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

                                    FORM 10-Q

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

              For the quarterly period ended September 30, 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       (I.R.S. Employer
            of Incorporation or Organization)     Identification
                                                    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
9,113,310 (as of November 12, 1998)


<PAGE>


                              PIERCING PAGODA, INC.


                                      INDEX
                                                                            PAGE
                         PART I - FINANCIAL INFORMATION               NUMBER

   Item 1.    Financial Statements

              Consolidated balance sheets as of
              September 30, 1998 (unaudited) and March 31, 1998          3

              Consolidated statements of operations for the three
              months ended September 30, 1998 and 1997(unaudited
              and six  months ended September 30, 1998 
              and 1997(unaudited)                                        4

              Consolidated statements of cash flows for the  six
              months ended September 30, 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                                         17

   Item 2.    Changes in Securities and Use of Proceeds                 17

   Item 3.    Defaults Upon Senior Securities                           17

   Item 4.    Submission of Matters to a Vote of Security Holders       17

   Item 5.    Other Information                                         18

   Item 6.    Exhibits and Reports on Form 8-K                          18

              Signatures                                                19



<PAGE>



PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

                     PIERCING PAGODA, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                        (In thousands, except share data)
                                                        September      March 31,
                                                           30,            1998
                                                          1998
                                                       ------------   -------------
   Assets                                              (Unaudited)

Current assets
<S>                                                    <C>             <C>    
   Cash                                                $   4,220       $ 2,699
   Accounts receivable                                       916         1,454
   Inventory                                              72,449        53,149
   Deposits for inventory purchases                          659           546
   Prepaid expenses and other current assets                 493         1,058
   Prepaid income taxes                                    1,939           215
   Deferred tax assets                                     2,074         1,972

                                                       ------------   -------------
Total current assets                                      82,750        61,093

Property, fixtures and equipment, net                     31,599        27,215
Goodwill, net                                             20,366         6,296
Other assets                                               2,111         1,495

                                                       ============   =============
                                                       $ 136,826      $ 96,099
                                                       ============   =============
   Liabilities and Stockholders' Equity

Current liabilities
   Accounts payable                                       10,032         3,232
   Current installments of long-term debt                    384           247
   Income taxes payable                                        -           889
   Accrued expenses and other current liabilities         12,679        12,423

                                                       ------------   -------------
Total current liabilities                                 23,095        16,791

Long-term debt, less current installments                 44,861         9,742
Deferred tax liabilities                                   2,906         2,535
Other liabilities                                            964           703

                                                       ------------   -------------
Total liabilities                                         71,826        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 9,113,310 shares and
   9,087,616                                                  91            91
      at September 30, 1998 and March 31, 1998,
   respectively.
   Additional paid-in capital                             40,721        40,387
   Retained earnings                                      24,188        25,850

                                                       ------------   -------------
Total stockholders' equity                                65,000        66,328
                                                       ------------   -------------
                                                       $ 136,826      $ 96,099
                                                       ============   =============
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>



<TABLE>
<CAPTION>

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

                                       Three months ended      Six months ended
                                         September 30,          September 30,
                                      ---------------------   -------------------
                                        1998        1997       1998       1997
                                      ----------  ---------   --------  ---------

<S>                                   <C>         <C>         <C>      <C>     
Net sales                             $ 49,670    $ 42,877    $97,688  $ 85,750

Cost of goods sold and occupancy
expenses, (excluding depreciation on    
kiosks)                                 27,620      24,099     54,253    48,865

                                      ----------  --------- --------   ---------
Gross profit                            22,050      18,778     43,435    36,885

Selling, general and administrative
expenses, (including depreciation on   
kiosks)                                 24,172      18,445     44,927    36,299

                                      ----------  ---------  --------  ---------
Income (loss) from operations           (2,122)        333     (1,492)      586

Interest and other income                   89         105        185       208
Interest expense                           837         682      1,400     1,525
                                      ----------  ---------  --------  ---------
Loss before income taxes                (2,870)       (244)    (2,707)     (731)

Income tax benefit                      (1,106)        (91)    (1,045)     (281)
                                      ==========  =========   ========  =========
Net loss                              $ (1,764)     $ (153)   $(1,662)  $ (450)
                                      ==========  =========   ========  =========

Basic loss per share                   $ (0.19)    $ (0.02)   ] $ (0.18)  $ (0.05)

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

Diluted loss per share                 $ (0.19)   $ (0.02)    $ (0.18)  $ (0.05)

                                      ==========  =========   ========  =========
</TABLE>

See accompanying notes to consolidated financial statements.

