UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

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

                For the quarterly period ended December 31, 1998

                                       OR

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

                For the transition period from _______ to _______

                         Commission File Number 0-24860

                              PIERCING PAGODA, INC.

             (Exact Name of Registrant as Specified in its Charter)

                               Delaware 23-1894725
         (State or Other Jurisdiction of (I.R.S. Employer Identification
                     Incorporation or Organization) Number)


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

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

                                       N/A
                     (Former Name, Former Address and Former
                   Fiscal Year, if Changed Since Last Report.)


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

The number of shares  outstanding of the registrant's  common stock is 9,133,901
(as of February 12, 1999)

<PAGE>


                                   PIERCING PAGODA, INC.


                                           INDEX
                                                                            PAGE
                         PART I - FINANCIAL INFORMATION               NUMBER

   Item 1.    Financial Statements

              Consolidated balance sheets as of
              December 31, 1998 (unaudited) and March 31, 1998           3

              Consolidated statements of operations for 
              the three months ended December 31, 1998 
              and 1997 (unaudited) and nine months  ended
              December 31, 1998 and 1997 (unaudited)                     4

              Consolidated statements of cash flows for the  nine
              months ended December 31, 1998 and 1997(unaudited)         5

              Notes to consolidated financial statements                 7

   Item 2.    Management's Discussion and Analysis of Financial
              Condition and Results of Operations                       10

                           PART II - OTHER INFORMATION

     Item 1.  Legal Proceedings                                         18

     Item 2.  Changes in Securities and Use of Proceeds                 18

     Item 3.  Defaults Upon Senior Securities                           18

     Item 4.  Submission of Matters to a Vote of Security Holders       18

     Item 5.  Other Information                                         19

     Item 6.  Exhibits and Reports on Form 8-K                          19

              Signatures                                                20



<PAGE>



PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                     PIERCING PAGODA, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                        (In thousands, except share data)
<TABLE>
<CAPTION>

                                                        December 31,   March 31,
                                                           1998          1998 
                                                       ------------   ----------
   Assets                                              (Unaudited)

Current assets
<S>                                                    <C>            <C>    
   Cash                                                  $ 2,733       $ 2,699
   Accounts receivable                                       412         1,454
   Inventory                                              56,657        53,149
   Deposits for inventory purchases                          531           546
   Prepaid expenses and other current assets                 336         1,058
   Prepaid income taxes                                        -           215
   Deferred tax assets                                     2,262         1,972

                                                       ------------   ----------
Total current assets                                      62,931        61,093

Property, fixtures and equipment, net                     33,439        27,215
Goodwill, net                                             19,993         6,296
Other assets                                               2,280         1,495

                                                       ============   ==========
                                                       $ 118,643      $ 96,099
                                                       ============   ==========
   Liabilities and Stockholders' Equity

Current liabilities
   Accounts payable                                       10,127         3,232
   Current installments of long-term debt                    373           247
   Income taxes payable                                    4,347           889
   Accrued expenses and other current liabilities         19,670        12,423

                                                       ------------   ----------
Total current liabilities                                 34,517        16,791

Long-term debt, less current installments                  4,655         9,742
Deferred tax liabilities                                   3,209         2,535
Other liabilities                                            993           703

                                                       ------------   ----------
Total liabilities                                         43,374        29,771

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 9,123,533 shares and
      9,087,616 at December 31, 1998 and 
      March 31, 1998, respectively.                           91            91
   Additional paid-in capital                             40,821        40,387
   Retained earnings                                      34,357        25,850

                                                       ------------   ----------
Total stockholders' equity                                75,269        66,328
                                                       ------------   ----------
                                                       $ 118,643      $ 96,099
                                                       ============   ==========
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>




                     PIERCING PAGODA, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)
                                   (Unaudited)
<TABLE>
<CAPTION>

                                       Three months ended     Nine months ended
                                          December 31,           December 31,
                                      ---------------------   ------------------
                                        1998        1997       1998       1997
                                      ----------  ---------   --------  --------

<S>                                   <C>          <C>        <C>       <C>     
Net sales                             $ 101,985    $89,915    $199,673  $175,665

Cost of goods sold and occupancy
expenses, (excluding depreciation on                              
kiosks)                                  51,919      44,684    106,172    93,549
                                      ----------  ---------  ---------  --------
Gross profit                             50,066      45,231     93,501    82,116

Selling, general and administrative
expenses, (including depreciation on                              
kiosks)                                  32,356      26,672     77,283    62,971
                                      ----------  ---------  --------  ---------
Income from operations                   17,710      18,559     16,218    19,145

