operations  from February  1986 to March 1988.  Since March
      1988,  Ms.  Zondag has served as Senior  Vice  President  -- Store
      Operations.

           Brandon  R.  Lehman  joined the  Company in August  1991 as a
      staff accountant and became the Corporate  Controller in 1992. Mr.
      Lehman was elected  Treasurer in March 1994. Mr. Lehman joined the
      Company with 16 years of experience at Ice City,  Inc., a retailer
      of seasonal products, where he last served as Corporate Treasurer.

            Lisa E. Sankovsky  joined the Company in 1983 as an assistant
      to Mr.  Penske,  focusing on lease  administration.  Ms.  Sankovsky
      served as Director of Real Estate from  February 1994 to July 1995.
      Since July 1995, Ms. Sankovsky has served as Vice President -- Real
      Estate.

            Richard  J.  McKeon  has  served as  Director  of  Management
      Information  Systems since he joined the Company in November  1990.
      From 1987 to 1990, Mr. McKeon was a programmer  trainer with Valley
      Computer Learning Center, a computer training company.

            Christopher J. Barone has served as the Corporate  Controller
      since October 1994. Prior thereto,  he served in various capacities
      with KPMG Peat  Marwick LLP from  September  1989 to October  1994,
      most recently as Audit Manager.




                                     14
<PAGE>


                                      PART II

      Item 5.  MARKET  FOR   REGISTRANT'S   COMMON  EQUITY  AND  RELATED
               STOCKHOLDER MATTERS

           The Company  consummated  the initial  public  offering of its
      common stock on October 20, 1994, and its common stock is traded on
      the Nasdaq National Market ("Nasdaq") under the symbol "PGDA".

           The  following  table  sets  forth,  for the  fiscal  quarters
      indicated,  the  high  and  low  sales  prices  per  share  for the
      Company's  common  stock,  as reported on Nasdaq,  for the last two
      fiscal years:


                                                High        Low
                                                ---------------
           Fiscal year 1997
           ----------------
           First Quarter                        $18.75    $13.25
           Second Quarter                       $22.25    $17.00
           Third Quarter                        $24.25    $20.00
           Fourth Quarter                       $26.63    $21.00

           Fiscal year 1998
           ----------------
           First Quarter                        $28.00    $24.00
           Second Quarter                       $32.00    $24.88
           Third Quarter                        $31.13    $23.75
           Fourth Quarter                       $31.25    $27.00



           As of June 22, 1998, there were  approximately  128 holders of
      record of the Company's common stock.

           There are  currently  no  restrictions  on the use of retained
      earnings for the distribution of dividends,  as long as the Company
      is not,  or the  making  of such  distribution  would not cause the
      Company  to be, in  default  under its  existing  credit  facility.
      However,  the  Company  currently  intends  to  retain  any  future
      earnings  to  fund  operations  and  continued  development  of its
      business and, therefore,  does not anticipate paying cash dividends
      on its common  stock for the  foreseeable  future.  The  payment of
      dividends is at the discretion of the Company's  Board of Directors
      and  will be based  upon the  earnings,  capital  requirements  and
      operating  and  financial  condition  of the  Company,  among other
      factors, at the time such dividends are considered. The Company has
      not paid any dividends since the beginning of fiscal 1996.

      Item 6. SELECTED FINANCIAL DATA

           The selected financial data for the five years ended March 31,
      1998 is qualified by reference to and should be read in conjunction
      with the  Company's  consolidated  financial  statements  and notes
      thereto and  "Management's  Discussion  and  Analysis of  Financial
      Condition and Results of Operations" appearing
      elsewhere herein.

                                     15
<PAGE>

<TABLE>
<CAPTION>


                                                   Fiscal Year Ended March 31,
                                    ---------------------------------------------------------
                                       1998       1997        1996       1995          1994
---------------------------------------------------------------------------------------------
                                      (In thousands, except per share and selected
                                                    operating data)
<S>                                 <C>        <C>          <C>          <C>         <C>
Income Statement Data:
  Net Sales                         $ 222,128  $ 166,885    $ 121,581    $86,076     $ 68,922
  Cost of goods sold and
   occupancy expenses                 119,328     92,308       67,440     48,069       37,961
   (excluding depreciation on
    kiosks)
---------------------------------------------------------------------------------------------
  Gross Profit                        102,800     74,577      54,141      38,007       30,961
  Selling, general and
   administrative expenses             82,916     60,845      43,887      30,007       25,122
   (including depreciation on
    kiosks)
  Restricted stock compensation           -           -             -         -           390
    bonus (1)
---------------------------------------------------------------------------------------------
  Income from operations               19,884     13,732      10,254       8,000        5,449
  Interest and other income               562        386         282         307          370
  Interest expense                      2,896      2,208       1,306       1,427        1,464
---------------------------------------------------------------------------------------------
  Earnings before income taxes         17,550     11,910       9,230       6,880        4,355
  Income taxes(2)                       6,581      4,372       3,553       3,352          121
---------------------------------------------------------------------------------------------
  Net income (2)                      $ 10,969   $ 7,538     $ 5,677      $3,528      $ 4,234
---------------------------------------------------------------------------------------------
Earnings Per Share Data:
   Earnings per share:
      Basic                           $ 1.88      $ 1.43      $ 1.08
      Diluted                         $ 1.82      $ 1.40      $ 1.07
   Weighted average shares
    outstanding:
      Basic                            5,843       5,257       5,237
      Diluted                          6,041       5,389       5,325
Pro Forma Data:
  Pro forma net income (2)                                               $ 4,156      $ 2,624
  Pro forma diluted earnings per
   share (2) (3)                                                          $ 0.91       $ 0.67
  Pro forma weighted average shares
   outstanding (3)                                                         4,558        3,895

Selected Operating Data:
  Number of stores at beginning of
   period                                682         513         366         295          279
  Stores added (net  of  closures
   and sales)                            107         169         147          71           16
---------------------------------------------------------------------------------------------
  Stores at end of period                789         682         513         366          295
---------------------------------------------------------------------------------------------

  Average jewelry units sold per
   comparable store (rounded) (4)     11,800      12,000       11,600     10,800        9,500
  Average comparable store net
   sales (5)                       $ 295,000   $ 303,000    $ 295,000   $266,000     $241,000
  Average comparable store
   net sales per square foot (6)     $ 1,630      $1,848      $ 1,821    $ 1,652      $ 1,544
  Average  comparable store square
   footage (6                            181         164          162        161          153
  Percentage increase  in
   comparable store net sales (7)       3.0%        7.6%        12.4%       9.8%        13.8%
</TABLE>
<TABLE>
<CAPTION>

                                                              March 31,
                                    ---------------------------------------------------------
                                       1998       1997       1996         1995        1994
---------------------------------------------------------------------------------------------
                                                     (In thousands)
<S>                                 <C>         <C>          <C>        <C>           <C>
Balance Sheet Data:
  Working capital                   $ 44,302    $ 40,649     $ 15,948   $ 13,556      $ 3,464
  Inventory                           53,149      43,109       25,390     15,128       12,413
  Total assets                        96,099      79,741       47,906     32,122       26,749
  Current installments of
   long-term debt                        247         234        5,910          -        5,693
  Long-term debt, less current
   installments                        9,742      26,690        2,350          -       10,628
  Stockholders' equity                66,328      37,522       29,579     23,862        2,335
---------------------------------------------------------------------------------------------
</TABLE>

                                     16
<PAGE>



       (1) The restricted stock compensation bonus in fiscal 1994 was due
         to the Company granting a bonus to seven employees and directors
         equal to  approximately  $1.78 for each share  purchased by such
         employees and  directors  under the  Company's  1994  Restricted
         Stock Plan.  The bonuses  were used by the  recipients  to pay a
         portion  of the  purchase  price for the shares  purchased.  The
         Company has not since and does not anticipate  granting  similar
         bonuses in the future.

       (2) For fiscal year 1994, the Company was an "S"  corporation  for
         federal and certain state income tax purposes and,  accordingly,
         was subject only to limited  corporate  income taxes. For fiscal
         1995,  income tax  expense  includes  the state tax  expense for
         certain   states  in  which  the   Company  did  not  elect  "S"
         corporation  status  prior to the  initial  public  offering  in
         October 1994, a one-time deferred tax charge for conversion from
         "S"  corporation  to "C"  corporation  status  for  federal  and
         certain  state  purposes,  and the  current and  deferred  taxes
         applicable to the Company's  income as a "C" corporation for the
         period after the initial public offering.  Due to the allocation
         method  utilized  for tax return  purposes,  tax expense for the
         post   offering   period   includes   taxes  payable  to  taxing
         authorities   and   payments   to  certain   of  the   Company's
         stockholders pursuant to a tax indemnification agreement between
         the Company and such stockholders.

       (3) Pro forma  diluted  earnings  per share has been  computed  by
         dividing pro forma net income by the weighted  average number of
         common shares and common share  equivalents  outstanding  during
         fiscal 1994 and fiscal  1995,  as adjusted to give effect at all
         times to the sale or other  issuance of shares  during March and
         June of fiscal 1994.

       (4) Fiscal 1995, fiscal 1996 , fiscal 1997 and fiscal 1998 reflect
         average  jewelry units sold per  comparable  store based on 260,
         283,  355  and  493  comparable  stores,   respectively,   which
         represent  the  number  of all  stores  open  at the end of such
         fiscal  year  which  were also open as of the  beginning  of the
         preceding  year.  Average jewelry units sold per store in fiscal
         1994 is  calculated  by dividing the total jewelry units sold by
         the  Company's  stores  during the period by the  average of the
         total  beginning  and ending  number of stores and is rounded to
         the nearest hundred.  Due to the significant number of new store
         openings in the last four  fiscal  years,  the Company  believes
         comparable  store data is a more meaningful  measure of the unit
         sales at its stores than total store data.

       (5) Average net sales per comparable  store is calculated based on
         the net  sales of all  stores  open as of the  beginning  of the
         preceding fiscal year divided by the number of such stores.

       (6) Fiscal 1995,  fiscal 1996, fiscal 1997 and fiscal 1998 reflect
         average net sales per square foot for  comparable  stores (those
         stores open at the end of the respective  fiscal year which were
         also open as of the  beginning  of the  preceding  fiscal  year)
         based on the  approximate  average square footage per comparable
         store  of  161,  162,  164 and 181  square  feet,  respectively.
         Average net sales per square foot in fiscal 1994 is based on the
         average  net sales per store  divided  by 153,  the  approximate
         average square footage for all stores during that year.  Average
         net sales per  store in fiscal  1994 is based on the net  sales,
         less  wholesale  sales,  divided  by the  average  of the  total
         beginning  and ending  number of stores  that  year.  Due to the
         significant  number of larger,  new store openings in the latest
         four fiscal years, the Company believes comparable store data is
         a more  meaningful  measure of the sales per square  foot at its
         stores than total store data.

       (7) Comparable  store net sales data are  calculated  based on the
         change in net sales of all stores  open as of the  beginning  of
         the preceding fiscal year.



                                     17
<PAGE>


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


           Net sales are comprised primarily of sales generated by stores
      and, to a much lesser  extent,  wholesale  sales  (primarily to the
      Florida  Licensee).  See  "Properties."  Cost  of  goods  sold  and
      occupancy expenses include the cost of merchandise,  rent and other
      occupancy expenses 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 on kiosks.

           Results of Operations

           The  following  table sets forth,  for the periods  indicated,
      certain selected income statement data expressed as a percentage of
      net sales:


                                                    Fiscal Year Ended
                                                        March 31,
       ------------------------------------------------------------------

                                                   1998     1997   1996
                                                 ------------------------

       Net sales                                  100.0%   100.0% 100.0%

       Cost of goods sold and occupancy expenses
          (excluding depreciation on kiosks)        53.7    55.3    55.5
       ------------------------------------------------------------------

       Gross profit                                 46.3     44.7   44.5

       Selling,   general   and   administrative
       expenses                                     37.3     36.5   36.1
          (including depreciation on kiosks)
       ------------------------------------------------------------------

       Income from operations                       9.0      8.2    8.4

       Interest and other income                    0.2      0.2    0.2

       Interest expense                             1.3      1.3    1.1
       ------------------------------------------------------------------

       Earnings before income taxes                 7.9      7.1    7.6

       Income taxes                                 3.0      2.6    2.9
       ------------------------------------------------------------------

       Net income                                   4.9%     4.5%   4.7%
       ------------------------------------------------------------------


           Comparison of Fiscal 1998 and Fiscal 1997

           Net Sales

           Net sales increased $55.2 million, or 33.1%, to $222.1 million
      in fiscal 1998 from $166.9  million in fiscal 1997.  This  increase
      was due  primarily to net sales  generated by new stores  opened or
      acquired by the Company and to a $4.3 million, or 3.0%, increase in
      comparable store net sales. At March 31, 1998, the Company operated
      789 stores  compared to 682 stores at March 31,  1997.  The average
      jewelry units sold per  comparable  store  decreased  slightly,  or
      1.7%, to 11,800 in fiscal 1998 from 12,000 in fiscal 1997.  This is
      due in part to the 138 additional stores included in the comparable
      store base in fiscal 1998 that  generally had lower dollar and unit
      sales  volume  than the  Company's  older  comparable  stores.  The
      average  price per jewelry unit sold for all the  Company's  stores
      increased slightly,  or $0.05, to $24.53 in fiscal 1998 from $24.48
      in fiscal 1997.  Wholesale sales to the Florida Licensee  increased
      59.3% to $4.3  million in fiscal  1998 from $2.7  million in fiscal
      1997 to support the increased  retail sales of the Florida Licensee
      including sales at three  additional  locations  purchased from the
      Company during fiscal 1998.

