PIERCING PAGODA INC, 424B4, 1997-06-25

PIERCING PAGODA INC
424B4, 1997-06-25
JEWELRY STORES

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<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-27213

[PIERCING PAGODA, INC. LOGO]

1,550,000 SHARES

COMMON STOCK
Of the 1,550,000 shares of Common Stock offered hereby, 650,000 are being
offered by Piercing Pagoda, Inc. ("Piercing Pagoda" or the "Company") and
900,000 shares are being offered by the Selling Stockholders. See "Principal
and Selling Stockholders." The Company will not receive any of the proceeds
from the sale of shares by the Selling Stockholders. As of June 24, 1997, the
last sale price of the Common Stock as reported on the Nasdaq National Market
was $25.75 per share. The Common Stock is traded under the Nasdaq symbol
"PGDA."

Upon consummation of this offering, Richard H. Penske, the Company's
Chief Executive Officer and Chairman of the Board, will own approximately
40.9% (approximately 40.2% if the Underwriters' over-allotment option
is exercised in full) of the outstanding shares of Common Stock. As a result,
Mr. Penske is likely to continue to have effective control over the outcome of
substantially all issues submitted to the Company's stockholders, including the
election of all of the Company's directors. See "Principal and Selling
Stockholders."

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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=======================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS
=======================================================================================================
<S> <C> <C> <C> <C>
Per Share............................... $24.875 $1.37 $23.505 $23.505
-------------------------------------------------------------------------------------------------------
Total(2)................................ $38,556,250 $2,123,500 $15,278,250 $21,154,500
=======================================================================================================
</TABLE>

(1) Before deducting estimated offering expenses of $325,000, all of which are
payable by the Company.
(2) The Company and the Selling Stockholders have granted the Underwriters a
30-day option to purchase an additional 232,500 shares of Common Stock
solely to cover over-allotments, if any. If such over-allotment option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to Company and Proceeds to Selling Stockholders will
be $44,339,688, $2,442,025, $17,569,988 and $24,327,675, respectively. See
"Underwriting."

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

The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens &
Company"), in San Francisco, California, on or about June 30, 1997.
ROBERTSON, STEPHENS & COMPANY
WHEAT FIRST BUTCHER SINGER
FURMAN SELZ
PARKER/HUNTER
INCORPORATED

The date of this Prospectus is June 25, 1997
<PAGE> 2

[PIERCING PAGODA, INC. LOGO]
STORE LOCATIONS

[THE INSIDE FRONT COVER GATEFOLD WILL INCLUDE PICTURES OF THE COMPANY'S KIOSKS
AND A MAP OF THE UNITED STATES INDICATING THE LOCATIONS OF THE COMPANY'S
STORES.]

<TABLE>
<CAPTION>
LOCATIONS AS OF MAY 7, 1997
------------------------------------------------
<S> <C>
Piercing Pagoda................................. 567
Plumb Gold...................................... 131
Silver & Gold Connection........................ 34
Other........................................... 2
---
734
</TABLE>

2
<PAGE> 3

NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, BY ANY SELLING STOCKHOLDER OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES
OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH
AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary............................................................................... 4
Risk Factors.......................................................................... 6
Use of Proceeds....................................................................... 12
Dividend Policy....................................................................... 12
Price Range of Common Stock........................................................... 13
Capitalization........................................................................ 14
Selected Financial and Operating Data................................................. 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 17
Business.............................................................................. 25
Management............................................................................ 34
Certain Transactions.................................................................. 41
Principal and Selling Stockholders.................................................... 42
Description of Capital Stock.......................................................... 43
Shares Eligible for Future Sale....................................................... 45
Underwriting.......................................................................... 46
Legal Matters......................................................................... 47
Experts............................................................................... 47
Additional Information................................................................ 47
Index to Consolidated Financial Statements............................................ F-1
</TABLE>

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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS OR EFFECTING SYNDICATE COVERING
TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ STOCK MARKET IN ACCORDANCE
WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."