Interest and other income                    47         165        232       373
Interest expense                          1,130         897      2,530     2,422
                                      ----------  --------- --------  ---------
Income before income taxes               16,627      17,827     13,920    17,096

Income tax expense                        6,458       6,651      5,413     6,370
                                      ==========  =========   ========  ========
Net Income                              $10,169     $11,176     $8,507   $10,726
                                      ==========  =========   ========  ========

Basic earnings per share                $ 1.12     $ 1.23      $ 0.93    $ 1.23
                                      ==========  =========   ========  ========

Diluted earnings per share              $ 1.10     $ 1.20      $ 0.91    $ 1.20
                                      ==========  =========   ========  ========
</TABLE>

See accompanying notes to consolidated financial statements.


<PAGE>



                     PIERCING PAGODA, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                           Nine months ended
                                                              December 31,
                                                        -------------------------
                                                           1998          1997
                                                        ------------  -----------

Cash flows from operating activities:
<S>                                                       <C>          <C>     
  Net income                                              $ 8,507      $ 10,726
  Adjustments to reconcile net income  to net cash
   provided by operating activities:
     Depreciation and amortization                          5,101         3,927
     Loss on disposal of property, fixtures and               
      equipment                                               242            48
     Other changes in other assets                            107           (21)
     Deferred income taxes                                    384           809
     Changes in operating assets and liabilities
        net of effects of acquisitions:
      Accounts receivable                                     574           556
      Inventory                                            (1,698)      (17,656)
      Deposits for inventory purchases                         15           199
      Prepaid expenses and other current assets               724           366
      Prepaid income taxes                                    215         1,494
      Accounts payable                                      6,895         8,814
      Accrued expenses and other current liabilities        7,047         7,551
      Income taxes payable                                  3,551         5,048
      Other liabilities                                      (210)         (129)

                                                        ------------  -----------
Net cash provided by operating activities                  31,454        21,732

Cash flows from investing activities:
  Additions to property, fixtures and equipment           (10,141)       (6,070)
  Payments for purchase of businesses                     (14,867)       (7,950)
  Proceeds from disposal of property, fixtures and            
   equipment                                                    -            68
  Noncurrent deposits, net                                   (400)          (44)

                                                        ------------  -----------
Net cash used in investing activities                     (25,408)      (13,996)

Cash flows from financing activities:
  Repayments of long-term debt                                (26)          (26)
  Revolving line of credit, net                            (8,742)      (24,200)
  Loan fees paid                                             (150)          (19)
  Proceeds from issuance of long-term debt                  2,565             -
  Net proceeds from issuance of common stock under            
   employee share plans                                       341           336
  Proceeds from issuance of common stock, net                   -        17,189

                                                        ------------  -----------
Net cash used in financing activities                      (6,012)       (6,720)

                                                        ------------  -----------
Net increase in cash                                           34         1,016

Cash at beginning of period                                 2,699         4,119

                                                        ============  ===========
Cash at end of period                                     $ 2,733       $ 5,135
                                                        ============  ===========
</TABLE>



<PAGE>




                     PIERCING PAGODA, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                                 (In thousands)
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                           Nine months ended
                                                              December 31,
                                                        -------------------------
                                                           1998          1997
                                                        ------------  -----------
Supplemental  disclosures of cash flow information:  

Cash paid (received) during
  the period for:
<S>                                                       <C>           <C>    
   Interest                                               $ 2,448       $ 2,147
                                                        ============  ===========
   Income taxes, net                                      $ 1,356        $ (981)
                                                        ============  ===========
</TABLE>

Supplemental disclosure of non-cash operating and investing activities:

During the periods ended  December 31, 1998 and 1997,  the Company  entered into
non-competition agreements for $500,000 and $300,000, respectively.

See accompanying notes to consolidated financial statements.



<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1            Summary of Significant Accounting Policies

     The accompanying consolidated financial statements of Piercing Pagoda, Inc.
and  subsidiaries  (the  "Company")  have been prepared in  accordance  with the
instructions  to  Form  10-Q  and do not  include  all  of the  information  and
footnotes  required by generally  accepted  accounting  principles  for complete
financial  statements.  These  consolidated  financial  statements  include  the
results  of  operations  for  Piercing   Pagoda,   Inc.  and  its  wholly  owned
subsidiaries.   All   intercompany   transactions   have  been   eliminated   in
consolidation.  These  consolidated  financial  statements  should  be  read  in
conjunction  with the  Company's  consolidated  financial  statements  and notes
thereto for the year ended March 31, 1998.  The financial  information  included
herein  is  unaudited;   however,   the  information  reflects  all  adjustments
(consisting solely of normal recurring  adjustments) that are, in the opinion of
management, necessary for a fair presentation of the financial position, results
of operations and cash flows for the interim periods.