                                     18
<PAGE>



           Gross Profit

           Gross profit  increased  $28.2  million,  or 37.8%,  to $102.8
      million  in fiscal  1998 from $74.6  million  in fiscal  1997 while
      gross profit margin increased to 46.3% in fiscal 1998 from 44.7% in
      fiscal 1997. The gross profit margin improvement primarily reflects
      lower costs of merchandise  during the period,  partially offset by
      an increase in promotional events held by the Company during fiscal
      1998 versus fiscal 1997.  The gross profit margin  improvement  was
      also  reduced  by  increased  rent  and  occupancy   expense  as  a
      percentage  of net  sales  due to the 123 new and  acquired  stores
      opened during the year and their lower initial sales volumes.

           Selling, General and Administrative Expenses

           Selling,  general and administrative  expenses increased $22.0
      million,  or 36.1%,  to $82.9  million  in fiscal  1998 from  $60.9
      million in fiscal  1997.  As a  percentage  of net sales,  selling,
      general and  administrative  expenses  increased to 37.3% in fiscal
      1998 from 36.5% in fiscal 1997.  The  increase in selling,  general
      and  administrative  expense as a percentage of net sales primarily
      reflects  higher  expenses  associated  with new stores  opened and
      acquired by the  Company.  Depreciation  and  amortization  expense
      increased 50.0% to $5.4 million in fiscal 1998 from $3.6 million in
      fiscal 1997. This was due primarily to capital expenditures for new
      stores and the upgrading of kiosks in existing locations as well as
      higher  amortization  expense for goodwill  recorded in  connection
      with  acquisitions in February 1997 and April 1997. A total of $6.4
      million of  goodwill  was  recorded  in  connection  with these two
      acquisitions and is being amortized over fifteen years.

           Interest Expense

           Interest expense increased $688,000, or 31.3%, to $2.9 million
      in  fiscal  1998  from  $2.2  million  in  fiscal  1997,  and  as a
      percentage  of net sales was  unchanged  at 1.3% in fiscal 1998 and
      1997. The increase in interest  expense,  which  includes  interest
      paid on bank borrowings, fees paid for letters of credit as part of
      the Company's gold consignment  program and gold consignment  fees,
      primarily  reflects an increase in total average  borrowings  under
      the  Company's  revolving  line of credit  and an  increase  in the
      number of ounces  consigned  under the Company's  gold  consignment
      program.  These increases were partially  offset by a lower average
      interest rate on the revolving  line of credit,  which was in place
      for all of fiscal 1998,  and the use of the proceeds of a secondary
      offering  of the  Company's  common  stock in June of 1997 to repay
      debt incurred in connection with acquisitions.

           Income Tax Expense

           Income tax expense  increased  $2.2 million to $6.6 million in
      fiscal 1998 from $4.4  million in fiscal 1997.  As a percentage  of
      earnings before income taxes, income tax expense increased to 37.5%
      in fiscal 1998 from 36.7% in fiscal  1997.  The  increase in income
      tax expense is due to the increase in the Company's earnings before
      income taxes. The higher effective income tax rate in 1998 resulted
      from the  effect  of  certain  acquisition-related  costs and other
      charges for which there were no corresponding tax benefits.

           Net Income

           The Company's net income increased $3.5 million,  or 46.7%, to
      $11.0 million in fiscal 1998 from $7.5 million in fiscal 1997.  The
      Company  believes that such increase  resulted  primarily  from the
      factors described above.


                                     19
<PAGE>



           Comparison of Fiscal 1997 and Fiscal 1996

           Net Sales

           Net sales increased $45.3 million, or 37.3%, to $166.9 million
      in fiscal 1997 from $121.6  million in fiscal 1996.  This  increase
      was due  primarily to net sales  generated by new stores  opened or
      acquired by the Company and to a $7.6 million, or 7.6%, increase in
      comparable store net sales. At March 31, 1997, the Company operated
      682 stores  compared to 513 stores at March 31,  1996.  The average
      jewelry units sold per comparable  store  increased 3.5%, to 12,000
      in fiscal  1997 from  11,600 in  fiscal  1996  partially  due to an
      increase  in the  number of  promotional  events  at the  Company's
      stores  versus the prior year.  The average  price per jewelry unit
      sold for all the Company's stores also increased modestly by $0.33,
      or 1.4%,  to  $24.48 in fiscal  1997  from  $24.15 in fiscal  1996.
      Wholesale sales (primarily to the Florida Licensee) increased 42.1%
      to $2.7  million in fiscal 1997 from $1.9 million in fiscal 1996 to
      support  the  increased   retail  sales  of  the  Florida  Licensee
      including  sales  at one  additional  location  purchased  from the
      Company during fiscal 1997.

           Gross Profit

           Gross  profit  increased  $20.5  million,  or 37.9%,  to $74.6
      million  in fiscal  1997 from $54.1  million  in fiscal  1996 while
      gross profit margin increased slightly to 44.7% in fiscal 1997 from
      44.5% in fiscal 1996.  Gross profit margin  increased due to higher
      mark-ups  associated  with lower  costs of  merchandise  during the
      period,  offset by an  increase in  promotional  events held by the
      Company  during  fiscal  1997 versus  fiscal  1996.  The  remaining
      improvement  in gross margin  primarily  reflects an improvement in
      rent and other  occupancy  expenses as a  percentage  of net sales,
      reflecting the leverage of a larger sales base.

           Selling, General and Administrative Expenses

           Selling,  general and administrative  expenses increased $17.0
      million,  or 38.7%,  to $60.9  million  in fiscal  1997 from  $43.9
      million in fiscal  1996.  As a  percentage  of net sales,  selling,
      general and  administrative  expenses  increased to 36.5% in fiscal
      1997 from 36.1% in fiscal 1996.  The  increase in selling,  general
      and  administrative  expense as a percentage of net sales primarily
      reflects  higher  expenses  associated  with new stores  opened and
      acquired by the  Company.  Depreciation  and  amortization  expense
      increased 38.5% to $3.6 million in fiscal 1997 from $2.6 million in
      fiscal 1996 due  primarily to capital  expenditures  for new stores
      and the upgrading of kiosks in existing locations.

           Interest Expense

           Interest expense increased $902,000, or 69.4%, to $2.2 million
      in  fiscal  1997  from  $1.3  million  in  fiscal  1996,  and  as a
      percentage of net sales, increased to 1.3% in fiscal 1997 from 1.1%
      in fiscal 1996.  The increase in interest  expense,  which includes
      interest paid on bank  borrowings,  fees paid for letters of credit
      as  part  of  the  Company's  gold  consignment  program  and  gold
      consignment fees,  primarily  reflects an increase in the Company's
      total  average  borrowings  under the Company's  revolving  line of
      credit and an increase in the number of ounces  consigned under the
      Company's gold consignment  program.  In addition,  $2.9 million of
      long-term  debt related to the Company's  fiscal 1996  expansion of
      its corporate  headquarters and distribution center was outstanding
      since the end of the first quarter of fiscal 1997.


                                     20
<PAGE>

           Income Tax Expense

           Income  tax  expense  increased  $819,000  to $4.4  million in
      fiscal 1997 from $3.6  million in fiscal 1996.  As a percentage  of
      earnings before income taxes, income tax expense decreased to 36.7%
      in fiscal 1997 from 38.5% in fiscal  1996.  The  increase in income
      tax expense is due to the increase in the Company's earnings before
      income taxes. The decrease in income taxes as a


      percentage of earnings  before income taxes  reflects the full year
      effect of certain tax planning strategies implemented during fiscal
      1996.

           Net Income

           The Company's net income increased $1.8 million,  or 31.6%, to
      $7.5 million in fiscal 1997 from $5.7  million in fiscal 1996.  The
      Company  believes  that such  increase  resulted from the foregoing
      factors, among other things.


           Liquidity and Capital Resources

           The Company's primary ongoing short-term capital  requirements
      have been to fund an  increase  in  inventory  and to fund  capital
      expenditures  and working  capital  (mostly  inventory) for new and
      acquired stores.  The Company's  long-term  liquidity  requirements
      relate principally to the maturity of its long-term debt in July of
      2000,   operating  lease  commitments  and  store  expansion.   The
      Company's  primary  sources of liquidity  have been funds  provided
      from operations,  a gold consignment program, bank borrowings and a
      public  offering of common  stock that was  completed in June 1997.
      The Company had working  capital of $44.3 million and $40.6 million
      at the end of fiscal 1998 and fiscal  1997,  respectively.  See "--
      Seasonality."

           Net cash provided by operating activities was $14.9 million in
      fiscal 1998 versus  $460,000 in fiscal 1997.  Net cash  provided by
      operating  activities  in fiscal  1998 and  fiscal  1997  primarily
      reflects  net  earnings  plus  depreciation,  partially  offset  by
      increases in working capital  requirements,  including increases in
      inventory to support new and acquired store growth.

           Net cash used in investing  activities  was $17.0  million and
      $17.1 million in fiscal 1998 and fiscal 1997,  respectively.  These
      amounts   reflect   $9.1   million  and  $9.7  million  of  capital
      expenditures  related to new and acquired stores in fiscal 1998 and
      fiscal  1997,  respectively.  Additionally,  in  fiscal  1998,  the
      Company paid $7.8 million for the  acquisition of 43 locations from
      Silver & Gold.  In fiscal  1997,  the Company paid $8.0 million for
      the acquisition of 93 locations.

           Net cash  provided by  financing  activities  was  $721,000 in
      fiscal 1998 and $18.9 million in fiscal 1997.  These changes in net
      cash  provided  by  financing  activities  over the last two fiscal
      years  primarily  reflect the Company's  expansion and  acquisition
      activity during those periods. During fiscal 1997, cash provided by
      financing   activities   primarily  reflects  an  increase  in  the
      Company's  revolving line of credit. This increase was used to fund
      store  expansion,  acquisitions  and an  increase in  inventory  to
      provide    merchandise   for   anticipated   store   openings   and
      acquisitions.  Net cash provided by financing  activities in fiscal
      1998 reflects the proceeds of an offering of common stock completed
      in July 1997,  partially  offset by a repayment of funds previously
      borrowed under the Company's revolving line of credit.

           The  Company  currently  has an  unsecured  revolving  line of
      credit  facility,  which  expires July 31, 2000,  that provides for
      maximum  borrowings of $80 million  through a  combination  of cash
      advances  (which may not exceed $50  million) and letters of credit
      (which may not exceed $55  million) to support the  Company's  gold
      consignment financing program.  Amounts borrowed under the facility
      generally  accrue  interest  at the higher of (i) the prime rate of
      the Company's  primary

                                   21
<PAGE>
      lender  minus 100 basis  points  (7.5% at March 31, 1998) or (ii) a
      rate based on overnight  federal  funds  transactions  with Federal
      Reserve  System  members  plus 50 basis  points  (6.5% at March 31,
      1998); however, the Company may elect to have all or any portion of
      the  outstanding  balance under the facility  accrue  interest at a
      rate  based on one,  two,  three or six month  LIBOR plus 110 basis
      points (6.79% at March 31, 1998 for a one month maturity),  subject
      to certain  restrictions.  Fees are paid on letters of credit based
      on amounts  outstanding  at an annual  rate of 0.75%.  At March 31,
      1998, the Company had $35.3 million  available for cash  borrowings
      under  this  revolving  credit  facility.  Letters of credit in the
      amounts of  approximately  $37.2  million and  approximately  $31.8
      million were issued at March 31, 1998 and 1997, respectively.