                    

<PAGE>


<TABLE>
<CAPTION>

                     PIERCING PAGODA, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (Unaudited)
                                                            Six months ended
                                                             September 30,
                                                        -------------------------
                                                           1998          1997
                                                        ------------  -----------

Cash flows from operating activities:
<S>                                                      <C>             <C>    
  Net loss                                               $ (1,662)       $ (450)
  Adjustments to reconcile net loss  to net cash
   used in operating activities:
     Depreciation and amortization                          3,205         2,512
     Gain on disposal of property, fixtures and                 
       equipment                                                -            (2)
     Other changes in other assets                             54           (20)
     Deferred income taxes                                    269           604
     Change in operating assets and liabilities
        net of effects of acquisitions:
      Accounts receivable                                      70         1,422
      Inventory                                           (17,490)       (5,468)
      Deposits for inventory purchases                       (113)       (4,887)
      Prepaid expenses and other current assets               567           210
      Prepaid income taxes                                 (1,724)       (1,081)
      Accounts payable                                      6,800         1,790
      Accrued expenses and other current liabilities           56          (249)
      Income taxes payable                                   (798)            -
      Other liabilities                                      (239)          (89)

                                                        ------------  -----------
Net cash used in operating activities                     (11,005)       (5,708)

Cash flows from investing activities:
  Additions to property, fixtures and equipment            (6,606)       (4,267)
  Payments for purchase of businesses                     (14,867)       (7,948)
  Proceeds from disposal of property, fixtures and              
   equipment                                                    -            38
  Noncurrent deposits, net                                   (160)          (26)

                                                        ------------  -----------
Net cash used in investing activities                     (21,633)      (12,203)

Cash flows from financing activities:
  Repayments of long-term debt                                (17)          (18)
  Revolving line of credit, net                            31,466          (900)
  Loan fees paid                                              (98)          (16)
  Proceeds from issuance of long-term debt                  2,565             -
  Net proceeds from issuance of common stock under            
   employee share plans                                       243           256
  Proceeds from issuance of common stock, net                   -        17,189

                                                        ------------  -----------
Net cash provided by financing activities                  34,159        16,511

                                                        ------------  -----------
Net increase (decrease) in cash                             1,521        (1,400)

Cash at beginning of period                                 2,699         4,119

                                                        ============  ===========
Cash at end of period                                     $ 4,220       $ 2,719
                                                        ============  ===========

</TABLE>


<PAGE>

<TABLE>
<CAPTION>



                     PIERCING PAGODA, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                                 (In thousands)
                                   (Unaudited)
                                                            Six months ended
                                                             September 30,
                                                        -------------------------
                                                           1998          1997
                                                        ------------  -----------
Supplementaldisclosures of cash flow information:  
Cash paid during the period
  for:
<S>                                                       <C>           <C>    
   Interest                                               $ 1,280       $ 1,401
                                                        ============  ===========
   Income taxes, net                                      $ 1,299         $ 277
                                                        ============  ===========
</TABLE>

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 six month periods ended September
     30, 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 loss per share.
<TABLE>
<CAPTION>

                                       1998                  1997
                               --------------------  --------------------
                                Quarter      YTD      Quarter      YTD
                               ---------  ---------  ---------  ---------
<S>                            <C>        <C>        <C>        <C>      
      Basic                    9,100,489  9,108,007  9,000,728  8,500,273
      Dilutive effect of
        outstanding stock
        options, using the          
        treasury stock
        method (1)                 -          -          -          -


                               =========  =========  =========  =========
      Diluted                  9,100,489  9,108,007  9,000,728  8,500,273
                               =========  =========  =========  =========
</TABLE>

     (1) For the periods  presented,  the dilutive  effect of outstanding  stock
     options was not  considered  in the  calculation  of diluted loss per share
     because their effects were anti-dilutive.