     In June 1998, the Company's  Board of Directors  authorized a three-for-two
stock split effected in the form of a stock dividend  payable to shareholders of
record on July 31, 1998,  payable on August 13, 1998.  Stockholders'  equity has
been restated to give retroactive recognition to the stock split for all periods
presented by reclassifying  from additional  paid-in capital to common stock the
par value of the  additional  shares  arising from the split.  In addition,  all
share and per share amounts have been restated to reflect the stock split.

     Operating results for the three-month and nine-month periods ended December
31, 1998 are not necessarily  indicative of the results that may be expected for
the entire fiscal year.

Note 2            Per Share Amounts

     The following  weighted  average number of shares of common stock were used
in the calculations for earnings per share.
<TABLE>
<CAPTION>

                                       1999                  1998
                               --------------------  --------------------
                                Quarter      YTD      Quarter      YTD
                               ---------  ---------  ---------  ---------
<S>                            <C>        <C>        <C>        <C>      
      Basic                    9,103,868  9,099,043  9,066,751  8,689,783
      Dilutive effect of
        outstanding stock
        options, using the     
        treasury stock
        method                   138,280    277,388    270,516    271,673
                               =========  =========  =========  =========
      Diluted                  9,242,148  9,376,431  9,337,267  8,961,456
                               =========  =========  =========  =========
</TABLE>

     Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares  outstanding during
the period. Diluted earnings per share is computed by dividing income available
to

<PAGE>


common  stockholders by the weighted average number of common shares outstanding
during the period  increased to include the number of  additional  common shares
that would have been  outstanding  if the dilutive  potential  common shares had
been issued.

Note 3            Property, Fixtures and Equipment

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

                                               December 31,    March 31,
                                                   1998           1998
                                              --------------  -----------
<S>                                            <C>            <C>  
      Land                                        $ 688          $ 688
      Furniture and fixtures                      4,809          3,881
      Kiosks                                     29,643         24,043
      Buildings and improvements                  7,281          5,413
      Computer equipment, software and other
      equipment                                  10,828          9,326
                                              --------------  -----------
                                                 53,249         43,351
      Less accumulated depreciation and  
      amortization                               19,810         16,136
                                              ==============  ===========
                                               $ 33,439       $ 27,215
                                              ==============  ===========
</TABLE>

Note 4            Accrued Expenses and Other Current Liabilities

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

                                               December 31,    March 31,
                                                   1998           1998
                                              --------------  -----------
<S>                                            <C>            <C>          
      Accrued payroll, vacation and related 
      taxes                                     $ 7,521       $ 5,230
      Sales tax payable                           3,593           794
      Accrued rents payable                       2,062           938
      Liability under jewelry club program        1,133         1,109
      Liability under lifetime guarantee   
      program                                     1,571         1,411
      Other accrued expenses                      3,790         2,941
                                              ==============  ===========
                                               $ 19,670       $ 12,423
                                              ==============  ===========
</TABLE>


Note 5            Purchase of Businesses

     In July 1998, the Company purchased approximately 104 of the retail outlets
of Sedgwick Sales, Inc., an independent kiosk retailer operating primarily under
the name Golden  Chain Gang  ("GCG").  The Company  paid $3.0  million for these
kiosk locations,  leases and store fixtures. No inventory was acquired. The cost
in excess of the fair value of the net assets  acquired over their fair value of
approximately  $2.7 million has been recorded as goodwill and is being amortized
over 15 years.  After a review of the initial  sales  results  and future  sales
potential  of the 104  locations  acquired  from GCG,  management  announced  on
September 28, 1998 that it would close  between 20 and 30 of these  locations by
March 31,  1999.  At  December  31,  1998,  the  Company  had closed 18 of these
locations.