          The loan agreement  contains  various  covenants  which,  among
      other things,  limit certain  corporate acts of the Company such as
      mergers and  acquisitions;  require the Company to maintain minimum
      ratios of indebtedness to adjusted net income (as defined), current
      assets to current  liabilities and  indebtedness to  capitalization
      (as defined);  place  limitations on the Company's ability to incur
      additional  debt or grant  security  interests  in its assets;  and
      restrict  the  redemption,  purchase or  retirement  of its capital
      stock.

           The Company utilizes gold consignment  arrangements that allow
      the Company to finance its gold merchandise at rates which are less
      than its traditional  bank borrowing  rates.  Under the consignment
      arrangements,  the Company  generally sells to a consignor the gold
      content of the merchandise that it owns and  simultaneously has the
      gold  consigned  back to the Company.  The jewelry  containing  the
      consigned  gold is  commingled  with the gold jewelry  owned by the
      Company.  The Company's  obligation to the consignors is based upon
      the  price of gold at the time of the  sale by the  Company  of the
      consigned gold and,  therefore,  is subject to fluctuation based on
      changes  in the  market  value  of  gold.  If the  gold  ounces  in
      merchandise  held for sale by the  Company  is about to be  reduced
      below the amount of gold consigned,  the Company either repurchases
      the gold from a consignor or purchases additional gold jewelry from
      suppliers to support the amount of consigned gold. In the event the
      price  of gold at the  time of such  repurchases  or  purchases  is
      greater than the price at the time the gold was originally  sold to
      the consignor, the Company's gross profit margin will be decreased.
      The Company does not engage,  and currently has no plans to engage,
      in hedging  transactions  to protect  against  fluctuations  in the
      market value of gold or to lock in prices for future purchases. The
      Company  does,  however,  manage  the amount of gold  consigned  in
      relation to its total  merchandise  available  for sale in order to
      provide the Company with the  flexibility  to consign or repurchase
      gold according to seasonal  fluctuations in merchandise  levels and
      sales.

           During fiscal 1998 and 1997, average financing costs under the
      consignment  agreements  were  approximately  2.74%  and  2.45% per
      annum,  respectively,  of the  market  value of the gold held under
      consignment.   Additionally,  the  current  consignment  agreements
      require a letter of credit to support the market  value of the gold
      consigned to the Company.  The financing cost to the Company of the
      consignment  program is substantially less than the cost that would
      have been  incurred if the Company  financed the purchase of all of
      its gold  requirements  with borrowings  under its revolving credit
      facility.  The Company's current gold consignment  arrangements are
      terminable  by  either  party  upon  either  30 or 45 days  notice,
      depending on the consignor. Gold consignment programs are common in
      the gold jewelry  industry and the Company  believes  that,  if the
      institutions   with  which  it  currently   has  gold   consignment
      agreements  were to  terminate  such  agreements,  it would  have a
      number of opportunities to establish gold consignment programs with
      terms similar to its current arrangements.

           During the last two fiscal years,  the Company has financed an
      average of approximately 70% of the gold content of its merchandise
      under the consignment  program. As of March 31, 1998, the amount of
      gold consigned was 119,800 ounces with a value of $36.1 million and
      88,300 ounces with a value of $30.7 million at March 31, 1997.  The
      consigned  gold  is not  included  in  inventory  on the 

                                    22
<PAGE>
      Company's  balance  sheet  and,  therefore,  there  is  no  related
      liability recorded. If the market value of gold increases, assuming
      the number of ounces consigned remain constant, the financing costs
      incurred by the Company which are included in interest expense, and
      the repayment  obligations to the consignors  under the consignment
      arrangements,  will  increase in  proportion to the increase in the
      market  value of gold.  Additionally,  the amount of the letters of
      credit would need to be increased to support the  increased  market
      value of the  consigned  gold,  thereby  reducing  the amount which
      might  otherwise  be  available  for  cash  borrowings   under  the
      Company's revolving credit facility.
  
            The Company anticipates  capital  expenditures in fiscal 1999
      to total  approximately $7.8 million,  of which  approximately $3.0
      million is related  primarily to the construction of new stores and
      the renovation of existing stores and approximately $1.8 million is
      related to the  construction  of a new warehouse  and  distribution
      facility.  The Company currently  anticipates opening approximately
      60 to 70 new  stores in fiscal  1999 as well as  approximately  107
      locations  acquired under an asset purchase agreement with Sedgwick
      Sales,   Inc.  The  purchase  of  these   locations   will  require
      approximately  $3.0  million  plus  costs  for  conversion  to  the
      Company's formats.  The opening of a new store generally requires a
      total investment of approximately $107,000, including approximately
      $70,000 of  inventory  (a portion  of which is  generally  financed
      through consignment arrangements),  $30,000 for construction of the
      kiosk,  fixtures,  point-of-sale  register and other  equipment and
      supplies  and $7,000 for  pre-opening  expenses  which are expensed
      when  incurred.  The Company  believes  that the  expected net cash
      provided by operating activities,  its gold consignment program and
      bank borrowings under its revolving line of credit facility will be
      sufficient to fund the Company's currently  anticipated capital and
      liquidity needs.

  
                                 23
<PAGE>

           Seasonality

           The Company's  business is highly seasonal.  Due to the impact
      of  the  holiday  shopping  season,   the  Company   experiences  a
      substantial portion of its total net sales and profitability in its
      third fiscal quarter (ending  December  31st).  During the last two
      fiscal years, the month of December,  on average, has accounted for
      approximately  25% of the Company's annual net sales and 99% of its
      annual   income  from   operations.   The  Company  has   generally
      experienced lower net sales in each of the first, second and fourth
      quarters of each fiscal year, and lower net income or net losses in
      each of those quarters.

                                   24

<PAGE>

           Quarterly Data

           Set forth below is certain summary information with respect to
      the Company's operations for the most recent eight fiscal quarters:
<TABLE>
<CAPTION>


                                       Fiscal 1998                          Fiscal 1997

                                 1st     2nd       3rd      4th      1st      2nd     3rd      4th
                             Quarter  Quarter  Quarter    Quarter  Quarter  Quarter  Quarter  Quarter
    --------------------------------------------------------------------------------------------------
                                             (In thousands, except per share data)

    Statement  of Income
    Data:
<S>                          <C>      <C>       <C>      <C>        <C>      <C>      <C>      <C>
      Net sales              $42,873  $42,877   $89,915  $46,463    $30,244  $32,439  $66,339  $37,863

      Gross profit(1)         18,107   18,778    45,231   20,684     12,781   13,716   31,880   16,200

      Selling, general
       and administrative
       expenses(1)            17,854   18,445    26,672   19,945     12,421   13,477   18,477   16,470

      Income (loss)
       from operation            253      333    18,559      739        360      239   13,403     (270)

      Net income (loss)         (297)    (153)   11,176      243         35     (105)   7,824     (216)

      Diluted earnings
      (loss) per share        $(0.05)  $(0.02)   $ 1.80   $  0.0     $ 0.01   $(0.02)  $ 1.45   $(0.04)

    Comparable Store
     Net Sales Increase
    (Decrease)                   5.8%    (1.4)%     2.9%     4.8%       5.6%     9.4%     9.1%     7.4%

    As a  Percentage  of
    Net Sales:
      Gross profit(1)           42.2%    43.8%     50.3%    44.5%      42.3%    42.3%    48.1%    42.8%

      Selling, general and
       administrative
       expenses(1)              41.6     43.0      29.7     42.9       41.1     41.5     27.9     43.5

      Income (loss)
       from operations           0.6      0.8      20.6      1.6        1.2      0.7     20.2     (0.7)

      Net income (loss)         (0.7)    (0.4)     12.4      0.5        0.1     (0.3)    11.8     (0.6)


    --------------------------------------------------------------------------------------------------
</TABLE>
    (1) Gross profit  excludes  depreciation  on kiosks.  Depreciation on
      kiosks is included in selling, general and administrative expenses.
      See Note 1 of Notes to Consolidated Financial Statements.

           If for any reason  the  Company's  net sales were below  those
      normally expected for the third fiscal quarter, and, in particular,
      the month of December, the Company's annual financial results would
      be materially adversely affected.  The seasonality of the Company's
      business puts a significant  demand on working capital resources to
      provide  for a build-up  of  merchandise  for the  holiday  season.
      Historically,  the Company's working capital  requirement is at its
      lowest  level in  January,  increases  steadily  through the end of
      November,  when it reaches its highest level,  and declines rapidly
      through the holiday season.

           The   Company's    results   of   operations   may   fluctuate
      significantly  from  quarter to quarter as a result of a variety of
      factors,  including  fluctuations  in the price of gold, the amount
      and timing of acquisitions and new store openings,  the integration
      of recently acquired and newly opened stores into the operations of
      the Company, the timing of promotions, fluctuations in the price of
      gold, and changes in national and regional economic conditions. For
      example,  earnings  from  operations  in the first and  second  and
      fourth  quarters  of  fiscal  1998 and  1997  have  been  adversely
      affected by the integration  and  assimilation of 454 stores opened
      or  acquired  over  the  last  three  fiscal  years.  This  was due
      primarily  to  the  relatively  fixed  nature  of  rent  and  other
      occupancy  costs and  selling,  general  and  administrative  costs
      associated  with the recently  acquired  and newly  opened  stores,
      which had a  significant  adverse  impact on these  lower net sales
      volume quarters.


                                   24

<PAGE>

           Inflation

           The impact of inflation on the Company's operating results has
      been moderate in recent years,  reflecting the relatively  moderate
      levels of  inflation  which  have been  experienced  in the  United
      States.  The Company's  leases for stores  typically  provide for a
      percentage rent based on store sales and, therefore,  to the extent
      retail  prices  increase,  there may be an  increase  in  occupancy
      costs. Generally,  the Company prices its gold merchandise based on
      the  price  it paid  suppliers  for the  merchandise  and  does not
      reprice the items based upon  normal  fluctuations  in the price of
      gold.  While inflation has not had a material impact upon operating
      results, there can be no assurance that the Company's business will
      not be affected by inflation in the future.

           Year 2000 Compliance

           The  Company is aware of "Year  2000"  issues  existing in the
      programming code of some existing computer systems.  The Company is
      currently working to identify,  correct or reprogram,  and test its
      systems for Year 2000 compliance. The Company expects its Year 2000
      project to be completed on a timely basis. However, there can be no
      assurance  that  the  systems  of  other  companies  on  which  the
      Company's  systems  also rely will be timely  converted or that any
      such  failure  to  convert  by  another  company  would not have an
      adverse effect on the Company's systems.

           Recent Accounting Pronouncements

           In fiscal 1998,  the Company  adopted SFAS No. 130  "Reporting
      Comprehensive  Income,"  which  requires  companies  to report  all
      changes in equity  during a period,  except  those  resulting  from
      investments by owners or  distributions  to owners,  in a financial
      statement  for  the  period  in  which  they  are  recognized.  The
      components of comprehensive income include net income and all other
      items of revenue,  expenses, gains and losses that previously would
      have been  reported  directly in equity under SFAS Nos. 52, 80, 87,
      and 115.  Because the  Company has no other items of  comprehensive
      income other than net income, a separate financial statement is not
      required and has not been presented.

           In fiscal 1998, the Company adopted SFAS No. 131  "Disclosures
      about  Segments of an  Enterprise  and Related  Information".  This
      statement requires that public business  enterprises report certain
      information about operating  segments in complete sets of financial
      statements of the enterprise and in condensed financial  statements
      of interim  periods issued to  shareholders.  It also requires that
      public business  enterprises report certain information about their
      products and services,  geographic areas in which they operate, and
      their major customers.  The Company has evaluated the applicability
      of SFAS No. 131 and concluded  that it does not currently  meet the
      criteria  for  segment  reporting  as defined in the SFAS No.  131.
      Accordingly, separate segment reporting has not been made.


      Item 7A. QUANTITATIVE  AND  QUALITATIVE  DISCLOSURES  ABOUT MARKET
               RISK

           Not applicable.



                                     25
<PAGE>


      Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                                                  Page
           Independent Auditors' Report                             27

           Consolidated Balance Sheets at March 31, 1998 and 1997   28

           Consolidated  Statements  of Income for the Years
            ended March 31, 1998, 1997 and 1996                     29

           Consolidated Statements of Changes in Stockholders'
            Equity for the Years ended March 31, 1998, 1997
            and 1996                                                30

           Consolidated Statements of Cash Flows for the Years
            ended March 31, 1998, 1997 and 1996                     31

           Notes to Consolidated Financial Statements               33

                                     26
<PAGE>




                           Independent Auditors' Report



      The Board of Directors
      Piercing Pagoda, Inc.:

           We have audited the accompanying  consolidated  balance sheets
      of Piercing  Pagoda,  Inc. and  subsidiary as of March 31, 1998 and
      1997 and the related consolidated  statements of income, changes in
      stockholders'  equity  and cash  flows for each of the years in the
      three-year   period  ended  March  31,  1998.  These   consolidated
      financial  statements  are  the  responsibility  of  the  Company's
      management.  Our  responsibility  is to express an opinion on these
      consolidated financial statements based on our audits.