     Basic  loss per share is  computed  by  dividing  net loss by the  weighted
     average number of common shares outstanding during the period.



<PAGE>


Note 3            Property, Fixtures and Equipment

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

<TABLE>
<CAPTION>
                                               September 30,   March 31,
                                                   1998           1998
                                              --------------  -----------
<S>                                            <C>           <C>  
      Land                                        $ 688         $ 688
      Furniture and fixtures                      4,394         3,881
      Kiosks                                     27,595        24,043
      Buildings and improvements                  7,090         5,413
      Computer equipment, software and other  
       equipment                                 10,677         9,326
                                              --------------  -----------
                                                 50,444        43,351
      Less accumulated depreciation and  
       amortization                              18,845        16,136
                                              ==============  ===========
                                               $ 31,599       $ 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>

                                               September 30,   March 31,
                                                   1998           1998
                                              --------------  -----------
      Accrued  payroll, vacation and related 
<S>                                             <C>           <C>    
      taxes                                     $ 5,674       $ 5,230
      Sales tax payable                             784           794
      Accrued rents payable                         637           938
      Liability under jewelry club program        1,133         1,109
      Liability under lifetime guarantee   
       program                                    1,471         1,411
      Other accrued expenses                      2,980         2,941
                                              ==============  ===========
                                               $ 12,679       $ 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 purchase  agreement provides
     for the payment of $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,
     1998.  The  Company  does not  anticipate  that  the  cost to  close  these
     locations will be material.


     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 purchase agreement provides for the payment
     of   approximately   $11.5   million,   subject  to  certain  post  closing
     adjustments, for all of the outstanding

<PAGE>


     common  stock of PPF and the  payment of  $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 the Florida  Licensee 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 Florida  Licensee  constituted  a single  entity during
     such periods.

<TABLE>
<CAPTION>

                                                     Six months ended
                                                      September 30,
                                                ---------------------------
                                                   1998           1997
                                                ------------  -------------
                                                (In thousands, except per
                                                       share data)

<S>                                               <C>           <C>     
    Net sales                                     $ 99,695      $ 87,256
                                                ============  =============

    Net loss                                      $(2,311)       $ (981)
                                                ============  =============

    Basic and Diluted loss per                    $ (0.26)      $(0.13)
    share
                                                ============  =============
</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 September 30, 1998 and 1997

     Consolidated  net sales  increased $6.8 million,  or 16% from $42.9 million
     for the three  months  ended  September  30, 1997 to $49.7  million for the
     three months ended  September 30, 1998.  This increase was due primarily to
     net sales  generated  by new  stores  opened or  acquired  by the  Company.
     Comparable store sales increased  $195,000,  or 0.5% in the quarter.  There
     were a total of 956 stores open at  September  30, 1998  compared to 769 at
     September  30,  1997,  an  increase  of 24%. 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,  wholesale
     sales to the Florida  Licensee  decreased  to $412,000 for the three months
     ended  September 30, 1998 from $707,000 in the three months ended September
     30, 1997.

     The average  jewelry units sold per store were  unchanged at  approximately
     2,400 for the three  months ended  September  30, 1998 and the three months
     ended  September  30,  1997.  The average  price per jewelry  unit sold was
     relatively  unchanged at $23.29 for the three months  ended  September  30,
     1998 compared to $22.96 for the three months ended September 30, 1997.