<PAGE>


     On August 31, 1998,  the Company  purchased all of the  outstanding  common
stock of Piercing Pagoda of Florida,  Inc. ("PPF"),  the Company's sole licensee
and operator of 22 locations under the Company's  Piercing Pagoda and Plumb Gold
trade names. The Company paid  approximately  $11.5 million,  subject to certain
post closing  adjustments,  for all of the outstanding  common stock of PPF. The
Company is  obligated to pay $100,000 per year for five years under the terms of
a non-competition  agreement with the former  shareholder of PPF.  Additionally,
the former  shareholder  of PPF entered into an  employment  agreement  with the
Company as a corporate vice president at an annual salary of $125,000.  The cost
in excess of the fair value of the net assets  acquired over their fair value of
approximately $11.4 million has been recorded as goodwill and is being amortized
over 15 years.  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  following  unaudited  pro forma  financial  information  presents  the
combined  results of operations of the Company and PPF as if the acquisition had
occurred as of the  beginning of fiscal 1998 and 1999,  after  giving  effect to
certain  adjustments,  including  amortization of goodwill,  increased  interest
expense on debt related to the acquisition  and related income tax effects.  The
pro forma  financial  information  does not  necessarily  reflect the results of
operations  that would have  occurred had the Company and the PPF  constituted a
single entity during such periods.

<TABLE>
<CAPTION>

                                                    Nine months ended
                                                       December 31,
                                                ---------------------------
                                                   1998           1997
                                                ------------  -------------
                                                (In thousands, except per
                                                        share data)

<S>                                             <C>           <C>      
    Net sales                                   $ 201,680     $ 178,691
                                                ============  =============

    Net income                                    $ 7,829      $ 10,318
                                                ============  =============

    Basic and Diluted earnings                    
    per share                                        $ 0.85       $ 1.15
                                                ============  =============
</TABLE>


Note 6            Litigation

     On October 19, 1998, a lawsuit was filed,  purportedly  as a class  action,
against the Company and certain of its executive  officers in the U.S.  District
Court of the Eastern District of Pennsylvania.  The lawsuit alleges, among other
things,  that the Company and certain of its officers made materially  false and
misleading  statements and/or failed to disclose material information  regarding
the Company's business performance and prospects.  The Company believes that the
lawsuit has no merit, and intends to vigorously defend the action.  Although the
ultimate  outcome  of the  lawsuit  cannot be  determined,  management  does not
believe the outcome of the lawsuit  will have a material  adverse  effect on the
financial position, results of operations or cash flows of the Company. However,
there can be no assurance as to the ultimate resolution of this matter.


<PAGE>


ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Background

     The  Company's  consolidated  net sales are  comprised  primarily  of sales
generated by the Company's stores and, to a much lesser extent,  wholesale sales
primarily  to an  independent  store  operator  in Florida to which the  Company
licensed  the use of its store name and concept  (the  "Florida  Licensee").  On
August 31, 1998, the Company acquired all of the outstanding common stock of the
Florida Licensee and now operates all the stores previously owned by the Florida
Licensee.  Beginning on September  1, 1998 net sales  consist  entirely of sales
generated  by the  Company's  retail  stores.  Cost of goods sold and  occupancy
expenses  include the cost of merchandise,  rent and occupancy,  and the cost of
preparing  merchandise for sale.  Selling,  general and administrative  expenses
include store and  supervisory  payroll,  corporate  overhead and  non-occupancy
store expenses including depreciation of kiosks.

Results of Operations

Three Months Ended December 31, 1998 and 1997

     Consolidated  net sales increased $12.1 million,  or 13% from $89.9 million
for the three  months ended  December  31, 1997 to $102.0  million for the three
months ended  December 31, 1998.  This  increase was due  primarily to net sales
generated  by new stores  opened or acquired by the  Company.  Comparable  store
sales  decreased  $2.6  million,  or 3.1% in the  quarter.  The  Company  cannot
determine if the decline in comparable store sales will continue.  However,  the
Company is taking steps to address  this issue  through a  combination  of store
closures,  changes in merchandise  selection and improved staff training.  There
can be no assurance that the Company will be successful in reversing this trend.

     There were a total of 957 stores open at December 31, 1998  compared to 783
at December 31, 1997, an increase of 22%. A significant  portion of the increase
in the  total  number of stores  was due to the  acquisition  on July 1, 1998 of
approximately  104 stores  from  Sedgwick  Sales,  Inc.,  an  independent  kiosk
retailer,  previously  operated under the name Golden Chain Gang ("GCG") and the
acquisition of 22 stores previously operated by the Florida Licensee.  On August
31,  1998,  the Company  acquired  all of the  outstanding  common  stock of the
Florida  Licensee.  Accordingly,  there were no  wholesale  sales to the Florida
Licensee for the three months ended  December 31, 1998 compared to sales of $1.9
million in the three months ended December 31, 1997.