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

           In our opinion, the consolidated financial statements referred
      to above present fairly,  in all material  respects,  the financial
      position of Piercing  Pagoda,  Inc. and  subsidiary as of March 31,
      1998 and 1997 and the  results of their  operations  and their cash
      flows for each of the years in the  three-year  period  ended March
      31,  1998,  in  conformity  with  generally   accepted   accounting
      principles.


                                                KPMG Peat Marwick LLP
      Allentown, Pennsylvania
      May 8, 1998



                                     27
<PAGE>

<TABLE>
<CAPTION>


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


       PIERCING PAGODA, INC.
       Consolidated Balance Sheets
       March 31,
       (In thousands, except share data)
       -----------------------------------------------------------------
       Assets                                       1998        1997
       -----------------------------------------------------------------
<S>                                                 <C>         <C>
       Current assets:
          Cash                                      $ 2,699     $ 4,119
          Accounts receivable                         1,454       2,233
          Inventory                                  53,149      43,109
          Deposits for inventory purchases              546         850
          Prepaid expenses and other current          1,058         757
          assets
          Prepaid income taxes                          215       1,494
          Deferred income taxes                       1,972       1,530

       -----------------------------------------------------------------
       Total current assets                          61,093      54,092
       -----------------------------------------------------------------

       Property, fixtures and equipment, net         27,215      22,572
       Other assets, net                              7,791       3,077

       -----------------------------------------------------------------
                                                   $ 96,099    $ 79,741
       -----------------------------------------------------------------

       Liabilities and Stockholders' Equity
       -----------------------------------------------------------------

        Current liabilities
          Accounts payable                          $ 3,232     $ 3,668
          Current installments of long-term debt
           and revolving line of credit                 247         234
          Income taxes payable                          889           -
          Accrued expenses and other current         12,423       9,541
          liabilities

        ----------------------------------------------------------------
        Total current liabilities                    16,791      13,443
        ----------------------------------------------------------------

       Long-term debt, less current installments      9,742      26,690
       Deferred income taxes                          2,535       1,550
       Other liabilities                                703         536

       -----------------------------------------------------------------
       Total liabilities                             29,771      42,219
       -----------------------------------------------------------------

       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 6,058,411 and 5,273,994 shares
           at March 31, 1998 and 1997, respectively.     61          53
          Additional paid-in capital                 40,417      22,588
          Retained earnings                          25,850      14,881

       -----------------------------------------------------------------
       Total stockholders' equity                    66,328      37,522
       -----------------------------------------------------------------
                                                   $ 96,099    $ 79,741
       -----------------------------------------------------------------
</TABLE>

      See accompanying notes to consolidated financial statements.

                                     28
<PAGE>

<TABLE>
<CAPTION>


       PIERCING PAGODA, INC.
       Consolidated Statements of Income
       Years ended March 31,
       (In thousands, except per share data)
       --------------------------------------------------------------------
                                              1998         1997       1996
       --------------------------------------------------------------------

<S>                                        <C>           <C>       <C>
       Net sales                           $ 222,128     $166,885  $121,581

       Cost of goods sold and occupancy
        expenses                             119,328       92,308    67,440
        (excluding depreciation on kiosks)

       --------------------------------------------------------------------
       Gross profit                          102,800       74,577    54,141

       Selling, general and
        administrative expenses               82,916       60,845    43,887
        (including depreciation on kiosks)

       --------------------------------------------------------------------
       Income from operations                 19,884       13,732    10,254

       Interest and other income                 562          386       282
       Interest expense                        2,896        2,208     1,306
       --------------------------------------------------------------------
       Earnings before income taxes           17,550       11,910     9,230

       Income taxes                            6,581        4,372     3,553
       --------------------------------------------------------------------
       Net income                           $ 10,969      $ 7,538   $ 5,677
       --------------------------------------------------------------------

       Basic earnings per share               $ 1.88       $ 1.43    $ 1.08
       --------------------------------------------------------------------
       Diluted earnings per share             $ 1.82       $ 1.40    $ 1.07
       --------------------------------------------------------------------

</TABLE>


      See accompanying notes to consolidated financial statements.


                                     29
<PAGE>

<TABLE>
<CAPTION>


       PIERCING PAGODA, INC.
       Consolidated Statements of Changes in Stockholders' Equity

       Years ended March 31,

       (In thousands, except number of shares)

       -----------------------------------------------------------------------
                                                    Additional
                                      Common stock    paid-in  Retained
                                      Shares  Amount  capital  earnings  Total
       -----------------------------------------------------------------------
<S>                                 <C>        <C>  <C>       <C>      <C>
       Balance - March 31, 1995     5,236,087    53 $  22,143 $  1,666 $23,862

       Share transactions under
        employee stock plans            4,206     -       40         -      40
       Net income                           -     -        -     5,677   5,677
       -----------------------------------------------------------------------
       Balance - March 31, 1996     5,240,293    53   22,183     7,343  29,579

       Share transactions
        under employee stock plans,
        including tax benefit          33,701     -      405         -     405
       Net income                           -     -        -     7,538   7,538
       -----------------------------------------------------------------------
       Balance - March 31, 1997     5,273,994  $ 53 $ 22,588  $ 14,881 $37,522

       Share transactions under
        employee stock plans,
        including tax benefit          36,917     -      648         -     648
       Secondary public offering      747,500     8   17,181         -  17,189
       Net income                           -     -        -    10,969  10,969
       -----------------------------------------------------------------------
       Balance - March 31, 1998     6,058,411  $ 61 $ 40,417  $ 25,850 $66,328

       -----------------------------------------------------------------------
</TABLE>

      See accompanying notes to consolidated financial statements.

                                     30
<PAGE>
<TABLE>
<CAPTION>



       PIERCING PAGODA, INC.

       Consolidated Statements of Cash Flows

       Years ended March 31,

       (In thousands)

       ------------------------------------------------------------------
                                              1998        1997     1996
       ------------------------------------------------------------------
<S>                                         <C>         <C>      <C>
       Cash flows from operating activities:
         Net income                         $10,969     $ 7,538  $ 5,677
         Adjustments to reconcile net
          income to net cash
          provided by (used in) operating
          activities:
            Depreciation and amortization     5,402       3,636    2,639
            Loss on disposal of property,
             fixtures and equipment             141          93       49
            Other changes in other assets      (101)        (97)     (61)
            Deferred income taxes               732         335      168
            Changes in operating assets
             and liabilities, net of effects
             of acquisitions:
               Accounts receivable              779      (1,428)     329
               Inventory                     (7,673)    (12,951) (10,262)
               Deposits for inventory           304        (489)     (11)
                purchases
               Prepaid expenses and other
                current assets                 (301)       (289)     (23)
               Prepaid income taxes           1,279        (514)    (883)
               Accounts payable                (436)      1,857      558
               Accrued expenses and other
                current liabilities           2,882       2,697    2,488
               Tax indemnification payable        -           -   (1,530)
               Income taxes payable            1019           -        -
               Other liabilities               (133)         72       12

       ------------------------------------------------------------------
       Net cash provided by (used in)
       operating activities                  14,863         460     (850)
       ------------------------------------------------------------------

       Cash flows from investing activities:
         Additions to property, fixtures     (9,066)     (9,724)  (7,175)
          and equipment
         Payments for purchases of
          businesses                         (7,980)     (8,010)  (1,150)
         Proceeds from disposal of
          property, fixtures and
          equipment                              67          22        -
         Return of deposit with Internal
          Revenue Service                         -           -      797
         Other changes in other assets, net     (25)        574     (176)

       ------------------------------------------------------------------
       Net cash used in investing
       activities                           (17,004)    (17,138)  (7,704)
       ------------------------------------------------------------------

</TABLE>

                                     31
<PAGE>
<TABLE>
<CAPTION>



       PIERCING PAGODA, INC.

       Consolidated Statements of Cash Flows - Continued

       Years ended March 31,

       (In thousands)

       -----------------------------------------------------------------
                                              1998       1997    1996
       -----------------------------------------------------------------
<S>                                         <C>         <C>      <C>
       Cash flows from financing activities:
         Repayments of long-term debt          (235)       (216)       -
         Revolving line of credit, net      (16,700)     18,480    5,720
         Proceeds from issuance of
          long-term debt                          -         400    2,540
         Debt issuance fees paid                (51)        (39)    (157)
         Proceeds from issuance of common
          stock, net                         17,189           -        -
         Net proceeds from the issuance
          of stock under employee
          share plans                           518         308       40
         Cash dividends paid                       -           -     (45)

       -----------------------------------------------------------------
       Net cash provided by financing
       activities                               721      18,933    8,098
       -----------------------------------------------------------------
       Net increase (decrease) in cash       (1,420)      2,255     (456)

       Cash at beginning of period            4,119       1,864    2,320

       -----------------------------------------------------------------
       Cash at end of period                $ 2,699     $ 4,119    1,864
       -----------------------------------------------------------------

       Supplemental disclosures of cash flow
        information:
         Cash paid during the period for:
          Interest                          $ 2,877     $ 2,100  $ 1,220
          Income taxes, net                 $ 6,669     $ 4,551  $ 5,818
       -----------------------------------------------------------------
</TABLE>


      Supplemental   disclosure  of  non-cash   financing  and  investing
      activities:

           During each of the years  ended  March 31, 1998 and 1997,  the
      Company entered into noncompetition agreements for $300,000.


      See accompanying notes to consolidated financial statements.


                                     32
<PAGE>


PIERCING PAGODA, INC.

Notes to Consolidated Financial Statements (continued)

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

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

PIERCING PAGODA, INC.

Notes to Consolidated Financial Statements

March 31, 1998, 1997 and 1996
------------------------------------------------------------------------------
------------------------------------------------------------------------------


(1)   Statement of Significant Accounting Policies

           Principles of Consolidation

            The consolidated financial statements include the accounts of
      the  Company   and  its  wholly   owned   subsidiary.   Significant
      intercompany  accounts and  transactions  have been  eliminated  in
      consolidation.

           Operations

            The Company is a national  retailer of gold jewelry primarily
      through  kiosk  stores in  enclosed  shopping  malls.  The  Company
      operates stores  primarily under the names Piercing  Pagoda,  Plumb
      Gold and Silver & Gold  Connection.  At March 31, 1998, the Company
      operated 789 stores,  including 27 in-line  stores.  The  Company's
      home office  provides  centralized  administrative  and warehousing
      services and assembles some of the products sold at its stores.

            In addition to its own retail units, the Company has licensed
      operations at 22 stores and three retail cart locations in Florida.
      The Company  provides the licensee with merchandise and promotional
      and  administrative  services.  Income from licensee  operations is
      based on a percentage of the licensee's sales and earnings from the
      sale of merchandise to the licensee. See Note 14.

           Sales

            Sales consist  primarily of net sales to the Company's retail
      customers at its kiosk and in-line  stores.  Also included in sales
      are wholesale sales to the Company's licensee.  At the time of each
      retail  sale,  the  Company  accrues  the  estimated  costs  of its
      "buy-five-get-one-free"   jewelry  club  promotional  program.  The
      Company  also  accrues  the  estimated  costs  associated  with its
      "lifetime guarantee" program for subsequent customer returns due to
      manufacturer's  defects in the jewelry.  All other  returns have an
      immaterial effect on the consolidated financial statements.

           Accounts Receivable

            The Company's  accounts  receivable  consist  principally  of
      receivables  from  credit  card  companies,   merchandise   credits
      receivable from vendors, and certain receivables from its licensee.

           Inventory and Cost of Goods Sold

            Inventories  are stated at the lower of cost or market.  Cost
      is determined by the first-in, first-out (FIFO) method. The Company
      purchases gold  merchandise and sells the gold content of a portion
      of such merchandise to financial  institutions  ("consignors") that
      simultaneously  consign the gold back to the Company. In accordance
      with the terms of the  agreements,  the  Company  has the option of
      repaying the  consignors in an equivalent  number of ounces of gold
      or cash based upon the then quoted market price of gold.

            The  Company  has  excluded  the  consigned  gold  content of
      merchandise  in its possession  from its inventory  because it does
      not yet have title to the gold which it holds under its consignment
      arrangements.  This gold has been manufactured into merchandise for
      sale and the costs associated with this  manufacturing  process are
      included in inventory.