     Gross profit  increased  $3.3  million,  or 18%, from $18.8 million for the
     three months ended September 30, 1997 to $22.1 million for the three months
     ended  September 30, 1998. The Company's  gross profit margin improved from
     43.8% for the three months September 30, 1997 to 44.4% for the three months
     ended

<PAGE>


     September 30, 1998. This improvement is primarily due to lower  merchandise
     costs as a percentage of net sales as well as lower  wholesale sales to the
     Florida  Licensee.  Wholesale sales to the Florida Licensee produce a lower
     gross margin than the  Company's own retail net sales.  These  improvements
     were  partially  offset by an  increase  in rent and  occupancy  costs as a
     percentage of sales due to the large number of newer stores operated by the
     Company.

     Selling,  general and administrative  expenses  increased $5.8 million,  or
     32%,  from $18.4  million for the three months ended  September 30, 1997 to
     $24.2  million  for  the  three  months  ended  September  30,  1998.  As a
     percentage  of net sales,  selling,  general  and  administrative  expenses
     increased from 43.0% for the three months ended September 30, 1997 to 48.7%
     for the three months  ended  September  30, 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  increased  costs
     associated with the significant number of new and acquired stores opened by
     the Company during the period.  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 the  significant
     increase in both  selling,  general and  administrative  expenses and their
     relationship to net sales.  After a review of the initial sales results and
     future sales  potential of the  approximately  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  and  work to  improve
     operations at the remaining  stores.  The Company does not anticipate  that
     the cost to close these locations will be material,  however, these factors
     may  negatively  impact  results  in future  quarters.  Also,  the  Company
     typically  reviews the results of operations of all its locations after the
     completion  of the year-end  holiday  shopping  season and makes  decisions
     regarding  the  closure  of stores it  believes  are under  performing.  In
     addition to the closure of 20 to 30 GCG locations previously announced, the
     Company anticipates  closing 20 to 30 additional  locations upon completion
     of this period end review.

     Depreciation and amortization  expense increased 31% to $1.7 million in the
     three months ended September 30, 1998 from $1.3 million in the three months
     ended September 30, 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  $155,000,  or 23%, from $682,000 for the three
     months  ended  September  30, 1997 to $837,000  for the three  months ended
     September 30, 1998,  and as a percentage of net sales  increased  from 1.6%
     for the three months ended  September 30, 1997 to 1.7% for the three months
     ended September 30, 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 to reduce indebtedness.


<PAGE>



     As a result of the foregoing,  the Company's net loss increased from a loss
     of $153,000 for the three months ended  September 30, 1997 to a net loss of
     $1.8 million for the three months ended September 30, 1998.

Six months ended September 30, 1998 and 1997

     Consolidated net sales increased $11.9 million,  or 14%, from $85.8 million
     for the six months ended  September  30, 1997 to $97.7  million for the six
     months ended  September  30, 1998.  This  increase was  primarily due to an
     increase  in the  average  number of stores  open for the six months  ended
     September 30, 1998, as compared to the six months ended  September 30, 1997
     and a $1.4 million,  or 2%, increase in comparable  store net sales.  There
     were a total of 956 stores open at  September  30, 1998  compared to 769 at
     September 30, 1997, an increase of 24%. The average  jewelry units sold per
     store  decreased  6% to 4,700 for the six months ended  September  30, 1998
     compared to 5,000 for the six months ended  September 30, 1997. The average
     price per jewelry unit sold increased 2% to $23.98 for the six months ended
     September  30, 1998  compared to $23.46 for the six months ended  September
     30, 1997. The decrease in average jewelry units sold primarily reflects the
     impact of lower  unit  sales at newly  opened and  acquired  stores.  These
     stores generally have lower unit and dollar sales volume than the Company's
     more mature stores.

     Gross profit increased $6.5 million, or 18%, from $36.9 million for the six
     months ended  September  30, 1997 to $43.4 million for the six months ended
     September 30, 1998. The Company's  gross profit margin  improved from 43.0%
     for the six months  ended  September  30,  1997 to 44.5% for the six months
     ended  September  30,  1998.  The  increase  in gross  profit  dollars  was
     attributable  to the Company's  increase in net sales.  Gross profit margin
     improved  primarily  due to improved  merchandise  margins  caused by lower
     merchandise  costs partially offset by increases in rent and occupancy as a
     percentage of net sales due to the large number of new and acquired  stores
     opened by the Company during the period.