     The  average   jewelry  units  sold  per  comparable   store  decreased  to
approximately  4,300 for the three months ended December 31, 1998 from 4,400 for
the three


<PAGE>


months  ended  December 31,  1997.  The average  price per jewelry unit sold was
relatively  unchanged  at $25.54 for the three  months  ended  December 31, 1998
compared to $25.59 for the three months ended December 31, 1997.ecember 31, 1998
compared to $25.59 for the three months ended December 31, 1997.

     Gross profit  increased  $4.9  million,  or 11%, from $45.2 million for the
three months ended December 31, 1997 to $50.1 million for the three months ended
December 31, 1998.  The Company's  gross profit margin  decreased from 50.3% for
the three months  December 31, 1997 to 49.1% for the three months ended December
31, 1998. This decrease primarily reflects the combination of lower gross margin
on merchandise  sold,  higher rent and occupancy  costs as a percentage of sales
due to lower  comparable  stores sales and the lower sales volumes  exhibited by
locations acquired in the Golden Chain Gang acquisition as well as new locations
opened by the Company. These decreases were partially offset by increased margin
on merchandise sold through the 22 locations acquired from the Florida Licensee.
The conversion of these sales from  wholesale  sales to retail sales resulted in
increased gross profit dollars and margin to the Company. Previously,  wholesale
sales to the Florida Licensee  produced a significantly  lower gross margin than
the Company's own retail net sales

     Selling,  general and administrative  expenses  increased $5.7 million,  or
21%,  from $26.7  million for the three months ended  December 31, 1997 to $32.4
million for the three months ended  December  31, 1998.  As a percentage  of net
sales, selling, general and administrative expenses increased from 29.7% for the
three  months  ended  December  31,  1997 to 31.7%  for the three  months  ended
December 31, 1998. The increase in selling,  general and administrative expenses
and their increase as a percentage of sales is  attributable  to the increase in
the number of stores  operated by the  Company in the period and the  additional
costs incurred to support the greater number of stores,  compounded by the lower
level of comparable store sales and the lower sales volumes generated by many of
the new and  acquired  stores  operated by the Company  during the period.  Also
contributing to the increase in selling,  general and  administrative  costs for
the quarter are amounts recorded for the Company's  estimated lease  obligations
on closed stores and a full quarter of  amortization  of goodwill  recognized on
the Company's acquisitions of the Florida Licensee and GCG.

     Many of the stores which  experienced  lower sales  volumes were  locations
acquired in the GCG acquisition.  Management  previously announced that it would
close between 20 and 30 of these locations by March 31, 1999 and work to improve
operations at the remaining stores. At December 31, 1998, the Company had closed
18 of these acquired locations with another 10 locations  scheduled to be closed
during the fourth  quarter.  In addition to the closure of the 28 GCG locations,
the Company closed 22 non-GCG  locations  between April 1, 1998 and December 31,
1998 and anticipates  closing 20 to 30 additional non-GCG locations by March 31,
1999. The accounting for any related  charges will be included in fourth quarter
results.  For the upcoming fiscal year, the Company anticipates opening 40 to 60
new locations, but may close 40 to 60 other locations. There can be no assurance
as to the exact  number of stores the Company will open or close in a particular
period.


<PAGE>



     Depreciation and amortization  expense increased 36% to $1.9 million in the
three months ended December 31, 1998 from $1.4 million in the three months ended
December  31, 1997 due  primarily to capital  expenditures  for new and acquired
stores,  increased amortization of goodwill from acquisitions,  the upgrading of
kiosks  in  existing  locations  and  the  completion  of a  new  warehouse  and
distribution facility adjacent to the Company's corporate headquarters.

     Interest expense  increased  $233,000,  or 26%, from $897,000 for the three
months  ended  December  31,  1997 to $1.1  million for the three  months  ended
December 31, 1998, and as a percentage of net sales  increased from 1.0% for the
three months ended December 31, 1997 to 1.1% for the three months ended December
31, 1998. The increase in interest  expense  reflects higher average balances on
the Company's  revolving line of credit  agreement and an increase in the number
of  ounces  consigned  under  the  Company's  gold   consignment   arrangements.
Additionally,  the Company completed a secondary offering of its common stock in
June of 1997, the proceeds of which were used  primarily to reduce  indebtedness
incurred in the prior fiscal year.

     As a result of the foregoing, the Company's net income decreased from $11.2
million for the three  months ended  December 31, 1997 to $10.2  million for the
three months ended December 31, 1998.