                                     33
<PAGE>


           Cost of goods sold and occupancy  expenses include the cost of
      merchandise,  rent and occupancy expenses and the cost of preparing
      merchandise  for sale. A major component of the cost of merchandise
      includes  the   previously   consigned   gold  after  it  has  been
      repurchased by the Company from the consignors.

            In fiscal 1998,  no vendors  supplied  more than 10% of total
      merchandise  purchased.  In fiscal 1997, two vendors  accounted for
      approximately  11% and  10%,  respectively,  of  total  merchandise
      purchased  by the  Company.  No vendors  supplied  more than 10% of
      purchases in fiscal 1996

           Property, Fixtures and Equipment

            Property,   fixtures  and   equipment  are  stated  at  cost.
      Depreciation  is computed  over the  estimated  useful lives of the
      related assets using the straight-line method.

                  Depreciable lives are as follows:


                    Furniture and fixtures              3-10 years

                    Building and improvements           10-39 years

                    Kiosks                              5-10 years

                    Computer equipment, software and
                    other equipment                     5-7 years

            Substantially    all    depreciation    expense,    including
      depreciation  on  kiosks,  is  included  in  selling,  general  and
      administrative  expense  rather than occupancy  expense,  since the
      Company  believes  that the  primary  function  of its kiosks is to
      display merchandise for sale.  Depreciation  expense for kiosks was
      $2,508,000,  $1,890,000  and  $1,338,000  in fiscal 1998,  1997 and
      fiscal 1996, respectively.

            Maintenance   and   repairs   are   expensed   as   incurred.
      Expenditures  for  renovations  are  capitalized.  Upon  the  sale,
      replacement or retirement of property,  fixtures and equipment, the
      cost and  accumulated  depreciation  thereon are  removed  from the
      accounts.  Gain or loss on sale, retirement or other disposition of
      property, fixtures and equipment is reflected in earnings.

           Goodwill

            Costs in  excess of fair  value of net  assets  acquired  are
      being  amortized  on a  straight-line  basis over  periods of up to
      fifteen years. The Company assesses the  recoverability of goodwill
      by  determining  whether the  remaining  balance  can be  recovered
      through projected undiscounted future cash flows.

           Leasing Expenses

            The Company recognizes lease expense on a straight-line basis
      over  the term of the  lease  when  lease  agreements  provide  for
      increasing  fixed  rentals.  The  difference  between lease expense
      recognized   and  actual   payments   made  is  included  in  other
      liabilities on the consolidated balance sheets.

           Preopening Costs and Advertising Expense

            Preopening  and start-up  costs for new stores are charged to
      operations as incurred.  Costs of advertising  and sales  promotion
      programs are charged to operations in the year incurred.


                                     34
<PAGE>


           Income Taxes

            Income taxes are  accounted for under the asset and liability
      method.  Deferred  income tax assets and liabilities are recognized
      for the future tax consequences attributable to differences between
      the financial  statement  carrying  amounts of existing  assets and
      their  respective tax bases.  Deferred income taxes are recorded at
      the  enacted  rates  expected  to apply to  taxable  income  in the
      periods in which the deferred tax liability or asset is expected to
      be  settled  or  realized.  The  effect  of a change in tax rate is
      recognized  as income or expense in the period  that  includes  the
      enactment date.


           Stock Option Plan

            The Company  accounts for its stock option plan in accordance
      with the provisions of Accounting  Principles Board ("APB") Opinion
      No. 25,  Accounting  for Stock  Issued to  Employees,  and  related
      interpretations.  As such,  compensation  expense  would  have been
      recorded  on the  date of  grant  only if the  market  price of the
      underlying stock exceeded its exercise price. On April 1, 1996, the
      Company  adopted  Statement  of  Financial   Accounting   Standards
      ("SFAS") No. 123,  Accounting for Stock-Based  Compensation  ("SFAS
      No. 123"). This statement encourages the fair value based method of
      accounting for stock options and similar equity instruments granted
      to  employees.  This method  requires that the fair value of equity
      instruments  granted  to  employees  be  recorded  as  compensation
      expense.  However,  the statement  allows  companies to continue to
      apply APB Opinion No. 25, with  appropriate pro forma disclosure of
      the fair value based method. The Company has elected to continue to
      apply the  provisions  of APB  Opinion  No. 25 and  provide the pro
      forma disclosure provisions of SFAS No. 123.

           Use of Estimates

            Management  of the Company has made a number of estimates and
      assumptions relating to the reporting of assets and liabilities and
      the  disclosure of  contingent  assets and  liabilities  to prepare
      these   consolidated   financial   statements  in  conformity  with
      generally  accepted  accounting  principles.  Actual  results could
      differ from those estimates.



           Net Income Per Share

            During  fiscal  1998,  the  Company  adopted  SFAS  No.  128,
      Earnings per Share.  SFAS No. 128 requires the  disclosure of basic
      and  diluted  earnings  per  share  on the  face  of the  financial
      statements. Basic earnings per share calculations are determined by
      dividing  the  earnings  available  to common  shareholders  by the
      weighted  average  number of shares  of  common  stock  outstanding
      during the period.  Diluted  earnings per share are  determined  by
      dividing earnings available to common  shareholders by the weighted
      average number of shares of common stock and dilutive  common stock
      equivalents  outstanding.  All  prior  period  earnings  per  share
      amounts have been  restated to comply with the  provisions  of SFAS
      No. 128.

                                     35
<PAGE>


           The  following  weighted  average  number  of shares of common
      stock were used in the  calculations  for earnings  per share.  The
      diluted  weighted  average number of shares includes the net shares
      that would be issued upon exercise of  outstanding  stock  options,
      using the treasury stock method (in thousands).
<TABLE>
<CAPTION>

                                                   Years ended March 31,
                                               --------------------------
                                                  1998    1997     1996
       ------------------------------------------------------------------
<S>                                             <C>      <C>     <C>  
       Basic                                    5,843    5,257   5,237
       Diluted                                  6,041    5,389   5,325
       ------------------------------------------------------------------
</TABLE>


           Recent Accounting Pronouncements

            In fiscal 1998,  the Company  adopted SFAS No. 130  Reporting
      Comprehensive  Income,  which  requires  companies  to  report  all
      changes in equity  during a period,  except  those  resulting  from
      investments by owners or  distributions  to owners,  in a financial
      statement  for  the  period  in  which  they  are  recognized.  The
      components of comprehensive income include net income and all other
      items of revenue,  expenses, gains and losses that previously would
      have been  reported  directly in equity under SFAS Nos. 52, 80, 87,
      and 115.  Because the  Company has no other items of  comprehensive
      income other than net income, a separate financial statement is not
      required and has not been presented.

           In fiscal 1998, the Company  adopted SFAS No. 131  Disclosures
      about  Segments  of an  Enterprise  and Related  Information.  This
      statement requires that public business  enterprises report certain
      information about operating  segments in complete sets of financial
      statements of the enterprise and in condensed financial  statements
      of interim  periods issued to  shareholders.  It also requires that
      public business  enterprises report certain information about their
      products and services,  geographic areas in which they operate, and
      their major customers.  The Company has evaluated the applicability
      of SFAS No. 131 and concluded  that it does not currently  meet the
      criteria  for  segment  reporting  as defined in the SFAS No.  131.
      Accordingly, separate segment reporting has not been made.

(2)    Common Stock Offering

           On June 30, 1997, the Company  completed a secondary  offering
      of 650,000 shares of its common stock. The transaction  resulted in
      net  proceeds  (after  underwriting   discounts,   commissions  and
      offering  expenses) to the Company of  approximately  $14.9 million
      which was used to repay indebtedness under the Company's  revolving
      line of credit. Subsequently, in July 1997, the underwriters of the
      offering  exercised  their option to purchase an additional  97,500
      shares  of stock  from the  Company  resulting  in  additional  net
      proceeds of approximately $2.3 million.

(3)    Gold Consignment Agreements

            In connection with the acquisition of certain inventory,  the
      Company maintains gold consignment  agreements.  In accordance with
      these  consignment  agreements,  title to the gold remains with the
      gold consignors until purchased by the Company.  At March 31, 1998,
      1997 and 1996, the Company had consigned 119,800, 88,300 and 54,500
      ounces  of  gold,   respectively,   with  values  of   $36,060,000,
      $30,749,000 and $21,601,000,  respectively.  The purchase price per
      ounce is based on the  Second  London  Gold  Fixing.  This gold was
      generally in the form of merchandise for sale held by

                                     36
<PAGE>


      the  Company at its offices or in its  stores.  Consigned  gold is
      not  included  in  inventory,  and there is no  related  liability
      recognized.

            Included  in  interest  expense for the years ended March 31,
      1998, 1997 and 1996 are consignment fees of $912,000,  $620,000 and
      $394,000,  respectively, based on fee rates of approximately 2.74%,
      2.45% and 2.31%, respectively,  of the value of consigned gold. The
      fee rates are adjusted  periodically  by the consignors upon giving
      seven to  thirty  days  advance  notice  to the  Company.  The gold
      financing arrangements could be terminated by either the Company or
      the lender on 30 or 45 days notice, depending on the consignor.

(4)   Property, Fixtures and Equipment

            A  summary  of  major  classes  of  property,   fixtures  and
      equipment follows (in thousands):
<TABLE>
<CAPTION>

                                                           March 31,
                                                   ----------------------
                                                      1998        1997
       ------------------------------------------------------------------
<S>                                                 <C>         <C>  
       Land                                            $ 688       $ 688
       Furniture and fixtures                          3,881       3,054
       Kiosks                                         24,043      19,832
       Building and improvements                       5,413       4,037
       Computer equipment, software and other
        equipment                                      9,326       7,396
       ------------------------------------------------------------------
                                                      43,351      35,007
       Less accumulated depreciation and
        amortization                                  16,136      12,435
       ------------------------------------------------------------------
                                                    $ 27,215    $ 22,572
       ------------------------------------------------------------------
</TABLE>


(5)   Other Assets

      Other assets are summarized as follows (in thousands):
<TABLE>
<CAPTION>

                                                           March 31,
                                                    ---------------------
                                                       1998        1997
       ------------------------------------------------------------------
<S>                                                 <C>         <C> 
       Goodwill (net of accumulated amortization
        of $735 and $237  at  March  31,  1998
        and  1997, respectively)                      6,296       1,907
       Noncompetition agreements (net of
        accumulated amortization of $125 and $10)       475         290
       Deferred expenses, principally long-term
        maintenance agreements                          416         394
       Cash surrender value of officers life
        insurance                                       415         342
       Other                                            189         144
       ------------------------------------------------------------------
                                                    $ 7,791     $ 3,077
       ------------------------------------------------------------------

</TABLE>


                                     37
<PAGE>



            In April 1997, the Company  purchased  substantially  all the
      operations of a company which operated  retail jewelry kiosks under
      the name Silver & Gold Connection for  approximately  $7.8 million.
      The  acquisition was accounted for as a purchase and the net assets
      acquired  and  operations  of  these  kiosks  are  included  in the
      Company's  consolidated  financial  statements  from  the  date  of
      acquisition.  The cost in  excess of the fair  value of net  assets
      acquired  of  approximately  $4.7  million  has  been  recorded  as
      goodwill and is being  amortized over 15 years.  In connection with
      the   acquisition,   the  Company  entered  into  a  noncompetition
      agreement   with  the  principal   stockholder  of  Silver  &  Gold
      Connection which provides for annual payments of $60,000 to be made
      over a five-year  period.  The effect of this  transaction  was not
      material to the results of operations of the Company.

           In January 1997, the Company  purchased  substantially  all of
      the operations of the companies  operating  retail kiosks under the
      names  Gemstone   Jewelry,   Gold-n-Gifts   and  Facets  of  Nature
      (collectively,  "Gemstone"),  which sold gold and  silver  jewelry,
      pewter and other gift items, for  approximately  $8.0 million.  The
      acquisition was accounted for as a purchase and the assets acquired
      and  operations  of these  kiosks  are  included  in the  Company's
      consolidated financial statements from the date of acquisition. The
      cost  in  excess  of the  fair  value  of net  assets  acquired  of
      approximately  $1.7  million has been  recorded as goodwill  and is
      being amortized over 15 years. In connection with the  acquisition,
      the  Company  entered  into a  noncompetition  agreement  with  the
      principal   stockholder  of  Gemstone  which  provides  for  annual
      payments of $60,000 to be made over a five-year period.  The effect
      of this  transaction  was not material to the results of operations
      of the Company.