     Selling,  general and administrative  expenses  increased $8.6 million,  or
     24%,  from $36.3  million for the six months  ended  September  30, 1997 to
     $44.9 million for the six months ended  September 30, 1998. As a percentage
     of net sales, selling,  general and administrative  expenses increased from
     42.3% for the six  months  ended  September  30,  1997 to 46.0% for the six
     months  ended  September  30, 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  second  half of the  period.  See the
     discussion  of selling,  general and  administrative  for the three  months
     ended  September  30, 1998 for a  description  of the impact of these store
     openings.

     Depreciation and amortization  expense increased 28% to $3.2 million in the
     six months  ended  September  30, 1998 from $2.5  million in the six months
     ended September 30, 1997 due primarily to capital  expenditures for new and
     acquired stores, increased amortization of goodwill from acquisitions,  the
     upgrading of kiosks in existing

<PAGE>


     locations  and the  completion  of a new  warehouse  and  distribution
     facility adjacent to the Company's corporate headquarters.

     Interest expense decreased  $100,000,  or 7%, from $1.5 million for the six
     months  ended  September  30, 1997 to $1.4 million for the six months ended
     September 30, 1998,  and as a percentage of net sales  decreased  from 1.8%
     for the six  months  ended  September  30,  1997 to 1.4% for the six months
     ended  September  30,  1998.  The  decrease  in  interest  expense  was due
     primarily to lower  average  balances on the  Company's  revolving  line of
     credit  agreement  partially  offset by an  increase in fees paid under the
     Company's gold consignment arrangements.

     As a  result  of the  foregoing,  the  Company's  net loss  increased  from
     $450,000 for the six months ended  September 30, 1997 to a net loss of $1.7
     million for the six months ended September 30, 1998.

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 increased to $59.6 million at September 30, 1998 from $44.3
     million at September  30,  1997.  At  September  30, 1998,  the Company had
     outstanding  borrowings of $40.2 million under its revolving line of credit
     and  $5.0  million  of  long-term  debt  outstanding,   including  $384,000
     classified as a current liability.  In addition,  the Company had consigned
     140,322  ounces  of gold  under  its gold  consignment  program  valued  at
     approximately $41.2 million.

     Net cash used in operating  activities was $11.0 million for the six months
     ended  September  30, 1998  compared to $5.7 million for the same period in
     the prior year. Net cash used in operating  activities  primarily  reflects
     increases in inventory to stock newly acquired and opened stores as well as
     a seasonal  increase in inventory in anticipation  for the year-end holiday
     selling season.  This was partially offset by depreciation and amortization
     and an increase in accounts payable.

     Net cash used in  investing  activities  was $21.6  million  during the six
     months ended  September 30, 1998  compared to $12.2 million  during the six
     months  ended  September  30, 1997.  Net cash used in investing  activities
     primarily  reflects the purchase of approximately 104 GCG locations in July
     of 1998,  the  acquisition of the Company's  Florida  Licensee in August of
     1998 and the addition of property,  fixtures  and  equipment in  connection
     with the opening of new stores,  the renovation of existing  stores and the
     construction  of an additional  warehouse and  distribution  center on land
     adjacent to the Company's current facility.

     Net cash  provided by financing  activities  was $34.2  million for the six
     months ended  September 30, 1998 versus $16.5 million during the six months
     ended September 30,

<PAGE>


     1997. Net cash provided by financing activities during the six months ended
     September  30,  1998  primarily  reflects  increased  borrowings  under the
     Company's  existing  line of credit  and the  proceeds  of $2.6  million in
     Industrial  Development  Authority  financing.  During the six months ended
     September  30,  1997,  the Company  completed  a secondary  offering of its
     common stock, raising net proceeds of approximately $17.2 million which was
     used to repay a portion of existing indebtedness.