Nine Months Ended December 31, 1998 and 1997

     Consolidated net sales increased $24.0 million, or 14%, from $175.7 million
for the nine  months  ended  December  31,  1997 to $199.7  million for the nine
months ended  December 31, 1998.  This increase was primarily due to an increase
in the  average  number of stores open for the nine months  ended  December  31,
1998, as compared to the nine months ended December 31, 1997.  Comparable  store
sales were  approximately flat with the previous year. There were a total of 957
stores open at December  31, 1998  compared  to 783 at  December  31,  1997,  an
increase of 22%. The average  jewelry units sold per comparable  store decreased
2% to 6,100 for the nine months ended  December  31, 1998  compared to 6,200 for
the nine months ended December 31, 1997. The average price per jewelry unit sold
increased 1% to $24.69 for the nine months ended  December 31, 1998  compared to
$24.50 for the nine months ended December 31, 1997.

     Gross profit  increased  $11.4 million,  or 14%, from $82.1 million for the
nine months ended  December 31, 1997 to $93.5  million for the nine months ended
December 31, 1998. The Company's gross profit margin was relatively unchanged at
46.8% for the nine months  ended  December  31,  1998 versus  46.7% for the nine
months  ended  December  31,  1997.  The  increase in gross  profit  dollars was
attributable to the

<PAGE>


     Company's increase in net sales. The change in gross profit margin reflects
lower gross profit margin on merchandise  sold offset by increased  gross profit
margin on sales through the 22 locations acquired from the Florida Licensee. The
conversion  of these sales after  August 31,  1998 from  wholesale  sales in the
previous  year to retail sales  resulted in increased  gross profit  dollars and
margin to the  Company.  Previously,  wholesale  sales to the  Florida  Licensee
produced a  significantly  lower gross margin than the  Company's own retail net
sales

     Selling,  general and administrative  expenses increased $14.3 million,  or
23%,  from $63.0  million for the nine months  ended  December 31, 1997 to $77.3
million for the nine months  ended  December 31,  1998.  As a percentage  of net
sales, selling, general and administrative expenses increased from 35.8% for the
nine months ended  December 31, 1997 to 38.7% for the nine months ended December
31, 1998. The increase in selling,  general and administrative  expenses as well
as the  increase in these  expenses  as a  percentage  of net sales  reflect the
negative impact of the  significant  number of new and acquired stores opened by
the Company during the period,  primarily  stores added during the quarter ended
September  30,  1998.  During the three  months ended  September  30, 1998,  the
Company opened 150 new and acquired stores,  the largest number of new stores it
has ever  opened  in a  single  three  month  period.  The  combined  effect  of
non-recurring pre-opening costs and lower than expected sales results at many of
the  acquired  locations  resulted in a  significant  increase in both  selling,
general and  administrative  expenses and their relationship to net sales during
that period.  The generally lower sales volume of these  locations  continued to
affect the relationship of selling, general and administrative expenses into the
third quarter ended December 31, 1998.

     Depreciation and amortization  expense increased 31% to $5.1 million in the
nine months  ended  December 31, 1998 from $3.9 million in the nine months ended
December  31, 1997 due  primarily to capital  expenditures  for new and acquired
stores,  increased amortization of goodwill from acquisitions,  the upgrading of
kiosks  in  existing  locations  and  the  completion  of a  new  warehouse  and
distribution facility adjacent to the Company's corporate headquarters.

     Interest expense increased $100,000,  or 4%, from $2.4 million for the nine
months  ended  December  31,  1997 to $2.5  million  for the nine  months  ended
December 31, 1998, and as a percentage of net sales  decreased from 1.4% for the
nine months ended  December 31, 1997 to 1.3% for the nine months ended  December
31, 1998.  The increase in interest  expense was due primarily to higher average
balances  on the  Company's  revolving  line of credit and an increase in ounces
consigned under the Company's gold consignment arrangements.

     As a result of the foregoing, the Company's net income decreased from $10.7
million  for the nine  months  ended  December  31,  1997 to net  income of $8.5
million for the nine months ended December 31, 1998.


<PAGE>



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,  in June 1997,  an offering of the
Company's common stock. The Company's working capital decreased to $28.4 million
at December 31, 1998 from $44.3  million at December  31, 1997.  At December 31,
1998, the Company had no outstanding  balance under its revolving line of credit
and $5.0 million of long-term debt outstanding, including $373,000 classified as
a current  liability.  In addition,  the Company had consigned 150,289 ounces of
gold under its gold consignment program valued at approximately $43.3 million.