 (6) Accrued expenses and other current liabilities

      Accrued  expenses and other current  liabilities  are summarized as
      follows (in thousands):
<TABLE>
<CAPTION>


                                                           March 31,
                                                    ---------------------
                                                       1998        1997
       ------------------------------------------------------------------
<S>                                                 <C>         <C>    
       Accrued payroll, vacation and related taxes  $ 5,230     $ 4,160
       Sales tax payable                                794         704
       Accrued rents payable                            938       1,091
       Liability under jewelry club program           1,109         747
       Liability under lifetime guarantee program     1,411       1,211
       Other accrued expenses                         2,941       1,628
       ------------------------------------------------------------------
                                                    $12,423     $ 9,541
       ------------------------------------------------------------------

</TABLE>


                                     38
<PAGE>


(7) Long-term debt and revolving line of credit

      A summary of long-term  debt and revolving  line of credit  follows
      (in thousands):
<TABLE>
<CAPTION>

                                                            March 31,
                                                     --------------------
                                                        1998       1997
       ------------------------------------------------------------------
<S>                                                  <C>        <C>     
       Revolving line of credit                      $ 7,500    $ 24,200
       Industrial development authority financing      2,489       2,724
       ------------------------------------------------------------------
       Total long-term debt                            9,989      26,924
       Less current installments                         247         234
       ------------------------------------------------------------------
                                                     $ 9,742    $ 26,690
       ------------------------------------------------------------------
</TABLE>

           The  Company  currently  has an  unsecured  revolving  line of
      credit with its primary  lender  acting as agent for a syndicate of
      banks.  This  facility,  which expires July 31, 2000,  provides for
      maximum  borrowings of $80 million  through a  combination  of cash
      advances  (which may not exceed $50  million)  or letters of credit
      (which may not exceed $55  million) to support the  Company's  gold
      consignment financing program.  Amounts borrowed under the facility
      generally  accrue interest at the higher of the rates designated by
      the  Company's  primary  lender at its prime  rate  minus 100 basis
      points  (7.5% at March  31,  1998)  and a rate  based on the  rates
      charged  on  overnight  federal  funds  transactions  with  Federal
      Reserve  System  members plus 50 basis  points  (6.50% at March 31,
      1998). However, the Company may elect to have all or any portion of
      the  outstanding  balance under the facility  accrue  interest at a
      rate  based on one,  two,  three or six month  LIBOR plus 110 basis
      points (6.79% at March 31, 1998 for a one-month maturity),  subject
      to certain restrictions.  Outstanding letters of credit incur a fee
      charged at an annual rate of 0.75%.  At March 31, 1998, the Company
      had  $35.3  million   available  for  cash  borrowings  under  this
      revolving  credit  facility.  Letters  of credit in the  amounts of
      $37,213,000 and $31,762,000 were issued at March 31, 1998 and 1997,
      respectively.

          The loan agreement  contains  various  covenants  which,  among
      other things,  limit certain  corporate acts of the Company such as
      mergers and acquisitions;  requires the Company to maintain minimum
      ratios of indebtedness to adjusted net income (as defined), current
      assets to current  liabilities and  indebtedness to  capitalization
      (as defined);  places limitations on the Company's ability to incur
      additional  debt or grant  security  interests  in its  assets  and
      restricts  the  redemption,  purchase or  retirement of its capital
      stock.  The Company was in  compliance  with these  covenants as of
      March 31, 1998.

           Borrowings  under the revolving  line of credit are summarized
      as follows (in thousands):
<TABLE>
<CAPTION>

                                                           March 31,
                                               -----------------------------
                                                  1998      1997      1996
       ---------------------------------------------------------------------
<S>                                             <C>      <C>       <C>     
       Borrowings at year end                   $ 7,500  $ 24,200  $  5,720
       Interest rate on borrowings
        at year end                               6.80%     7.50%     7.50%
       Maximum amount of  borrowings
       outstanding at any month end             $33,400  $ 28,789  $ 20,360

       Average aggregate borrowings during
        the year                                $20,492  $ 14,823   $ 8,051
       Weighted average interest rate
        during the year                            7.03%     7.50%     7.99%
       ---------------------------------------------------------------------
</TABLE>


                                     39
<PAGE>

           In October 1995, the Company  obtained a $2,540,000,  ten-year
      term loan through an industrial development authority.  The loan is
      collateralized  by a letter of credit totaling  $2,447,000 at March
      31, 1998 which is  supported by a lien on the  Company's  corporate
      headquarters and distribution center which has a net carrying value
      of  approximately  $2.9 million at March 31, 1998. The terms of the
      loan require semiannual interest payments at varying interest rates
      averaging 6.8% over the life of the loan.  Principal  payments,  in
      varying amounts, are required annually.

           In May 1996, the Company obtained an additional  $400,000 loan
      in  connection  with  the  expansion  of  the  Company's  corporate
      headquarters  and  distribution  facility in the prior fiscal year.
      This loan, through an industrial  development  authority,  requires
      monthly payments of principal and interest of approximately  $4,000
      through May 2006 at an effective annual interest rate of 4.59%.

           Maturities  of the term loans are as follows at March 31, 1998
           (in thousands):
<TABLE>
<CAPTION>

                                                                 Amount
       ------------------------------------------------------------------
<S>                                                             <C>  
       1998                                                       $ 247
       1999                                                         262
       2000                                                         278
       2001                                                         295
       2002                                                         317
       Subsequent to 2002                                         1,090
       ------------------------------------------------------------------
       Total payments                                           $ 2,489
       ------------------------------------------------------------------
</TABLE>

(8)   Leases

           The Company  leases space  primarily  in shopping  malls under
      operating  leases expiring in various years through fiscal 2007. In
      the normal  course of  business,  operating  leases  are  generally
      renewed or replaced by other leases;  thus, it is anticipated  that
      future  annual lease expense will not be less than the amount shown
      below for 1998.  Generally,  the leases also contain provisions for
      contingent  rental payments of approximately  10% of gross sales in
      excess of specified amounts.


                                     40
<PAGE>


           Minimum  future  rental  payments  as of March 31,  1998 under
      non-cancelable  operating leases having original terms in excess of
      one year are as follows (in thousands):
<TABLE>
<CAPTION>

                                                                Amount
       ------------------------------------------------------------------
<S>                                                           <C>     
       1998                                                   $ 19,803
       1999                                                     15,931
       2000                                                     10,135
       2001                                                      4,558
       2002                                                      1,672
       Subsequent to 2002                                          975
       ------------------------------------------------------------------
       Total rental payments                                  $ 53,074
       ------------------------------------------------------------------
</TABLE>

           A summary of minimum rent and  contingent  rent expense  under
      operating leases is as follows (in thousands):
<TABLE>
<CAPTION>

                                                   Years ended March 31,
                                               ----------------------------
                                                  1998     1997       1996
       -------------------------------------------------------------------
<S>                                            <C>      <C>        <C>     
       Minimum rentals                         $ 23,690 $ 17,292   $ 12,643
       Contingent rentals                        1,916     1,498      1,191
       --------------------------------------------------------------------
       Total rental expense                    $ 25,606 $ 18,790   $ 13,834
       --------------------------------------------------------------------
</TABLE>


(9)   Employee Benefit Plans

            The  Company  has a  defined  contribution  plan for  Company
      employees who are at least 21 years of age and have worked at least
      1,000 hours in the past year. The Plan consists of a profit sharing
      fund and a 401(k) fund. Annual  contributions to the profit sharing
      fund  are  determined  at  the  discretion  of  management.   Total
      contributions to this fund were $500,000,  $300,000 and $220,000 in
      fiscal 1998, fiscal 1997 and fiscal 1996, respectively.

           The Company provides a matching contribution  provision to the
      Company's 401(k) fund. The matching rate for Company  contributions
      is $.50 per  dollar  contributed  by the  employee  up to 4% of the
      employee's  income. The Company's  matching  contributions  totaled
      $212,000 in fiscal 1997,  $181,000 in fiscal 1997,  and $107,000 in
      fiscal 1996.  These matching  contributions  are 100% vested at the
      time they are made.

           See Note 12 for a description of the Company's  employee stock
      purchase plan.



                                     41
<PAGE>


(10)  Income Taxes

           Income taxes in the consolidated statements of income consists
      of the following components (in thousands):
<TABLE>
<CAPTION>

                                                   Years ended March 31,
                                               --------------------------
                                                 1998     1997     1996
       ------------------------------------------------------------------
       Current tax expense:
<S>                                            <C>      <C>     <C>    
          Federal                              $ 5,346  $ 3,703 $ 2,877
          State                                    503      334     508
       ------------------------------------------------------------------
                                                 5,849    4,037   3,385
       ------------------------------------------------------------------
       Deferred tax expense
          Federal                                  570      251     133
          State                                    162       84      35
       ------------------------------------------------------------------
                                                   732      335     168
       ------------------------------------------------------------------
                                               $ 6,581  $ 4,372 $ 3,553
       ------------------------------------------------------------------
</TABLE>

           The tax  effect  of  temporary  differences  that give rise to
      deferred  tax assets and  deferred tax  liabilities  are  presented
      below (in thousands):
<TABLE>
<CAPTION>

                                                             March 31,
                                                       ------------------
                                                          1998     1997
       ------------------------------------------------------------------
       
<S>                                                    <C>       <C> 
       Deferred tax liabilities:
         Excess of tax over book depreciation          ($ 2,827  ($ 1,754)
         Employee benefit plans                            (250)       -
       ------------------------------------------------------------------
       Total deferred tax liabilities                    (3,077)   (1,754)
       ------------------------------------------------------------------

       Deferred tax assets:
         Inventory                                          382       129
         Accrual for lifetime guarantee costs               563       484
         Accrued vacation expense                           468       381
         Accrual for jewelry club costs                     443       298
         Accrued group insurance                            226       117
         Other                                              432       325
       --------------------------------------------------------------------
       Total deferred tax assets                          2,514     1,734
       Less valuation allowance                               -         -
       --------------------------------------------------------------------
       Net deferred tax assets                            2,514     1,734
       --------------------------------------------------------------------
       Net deferred tax liability                        ($ 563)    ($ 20)
       --------------------------------------------------------------------
</TABLE>

           Based  upon  the  Company's  current  and  historical  taxable
      history  and  the  anticipated  level  of  future  taxable  income,
      management  of  the  Company   believes  the  existing   deductible
      differences  will, more likely than not,  reverse in future periods
      in which the Company generates net taxable income. Accordingly, the
      Company  does not believe a valuation  allowance  is  necessary  at
      March 31, 1998.


                                     42
<PAGE>


           Income tax  expense in 1998,  1997 and 1996  differs  from the
      amounts  computed by applying the federal  statutory rate of 34% to
      income before taxes as follows (in thousands):

<TABLE>
<CAPTION>
                                                   Years ended March 31,
                                                -------------------------
                                                  1998     1997     1996
       -------------------------------------------------------------------
<S>                                              <C>    <C>      <C>    
       Tax expense at statutory rates            $5,967 $ 4,049  $ 3,138
       State income taxes, net of federal benefit   439     276      358
       Non-deductible  amortization of cost in
         excess of net assets of acquired            39       6        -
         business
       Other                                        136      41       57
       -------------------------------------------------------------------
                                                 $6,581 $ 4,372  $ 3,553
       -------------------------------------------------------------------
</TABLE>

(11)  Transactions with Related Parties

           The Company  performs  certain  administrative  functions  for
      entities  owned by the Company's  Chief  Executive  Officer and its
      President. The Company charged to the entities $13,000, $10,000 and
      $14,000 in fiscal 1998, fiscal 1997, and fiscal 1996, respectively,
      representing  certain direct  expenses and the estimated fair value
      of providing  administrative  services,  primarily  allocations  of
      salary and overhead.

           Included in accounts receivable at March 31, 1998 and 1997 are
      $420,000 and $199,000,  respectively,  from the sale of merchandise
      and other supplies to the licensee, and additionally,  at March 31,
      1997,  $137,000  from  the  sale  of one of the  Company's  Florida
      locations to the licensee.

(12)  Stockholders' Equity

           The Company has a stock  option  plan which  provides  for the
      grant of common stock options to eligible employees and others. The
      aggregate  maximum  number of shares of common stock  available for
      awards under the plan is 600,000.  Stock options granted may be the
      fair  market  value  of the  stock  or at a price  determined  by a
      committee of the Board of Directors. The options vest over a period
      of up to five years and are exercisable over a period determined by
      the committee, but not longer than ten years.