     At  September  30,  1998,  the Company  had $5.4  million  available  to be
     borrowed  under its then  existing  revolving  credit  facility  and was in
     compliance  with covenants  contained in that agreement.  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.  On September 2, 1998, the Company's  lenders granted a temporary
     $10.0 million dollar increase in the revolving credit facility to a maximum
     of $90.0  million.  The  entire  $10.0  million  increase  was added to the
     sublimit for cash advances ($60.0 million maximum).  On October 16, 1998 an
     additional  lender was added to the  financing  syndicate and the revolving
     credit facility was increased further to provide for maximum  borrowings of
     $108.0 million through a combination of cash advances (which may not exceed
     $68.0  million) and letters of credit (which may not exceed $70.0  million)
     to support the Company's gold consignment  programs.  On December 15, 1998,
     under the terms of this amended  facility,  the maximum  borrowings will be
     reduced  to $105.0  million  with a  corresponding  decrease  in the amount
     available for cash advances to $65.0 million. The Company believes that the
     expected cash flows from operations,  its gold consignment program and bank
     borrowings will be sufficient to fund the Company's  currently  anticipated
     capital and liquidity needs.

Year 2000 Compliance & Year 2000 Readiness Disclosures

     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 computer  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 in  information
     systems or systems failures.

     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 has begun the  process of  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 not incurred any  material  costs  related to its Year 2000 project and
     does not  anticipate  incurring  material  costs in the  completion  of its
     remediation efforts.



<PAGE>


     The Company  expects its own 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 compliant.  The
     Company is seeking  confirmation  from its  primary  vendors  that they are
     developing and implementing  plans to become Year 2000 compliant.  However,
     there can be no assurance that the systems of third parties,  which are not
     within the control of the Company,  will function properly. As a result the
     failure of certain  primary  vendors to be Year 2000  compliant may have an
     adverse  impact on the  Company's  performance.  The Company is  developing
     contingency  plans  as  part of its  remediation  efforts  and the  Company
     expects such plans to be completed by September 30, 1999.

     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 results of operations,  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.



<PAGE>


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  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;  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 2000
     project on a timely basis; the Company's  ability to improve the operations
     of its newly  opened and acquired  stores;  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

      On  September  16,  1998,  the  Registrant  held  its  Annual  Meeting  of
     Stockholders. The stockholders approved the following proposals:

     1. To elect one  director to hold office  until the 2001 Annual  Meeting of
        Stockholders   and  until  his  successor  has  been  duly  elected  and
        qualified.


     2. To ratify the  appointment  of KPMG Peat  Marwick  LLP as the  Company's
        independent auditors for the 1999 fiscal year.

     By a margin in excess of 95% of the votes cast,  Mark A. Randol was elected
     to serve as a  director  until  the  2001  Annual  Meeting  and  until  his
     successor has been duly elected and qualified and the  appointment  of KPMG
     Peat Marwick LLP as the Company's  independent auditors for the 1999 fiscal
     year was ratified.




<PAGE>



ITEM 5.     OTHER INFORMATION

         None.

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K

      a)    Exhibits

            Financial Data Schedule.

            27.1  Financial Data Schedule.

      b)    Reports on Form 8-K

            On  September  11,  1998,  one  report  on Form 8-K was filed by the
            Company  reporting the  acquisition  of the Company's sole licensee,
            Piercing Pagoda of Florida, Inc.


<PAGE>



SIGNATURES


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





                                          PIERCING PAGODA, INC.
                                                (Registrant)



     Date:  November 12, 1998             /s/ John F. Eureyecko         
                                          John F. Eureyecko
                                          President,
                                          Chief Operating Officer
                                          (Principal Financial Officer)



     Date:  November 12, 1998             /s/ Brandon R. Lehman   
                                          Brandon R. Lehman
                                          Treasurer
                                          (Principal Accounting Officer)



<PAGE>



                                INDEX TO EXHIBITS
                                                                    Sequentially
   Exhibit                                                           Numbered
   Number                                                              Page

     27       Financial Data Schedule - September 30, 1998              21

    27.1      Financial Data Schedule - September 30, 1997              22