     Net cash  provided by operating  activities  was $31.5 million for the nine
months ended  December 31, 1998 compared to $21.7 million for the same period in
the prior year. Net cash provided by operating activities primarily reflects the
results  of  the  year-end  holiday   shopping  season,   non-cash  charges  for
depreciation and amortization as well as increases in current liabilities. These
were partially offset by increases in inventory to support newly opened stores.

     Net cash used in investing  activities  was $25.4  million  during the nine
months ended  December 31, 1998 compared to $14.0 million during the nine months
ended  December  31,  1997.  Net cash  used in  investing  activities  primarily
reflects  the  acquisition  of 104 former  GCG  locations  in July of 1998,  the
acquisition  of the  Florida  Licensee  in  August of 1998 and the  addition  of
property,  fixtures and equipment in  connection  with the opening of new stores
and the renovation of existing stores.

     Net cash used in financing  activities was $6.0 million for the nine months
ended  December  31,  1998  versus $6.7  million  during the nine  months  ended
December 31, 1997. Net cash used in financing  activities during the nine months
ended December 31, 1998 primarily  reflects a reduction in borrowings  under the
Company's  revolving  line of credit  partially  offset by the  proceeds of $2.6
million in long term financing.

     During  September 1998 and again in October 1998,  the Company's  revolving
credit  facility was amended to provide  additional  funds for the operation and
expansion of its  business.  The  Company's  current,  amended  credit  facility
provides for maximum  borrowings of $105.0 million through a combination of cash
advances  (which may not exceed $65.0  million) and letters of credit (which may
not exceed $70.0 million) to support the Company's gold consignment  program. At
December 31, 1998, the Company had $58.4 million  available to be borrowed under
its then existing revolving credit facility and was in compliance with covenants
contained in that agreement. The

<PAGE>


     Company  believes  that the expected cash flows from  operations,  its gold
consignment program and bank borrowings will be sufficient to fund the Company's
currently anticipated capital and liquidity needs.

Year 2000 Compliance & Year 2000 Readiness Disclosures

     The  information  set  forth  in  this  section  is a Year  2000  Readiness
Disclosure as defined in the Year 2000 Information Readiness and Disclosure Act.

     The Company is aware of "Year 2000" issues existing in the programming code
of some information  technology  ("IT") and non-IT systems.  The Year 2000 issue
may arise  because many  hardware  and  software  systems only use two digits to
represent the year. As a result,  these systems may not be able to process dates
beyond 1999, which may cause errors or failures in IT or non-IT systems.

     The  Company  relies  significantly  on both IT and  non-IT  systems in its
retail outlets as well as at its corporate headquarters and distribution center.
These systems include hardware and software that the Company uses to conduct its
operations, analyze business performance and safeguard assets. The Company is in
the midst of a comprehensive review of these systems in preparation for the Year
2000. The Company's  strategy for addressing  Year 2000 compliance is to replace
or renovate all critical systems identified as non-compliant by a target date of
June 30, 1999 followed by final testing and  remediation  by September 30, 1999.
The first phase of this approach involves identifying all critical IT and non-IT
systems and making an initial  assessment of each as either Year 2000  compliant
or non-compliant.  The Company is substantially  complete with this phase of its
Year 2000 review and is currently  replacing or  renovating  systems  which were
found to be  non-compliant  and  verifying the  compliance of systems  initially
assessed as compliant.  To date,  the Company has met all costs of its Year 2000
remediation  efforts with existing  internal staff resources.  The cost of these
efforts  has not been  separately  tracked or  allocated  and,  accordingly  the
Company cannot reasonably  estimate the expense  incurred.  The Company does not
anticipate  future  Year 2000 costs will be  material  and will  continue to use
internal staff supplemented by external resources if necessary.



     While the Company continues to believe that the Year 2000 matters discussed
above will not have a material impact on its  business,  financial  condition or


<PAGE>


     
results of operation it remains  uncertain whether or to what extent the Company
may be affected.

Seasonality

     The  Company's  business  is  highly  seasonal.  Due to the  impact  of the
year-end holiday shopping season, the Company  experiences a substantial portion
of its annual net sales and  profitability  in its third fiscal quarter  (ending
December 31st). The Company has generally experienced lower net sales in each of
the first, second and fourth quarters and lower net income or net losses in each
of those quarters.

     The  Company's  results of  operations  may  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, and changes in national and
regional economic conditions.