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

                                              Years ended March 31,
                                              ---------------------
                                           1998      1997        1996
       ------------------------------------------------------------------
<S>                                      <C>        <C>         <C> 
       Net income:   
         As reported                     $ 10,969   $ 7,538     $ 5,677
         Pro forma                       $ 10,243   $ 7,089     $ 5,614

       Diluted earnings per share:
         As reported                      $ 1.82    $ 1.40      $ 1.07
         Pro forma                        $ 1.70    $ 1.32      $ 1.05
       ------------------------------------------------------------------
</TABLE>

                                     43
<PAGE>


           The per share  weighted  average  fair value of stock  options
      granted during fiscal 1998, fiscal 1997 and fiscal 1996 was $15.84,
      $13.84  and  $10.50,  respectively,  on the date of grant  and were
      determined using the Black-Scholes  option-pricing model based upon
      the following weighted-average assumptions:
<TABLE>
<CAPTION>


                                          1998       1997        1996
       ------------------------------------------------------------------
<S>                                      <C>         <C>         <C> 
       Expected dividend yield            0.0%        0.0%        0.0%
       Expected volatility               42.1        49.4        52.2
       Risk-free interest rate            5.7         5.4         7.6
       Expected life (in years)           9.0         9.6         9.5
       ------------------------------------------------------------------
</TABLE>

           Pro forma net income  reflects  only options  granted in 1998,
      1997  and  1996.   Therefore,   the  full  impact  of   calculating
      compensation  cost for  stock  options  under  SFAS No.  123 is not
      reflected  in the pro  forma net  income  amounts  presented  above
      because  compensation  cost is reflected over the option's  vesting
      period  of up to five  years  and  compensation  cost  for  options
      granted prior to April 1, 1995 is not considered.

           Summarized stock option data is as follows:
<TABLE>
<CAPTION>

                                                   Weighted
                                                   Average      Shares
                                                   Exercise  Under Option
                                                    Price
       ------------------------------------------------------------------
<S>                                                 <C>        <C>    
       Outstanding at March 31, 1995                   8.15    226,300
         Granted                                      14.62     40,000
         Exercised                                     8.00     (2,600)
         Canceled                                      9.91    (14,100)
       ------------------------------------------------------------------
       Outstanding at March 31, 1996                   9.09    249,600
         Granted                                      20.79    186,000
         Exercised                                     8.28    (25,550)
         Canceled                                     13.58    (15,300)
       ------------------------------------------------------------------
       Outstanding at March 31, 1997                  14.48    394,750
         Granted                                      26.17    149,500
         Exercised                                    11.96    (27,600)
         Canceled                                     18.83    (16,200)
       ------------------------------------------------------------------
       Outstanding at March 31, 1998                  17.97    500,450
       ------------------------------------------------------------------
       Exercisable                                  $ 12.66    204,950
       ------------------------------------------------------------------
</TABLE>


                                     44
<PAGE>


           The  following   table   summarizes   information   concerning
      currently outstanding and exercisable options:
<TABLE>
<CAPTION>

                                                     Exercise Price
                                              ---------------------------
                                                 $8.00 -      $18.00 -
                                                 $10.625       $29.00
       ------------------------------------------------------------------
<S>                                              <C>          <C>    
       Options outstanding at                    173,550      326,900
       March 31, 1998
       Weighted average remaining
         contractual life (years)                   6.25         8.94
       Weighted average exercise
       price                                      $ 8.23       $23.15
       Options exercisable at
       March 31, 1998                            132,250       72,700
       Weighted average exercise
       price                                      $ 8.21      $ 20.75
       ------------------------------------------------------------------

</TABLE>

           On October 12,  1995,  the Company  created an Employee  Stock
      Purchase  Plan under which the sale of 96,000  shares of its common
      stock has been  authorized.  Generally,  all employees who meet the
      requirements  for  participation  in  any of  the  Company's  other
      employee  benefit  plans are also eligible to  participate  in this
      plan.  Employees may designate up to the lesser of $25,000 or 5% of
      their annual  compensation  for the purchase of common  stock.  The
      price for the shares  purchased  under the plan is the lower of 85%
      of the fair market  value on the first or last day of the  purchase
      period. Employees are not permitted to obtain share certificates or
      sell or  transfer  any shares for one year from the last day of the
      offering period in which the shares were  purchased.  During fiscal
      1998, 1997 and 1996, 9,317,  8,151 and 1,606 shares,  respectively,
      were issued under this plan.

(13)  Fair Value of Financial Instruments

           Cash,   Accounts   Receivable,   Accounts  Payable  and  Gold
      Consignment Agreements

           The carrying  amount  approximates  fair value  because of the
      short maturity of these instruments.

           Long-term Debt

           The fair value of the Company's  long-term  debt  approximates
      its cost based on current  rates offered to the Company for debt of
      the same remaining maturities.

(14)  Commitments and Contingencies

           The  Company is  periodically  a  defendant  in certain  legal
      actions  and other  claims  arising in the  ordinary  course of its
      business.  In the  opinion  of  management,  liabilities,  if  any,
      arising from the ultimate resolution of such actions would not have
      a material  adverse  effect on the  Company's  financial  position,
      results of operations or liquidity.

           At March 31, 1998, the Company had commitments  outstanding of
      approximately  $5.0  million.  Of this amount,  approximately  $3.2
      million was committed for the  construction of new kiosks,  in-line
      stores or the renovation of existing stores as well as fixtures and
      supplies for current and planned stores. Approximately $1.8 million
      of total  commitments  reflect remaining costs for the construction
      of a new warehouse and distribution center.

                                     45
<PAGE>


           Pursuant  to  the  agreement   between  the  Company  and  its
      licensee,  the  licensee  has the right to acquire,  under  certain
      circumstances,  the  Company's  42 kiosk stores (at March 31, 1998)
      operating  in the  state  of  Florida  and has the  right  of first
      refusal  with respect to new  locations in the state.  Upon 90 days
      notice,  the licensee may purchase any or all  locations in certain
      Florida counties. Locations outside these counties may be purchased
      only during the first seven  months of any calendar  year  provided
      they have been open for two full calendar years. The purchase price
      of a location  is due within 30 days of closing  and is  determined
      based upon the cost of assets acquired at the closing date. In each
      of  fiscal  1998 and  1997,  the  licensee  exercised  its right to
      acquire three stores and one store, respectively, from the Company,
      and as of  March  31,  1998 has  delivered  written  notice  to the
      Company of its intention to acquire five additional stores from the
      Company in fiscal 1999.

           The Company  entered into a tax  indemnification  agreement in
      June of 1994 with certain current  stockholders  which provides for
      distributions  relating to tax  liabilities  for allocable  taxable
      income  for  fiscal  1994 and 1995 and an  indemnification  of such
      stockholders  for any  losses or  liabilities  with  respect to any
      additional taxes resulting from the Company's operations during the
      period in which it was an "S"  corporation.  Payments of $1,530,000
      were made during fiscal 1996 under this agreement.

(15)  Subsequent Event

           On May 8, 1998,  the  Company  entered  into an  agreement  to
      acquire  approximately 107 retail kiosk stores from Sedgwick Sales,
      Inc., a Nevada  corporation.  The total cost of the  acquisition is
      $3.0 million and includes the leases, kiosks and fixtures.  Because
      the seller's jewelry  business is significantly  different from the
      Company's,  there  will be no  inventory  purchased  or  trademarks
      acquired. Closing is expected to occur during June 1998.


                                     46
<PAGE>




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

           None.

                                       PART III

      Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

           The  information   required  by  this  item  (except  for  the
      information  regarding executive officers called for by Item 401 of
      Regulation  S-K  which is  included  in Part I hereof as Item 4A in
      accordance  with General  Instruction  G(3)),  is  incorporated  by
      reference to the information set forth in the Company's  definitive
      Proxy  Statement for its 1998 Annual Meeting of  Stockholders to be
      filed with the Securities and Exchange  Commission  within 120 days
      following the end of the Company's fiscal year.

      Item 11. EXECUTIVE COMPENSATION

           The  information  required  by this  item is  incorporated  by
      reference to the information set forth in the Company's  definitive
      Proxy  Statement for its 1998 Annual Meeting of  Stockholders to be
      filed with the Securities and Exchange  Commission  within 120 days
      following the end of the Company's fiscal year.

      Item 12. SECURITY  OWNERSHIP  OF  CERTAIN  BENEFICIAL  OWNERS  AND
               MANAGEMENT

           The  information  required  by this  item is  incorporated  by
      reference to the information set forth in the Company's  definitive
      Proxy  Statement for its 1998 Annual Meeting of  Stockholders to be
      filed with the Securities and Exchange  Commission  within 120 days
      following the end of the Company's fiscal year.


      Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

           The  information  required  by this  item is  incorporated  by
      reference to the information set forth in the Company's  definitive
      Proxy  Statement for its 1998 Annual Meeting of  Stockholders to be
      filed with the Securities and Exchange  Commission  within 120 days
      following the end of the Company's fiscal year.


                                     47
<PAGE>


                                      PART IV

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

      (a)   Documents filed as part of this Report.

         1. Financial Statements                                        Page

            Independent Auditors' Report                                 27

            Consolidated Balance Sheets at March 31, 1998 and 1997       28

            Consolidated Statements of Income for the Years ended
            March 31, 1998, 1997 and 1996                                29

            Consolidated Statements of Changes in Stockholders'
            Equity for the Years ended March 31, 1998, 1997 and 1996     30

            Consolidated Statements of Cash Flows for the Years ended
            March 31, 1998, 1997 and 1996                                31

            Notes to Consolidated Financial Statements                   33

         2. Financial Statement Schedules.

                 All Financial Statement Schedules for which provision is
            made  in  the  applicable   accounting   regulations  of  the
            Securities and Exchange  Commission are either not applicable
            or  not  required  under  the  related  instructions  or  the
            required  information is given in the Consolidated  Financial
            Statements or Notes thereto, and therefore have been omitted.

         3. Exhibits

Exhibit
  No.

2         See 10.40, 10.41 and 10.43.


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).

9         None

10.1      Third Amended and Restated Loan  Agreement  dated  February 13,
          1995  between the  Registrant  and First  Valley  Bank  ("First
          Valley")  (incorporated  by  reference  to Exhibit  10.1 to the
          Registrant's  Form 10-K filed with the  Securities and Exchange
          Commission on June 28, 1995).


                                     48
<PAGE>




10.2      Letter  Amendment to Third Amended and Restated Loan  Agreement
          dated April 28, 1995  between the  Registrant  and First Valley
          (incorporated  by reference to Exhibit 10.2 to the Registrant's
          Form 10-K filed with the Securities and Exchange  Commission on
          June 28, 1995).

10.3      Amendment to Third  Amended and Restated Loan  Agreement  dated
          November  21, 1995  between  the  Registrant  and First  Valley
          (incorporated by reference to Exhibit 10.11 to the Registrant's
          Form 10-Q filed with the Securities and Exchange  Commission on
          August 9, 1995).

10.4      Second  Amendment to Third Amended and Restated Loan  Agreement
          dated November 21, 1995 between the Registrant and First Valley
          (incorporated by reference to Exhibit 10.11 to the Registrant's
          Form 10-Q filed with the Securities and Exchange  Commission on
          February 14, 1996).

10.5      Tenth  Replacement  Revolving Loan Note dated November 21, 1995
          between  the  Registrant  and  First  Valley  (incorporated  by
          reference to Exhibit 10.12 to the Registrant's  Form 10-Q filed
          with the  Securities  and Exchange  Commission  on February 14,
          1996).

10.6      Master  Advance  Note  Extension  And/Or   Modification  And/Or
          Renewal   Agreement   dated   November  21,  1995  between  the
          Registrant  and First  Valley  (incorporated  by  reference  to
          Exhibit  10.13 to the  Registrant's  Form 10-Q  filed  with the
          Securities and Exchange Commission on February 14, 1996).

10.7      Letter  of  Amendment  to  Third   Amended  and  Restated  Loan
          Agreement  dated  December 18, 1995 between the  Registrant and
          First Valley (incorporated by reference to Exhibit 10.15 to the
          Registrant's  Form 10-Q filed with the  Securities and Exchange
          Commission on February 14, 1996).

10.8      Letter  of  Amendment  to  Third   Amended  and  Restated  Loan
          Agreement Between Piercing Pagoda,  Inc. and First Valley dated
          February 28, 1996 (incorporated by reference to Exhibit 10.8 to
          the  Registrant's  Form 10-K filed with Securities and Exchange
          Commission on June 25, 1996).

10.9      Third  Amendment to Third Amended and Restated  Loan  Agreement
          dated  September 5, 1996 between the Registrant and Summit Bank
          (incorporated  by reference to Exhibit 10.1 to the Registrant's
          Form 10-Q filed with the Securities and Exchange  Commission on
          November 13, 1996).

10.10     Eleventh  Replacement  Revolving  Loan Note dated  September 5,
          1996 between the  Registrant and Summit Bank  (incorporated  by
          reference to Exhibit 10.2 to the  Registrant's  Form 10-Q filed
          with the  Securities  and Exchange  Commission  on November 13,
          1996).