3
<PAGE> 4

SUMMARY

THE COMPANY

Piercing Pagoda is the largest retailer of gold jewelry through kiosk
stores in the United States. At May 7, 1997, the Company operated 734 stores in
43 states and Puerto Rico, including 710 kiosk stores and 24 in-line stores. The
Company offers an extensive selection of popular-priced 14 karat and 10 karat
gold chains, bracelets, earrings, charms and rings, as well as a selection of
silver jewelry, all in basic styles at everyday low prices. The Company's stores
are generally located in high traffic concourses of regional shopping malls and
are primarily operated under the names Piercing Pagoda, Plumb Gold and Silver &
Gold Connection. The Company's kiosk stores average approximately 165 square
feet in size, typically carry approximately 3,300 stock keeping units ("SKUs"),
require a low initial investment, can be opened quickly and are easily
accessible and visible within malls. During fiscal 1997, the average price of a
jewelry item sold by the Company was approximately $24, and average comparable
store net sales per square foot were $1,848.

The Company's freestanding kiosk stores provide an easy-to-shop environment
for both destination customers and impulse shoppers. Merchandise is prominently
displayed with clearly visible price tags on specially designed pads in glass
showcases that facilitate browsing and comparison shopping, and maximize the
number of items shown. The Company maintains everyday low prices in its stores
and its goal is to be the value leader in the popular-priced gold jewelry
business in the markets that it serves. Additionally, the Company emphasizes
customer service and offers complimentary ear piercing with the purchase of
earrings, provides a lifetime guarantee for its merchandise and maintains a
"buy-five-get-one-free" jewelry club. The Company is also committed to
maintaining sophisticated management information systems. The Company believes
that these operating strategies, along with its low price points and focused
merchandise selection, enhance the Company's ability to generate a significant
level of repeat business and to attract new customers, and differentiate it from
other mall-based jewelry retailers.

The Company's net sales have grown at a 29.9% compound annual rate from
$58.7 million in fiscal 1993 to $166.9 million in fiscal 1997 and average net
sales per comparable store have grown at a 9.9% compound annual rate from
$208,000 in fiscal 1993 to $303,000 in fiscal 1997. The Company operated 734
stores at May 7, 1997, a 43% increase from the 513 open at March 31, 1996. This
increase was achieved through the acquisition of 141 stores and the opening of
80 net new stores. In January 1997 and April 1997, the Company solidified its
position as the largest operator of gold jewelry kiosk stores by acquiring 93
and 43 kiosk stores, respectively, from the companies that had been the second
and third largest gold jewelry kiosk operators. The Company intends to focus in
fiscal 1998 on the assimilation of these recently acquired stores, as well as on
increasing the productivity of the newly opened stores. The Company plans to
open approximately 60 to 70 new stores in fiscal 1998 and approximately 70 to 90
new stores in fiscal 1999 (excluding any acquisitions), and to close an
aggregate of approximately 20 stores during that two-year period.

The Company was organized under the laws of the State of Delaware in 1973
and succeeded to the business of a Pennsylvania corporation formed in 1970. The
Company's principal executive offices are located at 3910 Adler Place,
Bethlehem, Pennsylvania 18017. Its telephone number is (610) 691-0437.

THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered by the Company.......... 650,000 shares
Common Stock Offered by the Selling
Stockholders............................... 900,000 shares
Common Stock Outstanding after the Offering.. 5,933,620 shares (1)
Use of Proceeds.............................. To repay certain indebtedness. See "Use of Proceeds."
Nasdaq National Market Symbol................ PGDA
</TABLE>

- ------------
(1) Excludes 394,650 shares of Common Stock issuable upon exercise of
outstanding options, 197,551 of which are exercisable as of the date of this
Prospectus. See "Management -- 1994 Stock Option Plan."