Recent accounting pronouncement

     In June 1998, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards  (SFAS)  No.  133,  Accounting  for  Derivative
Instruments and Hedging Activities.  This statement  establishes  accounting and
reporting  standards for derivative  instruments,  including certain  derivative
instruments   embedded  in  other   contracts   (collectively   referred  to  as
derivatives),  and for hedging  activities.  This statement is effective for all
fiscal  quarters  of fiscal  years  beginning  after June 15,  1999.  Management
believes  the effect on the  Company of the  adoption of this  standard  will be
limited  to  changes  in  financial  statement  disclosure  and  will not have a
material impact on financial condition or results of operations.

Forward-looking statements

     The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for  forward-looking  statements.  A number of the  matters  and  subject  areas
discussed in  "Management's  Discussion and Analysis of Financial  Condition and
Results of  Operations"  are not limited to historical or current facts and deal
with potential future circumstances and developments.  Prospective investors are
cautioned that such  forward-looking  statements are only  predictions  and that
actual events or results may differ materially. 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: the Company's ability to hire, train and retain qualified personnel,
the availability of adequate capital resources and the successful integration of
new and acquired stores into the Company's  existing  operations;  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;   the  Company's   ability  to
successfully complete its Year

<PAGE>


     2000  project on a timely  basis;  the  Company's  ability  to improve  the
operations of its newly opened and acquired  stores;  the  Company's  ability to
secure  suitable  store  sites  on a timely  basis  and on  satisfactory  terms;
fluctuations  in quarterly  net sales,  and, in  particular,  third  quarter net
sales; fluctuations in gold prices; competitive conditions;  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 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.


<PAGE>



PART II - OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

     On October 19, 1998, a lawsuit was filed,  purportedly  as a class  action,
against the Company and certain of its executive  officers in the U.S.  District
Court of the Eastern District of Pennsylvania.  The lawsuit alleges, among other
things,  that the Company and certain of its officers made materially  false and
misleading  statements and/or failed to disclose material information  regarding
the Company's business performance and prospects.  The Company believes that the
lawsuit has no merit, and intends to vigorously defend the action.  Although the
ultimate  outcome  of the  lawsuit  cannot be  determined,  management  does not
believe the outcome of the lawsuit  will have a material  adverse  effect on the
financial position, results of operations or cash flows of the Company. However,
there can be no assurance as to the ultimate resolution of this matter.

ITEM 2.     CHANGES IN SECURITIES AND USE OF PROCEEDS

         None.

ITEM 3.     DEFAULTS UPON SENIOR SECURITIES

         None.

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

         None.



<PAGE>



ITEM 5.     OTHER INFORMATION

         None.

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K

      a)    Exhibits

            10.52   Second Amendment to Syndicated Loan Agreement Date September
                    2, 1998 between Piercing Pagoda, Inc. ("the Registrant") and
                    Summit Bank,  First Union National Bank and CoreStates Bank,
                    N.A.

            10.53   Second  Revolving  Replacement  Note Dated September 2, 1998
                    between the Registrant and Summit Bank.

            10.54   Second  Revolving  Replacement  Note Dated September 2, 1998
                    between the Registrant and First Union National Bank.

            10.55   Bond  Placement  Agreement  Dated April 29, 1998 between the
                    Registrant and CoreStates Securities Corp.

            10.56   Open-end  Mortgage  and Security  Agreement  Dated April 29,
                    1998 between the Registrant and CoreStates Bank, N.A.

            10.57   Trust  Indenture Dated April 29, 1998 between the Registrant
                    and Dauphin Deposit Bank And Trust Company.

            10.58   Pledge and Security  Agreement  Dated April 29, 1998 between
                    the Registrant and CoreStates Bank, N.A.


            10.59   Assignment  of Lease  Interest  Dated April 29, 1998 between
                    the Registrant and CoreStates Bank, N.A.

            10.60   Reimbursement  Agreement  Dated April 29,  1998  between the
                    Registrant  and Summit Bank,  First Union  National Bank and
                    CoreStates Bank, N.A.

            27      Financial Data Schedule

            27.1    Financial Data Schedule.

      b)    Reports on Form 8-K

             During the quarter ended  December 31, 1998, no reports on Form 8-K
             were filed.


<PAGE>



SIGNATURES


     Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.





                                          PIERCING PAGODA, INC.
                                                (Registrant)



     Date:  February 12, 1999             /s/ John F. Eureyecko         
                                          John F. Eureyecko
                                          President,
                                          Chief Operating Officer
                                          (Principal Financial Officer)



     Date:  February 12, 1999             /s/ Brandon R. Lehman   
                                          Brandon R. Lehman
                                          Treasurer
                                          (Principal Accounting Officer)