10.11     Fourth  Amendment to Third Amended and Restated Loan  Agreement
          dated October 18, 1996 between the  Registrant  and Summit Bank
          (incorporated  by reference to Exhibit 10.3 to the Registrant's
          Form 10-Q filed with the Securities and Exchange  Commission on
          November 13, 1996).

10.12     Twelfth Replacement  Revolving Loan Note dated October 18, 1996
          between  the  Registrant  and  Summit  Bank   (incorporated  by
          reference to Exhibit 10.4 to the  Registrant's  Form 10-Q filed
          with the  Securities  and Exchange  Commission  on November 13,
          1996).

10.13     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  (incorporated
          by  reference  to Exhibit  10.1 of the  Registrant's  Form 10-Q
          filed with the Securities  and Exchange  Commission on February
          13, 1997).


10.14     Bond Placement  Agreement between Northampton County Industrial
          Development  Authority,  Meridian  Bank  ("Meridian")  and  the
          Registrant dated October 12, 1995 (incorporated by reference to
          exhibit  10.3 to the  Registrant's  Form  10-Q  filed  with the
          Securities and Exchange Commission on February 14, 1996).


                                     49
<PAGE>



10.15     Loan   Agreement   between    Northampton   County   Industrial
          Development Authority and the Registrant dated October 15, 1995
          (incorporated  by reference to Exhibit 10.4 to the Registrant's
          Form 10-Q filed with the Securities and Exchange  Commission on
          February 14, 1996).

10.16     Reimbursement  Agreement  between the  Registrant  and Meridian
          dated  October 15, 1995  (incorporated  by reference to Exhibit
          10.5 to the  Registrant's  Form 10-Q filed with the  Securities
          and Exchange Commission on February 14, 1996.

10.17     Continuing  Disclosure  Agreement  between Dauphin Deposit Bank
          and Trust Company  ("Dauphin") and the Registrant dated October
          15, 1995  (incorporated  by  reference  to Exhibit  10.6 to the
          Registrant's  Form 10-Q filed with the  Securities and Exchange
          Commission on February 14, 1996).

10.18     Continuing  Letter of Credit Agreement between Meridian and the
          Registrant dated October 19, 1995 (incorporated by reference to
          Exhibit  10.7 to the  Registrant's  Form  10-Q  filed  with the
          Securities and Exchange Commission on February 14, 1996).

10.19     Promissory  Note  between  Meridian  and the  Registrant  dated
          October 19, 1995  (incorporated by reference to Exhibit 10.8 to
          the  Registrant's  Form  10-Q  filed  with the  Securities  and
          Exchange Commission on February 14, 1996).

10.20     Open-End  Mortgage and Security  Agreement between Meridian and
          the  Registrant   dated  October  19,  1995   (incorporated  by
          reference to Exhibit 10.9 to the  Registrant's  Form 10-Q filed
          with the  Securities  and Exchange  Commission  on February 14,
          1996).

10.21     Assignment of Lessor's  Interest in Leases between Meridian and
          the  Registrant   dated  October  19,  1995   (incorporated  by
          reference to Exhibit 10.10 to the Registrant's  Form 10-Q filed
          with the  Securities  and Exchange  Commission  on February 14,
          1996).

10.22     Consignment  Agreement  dated  November 30, 1990 between  Fleet
          Precious Metals Inc. ("Fleet") and the Registrant (incorporated
          by reference to Exhibit 10.15 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).

10.23     First  Amendment and Agreement to Consignment  Agreement  dated
          July 26, 1994 between Fleet and the Registrant (incorporated by
          reference  to Exhibit  10.17 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).

10.24     Third  Amendment and Agreement to Consignment  Agreement  dated
          September   19,   1995   between  the   Registrant   and  Fleet
          (incorporated  by reference to Exhibit 10.2 to the Registrant's
          Form 10-Q filed with the Securities and Exchange  Commission on
          February 14, 1996).

10.25     Fourth  Amendment and Agreement to Consignment  Agreement dated
          December 1, 1995 between the Registrant and Fleet (incorporated
          by reference  to Exhibit  10.14 to the  Registrant's  Form 10-Q
          filed with the Securities  and Exchange  Commission on February
          14, 1996).

10.26     Fifth  Amendment and Agreement to Consignment  Agreement  dated
          December   21,   1995   between   the   Registrant   and  Fleet
          (incorporated by reference to Exhibit 10.16 to the Registrant's
          Form 10-Q filed with the Securities and Exchange  Commission on
          February 14, 1996).

10.27     Sixth  Amendment And Agreement To Consignment  Agreement  dated
          October 31,  1996  between the  Registrant  and Fleet  Precious
          Metals Inc.  (incorporated  by reference to Exhibit 10.2 of the
          Registrant's  Form 10-Q filed with the  Securities and Exchange
          Commission on February 13, 1997).

10.28     Amended and Restated Consignment  Agreement dated July 26, 1994
          between  Rhode  Island  Hospital  Trust  National  Bank and the
          Registrant  (incorporated  by reference to Exhibit 10.16 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).


                                     50
<PAGE>




10.29     Second Amendment to Amended and Restated Consignment Agreement,
          dated  September  11,  1995  between the  Registrant  and Rhode
          Island Hospital Trust National Bank  (incorporated by reference
          to Exhibit  10.1 to the  Registrant's  Form 10-Q filed with the
          Securities and Exchange Commission on February 14, 1996).

10.30     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
          (incorporated  by reference to Exhibit 10.3 of the Registrant's
          Form 10-Q filed with the Securities and Exchange Commission on
          February 13, 1997).

10.31     Registrant's 1994 Stock Option Plan  (incorporated by reference
          to Exhibit 10.7 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).

10.32     Registrant's  1994  Restricted  Stock  Plan   (incorporated  by
          reference  to  Exhibit  10.8 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).

10.33     Registrant's  Annual Incentive Plan  (incorporated by reference
          to Exhibit 10.9 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).

10.34     Registrant's   Retirement  &  Savings  Plan   (incorporated  by
          reference  to Exhibit  10.14 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).

10.35     Registrant's  Employee  Stock  Purchase Plan  (incorporated  by
          reference to the  Registrant's  Registration  Statement on Form
          S-8, File No.  33-982288,  initially  filed with the Securities
          and Exchange Commission on October 18, 1995).

10.36     Tax Indemnification Agreement dated June 10, 1994 (incorporated
          by reference to Exhibit 10.10 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).

10.37     Amendment  to Tax  Indemnification  Agreement  dated August 30,
          1994  (incorporated  by  reference  to  Exhibit  10.19  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).

10.38     Restatement and Modification of Licensing Agreement between the
          Registrant and Piercing Pagoda of Florida,  Inc., dated June 3,
          1994  (incorporated  by  reference  to  Exhibit  10.13  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).

10.39     Agreement  together with Addendum  dated August 4, 1994 between
          the  Registrant  and  Lehigh  Valley   Industrial   Park,  Inc.
          (incorporated by reference to Exhibit 10.22 to the Registrant's
          Registration   Statement  on  Form  S-1,  File  No.   33-80200,
          initially field with the Securities and Exchange  Commission on
          June 14, 1994).

10.40     Asset  Purchase   Agreement  dated  January  29,  1997  Between
          Piercing Pagoda,  Inc., EARS, Inc., Weaver's Gems and Minerals,
          Inc. and Gemstone Jewelry,  Inc.  (incorporated by reference to
          Exhibit  10.4 to the  Registrant's  Form  10-Q  filed  with the
          Securities and Exchange Commission on February 13, 1997).

10.41     Asset  Purchase  Agreement  dated April 25, 1997 between  Piercing
          Pagoda,  Inc.  and  the  Silver  &  Gold  Trading  Company,   Inc.
          (incorporated  by reference to Exhibit  10.41 to the  Registrant's
          Registration  Statement on Form S-1 File No. 333-27213,  initially
          filed  with the  Securities  and  Exchange  Commission  on May 15,
          1997).

                                     51
<PAGE>

10.42     Syndicated  Loan  Agreement  dated  March 27, 1997 by and among
          Piercing Pagoda,  Inc.,  CoreStates Bank, N.A., Summit Bank and
          First Union National Bank (incorporated by reference to Exhibit
          10.42 to the  Registrant's  Registration  Statement on Form S-1
          File No.  333-27213,  initially  filed with the  Securities and
          Exchange Commission on May 15, 1997).

10.43     First  Amendment to Syndicated  Loan Agreement  dated November,
          21, 1997 between the  Registrant and Summit Bank and CoreStates
          bank, N.A.  (incorporated  by reference to Exhibit 10.43 to the
          Registrant's  Form 10-Q filed with the  Securities and Exchange
          Commission on February 12, 1998).

10.44     Replacement  Revolving Note dated November 21, 1997 between the
          Registrant  and  Summit  Bank  (incorporated  by  reference  to
          Exhibit  10.44 to the  Registrant's  Form 10-Q  filed  with the
          Securities and Exchange Commission on February 12, 1998).

10.45     Replacement  Revolving Note dated November 21, 1997 between the
          Registrant  and  First  Union  (incorporated  by  reference  to
          Exhibit  10.45 to the  Registrant's  Form 10-Q  filed  with the
          Securities and Exchange Commission on February 12, 1998).

10.46     Replacement  Revolving Note dated November 21, 1997 between the
          Registrant and CoreStates Bank, N.A. (incorporated by reference
          to Exhibit 10.46 to the  Registrant's  Form 10-Q filed with the
          Securities and Exchange Commission on February 12, 1998).

10.47     Seventh  Amendment and Agreement to  Consignment  Agreement  dated
          October  2, 1997  Between  Fleet  Precious  Metals,  Inc.  and the
          Registrant. *

10.48     Asset  Purchase  Agreement  dated  May 8,  1998  between  Piercing
          Pagoda,  Inc. and  Sedgwick  Sales,  Inc.,  a Nevada  corporation,
          Donald M. Sedgwick,  Gregory K. Stapley, The Sedgwick Family Trust
          and the Beneficiary of the Trust. *

11        Not applicable.

12        Not applicable.

13        Not applicable.

16        Not applicable.

18        Not applicable.

21        Subsidiaries  of the Registrant  (incorporated  by reference to
          Exhibit  21 to  the  Registrant's  Form  10-K  filed  with  the
          Securities and Exchange Commission on June 25, 1996).

22        Not applicable.

23.1      Consent of KPMG Peat Marwick LLP, independent  certified public
          accountants.*

24        None.

27        Financial Data Schedule. *


27.1      Financial Data Schedule. *

*         Filed herewith.

       (b)  Reports on Form 8-K

            The  Company  did not file any  Current  Reports  on Form 8-K
            during the last quarter of fiscal 1998.

                                     52
<PAGE>



      SIGNATURES


           Pursuant  to the  requirements  of  Section 13 or 15(d) of the
      Securities  Exchange Act of 1934,  the  Registrant  has duly caused
      this  report  to be  signed  on  its  behalf  by  the  undersigned,
      thereunto  duly  authorized  in  the  township  of  Hanover  in the
      Commonwealth of Pennsylvania on June 22, 1998.

                                    PIERCING PAGODA, INC.



      By:                           /s/ John F. Eureyecko
                                    John F. Eureyecko
                                    President and
                                    Chief Operating Officer


                                     53
<PAGE>



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

           Signature                Title                   Date




 /s/ Richard H. Penske                                     June 22, 1998
    Richard H. Penske        Chief Executive Officer and
                             Chairman of the Board
                             (Principal Executive Officer)





/s/ John F. Eureyecko                                      June 22, 1998
   John F. Eureyecko         Director, President and
                             Chief Operating Officer
                             (Principal  Financial and
                              Accounting  Officer)



/s/ Alan R. Hoefer                                         June 22,1998
   Alan R. Hoefer                 Director





/s/ Mark A. Randol                                         June 22 1998
    Mark A. Randol                Director




                                     54
<PAGE>



                                 INDEX TO EXHIBITS

Exhibit No.                   Exhibit                                  Page No.

10.47           Seventh Amendment and Agreement to Consignment               56
                Agreement dated October 2, 1997 Between Fleet
                Precious Metals, Inc. and the Registrant.

10.48           Asset Purchase Agreement dated May 8, 1998                   58
                between Piercing Pagoda, Inc. and Sedgwick Sales, Inc.,
                a Nevada  corporation, Donald M. Sedgwick,
                Gregory K. Stapley, The Sedgwick Family Trust and
                the Beneficiary of the Trust.

23.1            Consent of KPMG Peat Marwick LLP, independent                72
                certified public accountants.



                                     55
<PAGE>