4
<PAGE> 5

SUMMARY FINANCIAL AND OPERATING DATA
(In thousands, except per share and selected operating data)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
----------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:

Net sales................................................... $ 58,725 $ 68,922 $ 86,076 $121,581 $166,885
Gross profit(1)............................................. 26,959 30,961 38,007 54,141 74,577
Selling, general and administrative expenses (including
depreciation on kiosks)................................... 22,706 25,122 30,007 43,887 60,845
Income from operations...................................... 4,253 5,449 8,000 10,254 13,732
Net income(2)............................................... 2,871 4,234 3,528 5,677 7,538
Earnings per share.......................................... $ 1.07 $ 1.40
Weighted average shares outstanding......................... 5,325 5,389
PRO FORMA DATA:
Pro forma net income(2)..................................... 2,624 4,156
Pro forma net income per share(2)(3)........................ $ 0.67 $ 0.91
Pro forma weighted average shares outstanding(3)............ 3,895 4,558
SELECTED OPERATING DATA:
Number of stores at beginning of period..................... 285 279 295 366 513
Stores added (net of closures and sales).................... (6) 16 71 147 169
-------- -------- -------- -------- --------
Stores at end of period..................................... 279 295 366 513 682
========= ========= ========= ========= =========
Average jewelry units sold per comparable store
(rounded)(4).............................................. 8,300 9,500 10,800 11,600 12,000
Average net sales per comparable store(5)................... $208,000 $241,000 $266,000 $295,000 $303,000
Average comparable store net sales per square foot(6)....... $ 1,333 $ 1,544 $ 1,652 $ 1,821 $ 1,848
Average comparable store square footage(6).................. 153 153 161 162 164
Percentage increase in comparable store net sales(7)........ 14.2% 13.8% 9.8% 12.4% 7.6%
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------
ACTUAL AS ADJUSTED(8)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:

Working capital...................................................................... $40,649 $ 40,649
Inventory............................................................................ 43,109 43,109
Total assets......................................................................... 79,741 79,741
Total long-term debt................................................................. 26,924 11,970
Stockholders' equity................................................................. 37,522 52,476
</TABLE>

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

(2) Prior to the initial public offering of the Company's Common Stock in
October 1994, the Company was an "S" corporation for federal and certain
state income tax purposes and, accordingly, was subject to only limited
corporate income taxes. All pro forma information has been computed as if
the Company were subject to federal and applicable state corporate income
taxes for all periods presented, based upon the tax laws in effect during
the respective periods, in accordance with Financial Accounting Standards
Board Statement No. 109, which the Company adopted in 1994. Income tax
expense in fiscal 1995 includes certain amounts relating to the Company's
conversion from an "S" corporation to a "C" corporation. See Notes to
Consolidated Financial Statements. In fiscal 1996 and fiscal 1997, the
Company was taxed as a "C" corporation in all jurisdictions.

(3) Pro forma net income per share has been computed by dividing pro forma net
income by the weighted average number of common shares and common share
equivalents outstanding during fiscal 1994 and fiscal 1995, as adjusted to
give effect at all times to the sale or other issuance of shares during
March and June of fiscal 1994. See Note 1 of Notes to Consolidated Financial
Statements.

(4) Fiscal 1995, fiscal 1996 and fiscal 1997 reflect average jewelry units sold
per comparable store based on 260, 283 and 355 comparable stores,
respectively, which represent the number of all stores open at the end of
such fiscal year which were also open as of the beginning of the preceding
year. Average jewelry units sold per store in fiscal 1993 and fiscal 1994 is
calculated by dividing the total jewelry units sold by all of the Company's
stores during the period by the average of the total beginning and ending
number of stores and is rounded to the nearest hundred. Due to the
significant number of new store openings in the last three fiscal years, the
Company believes comparable store data is a more meaningful measure of the
growth in unit sales at its stores than total store data.

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

(6) Fiscal 1995, fiscal 1996 and fiscal 1997 reflect average net sales per
square foot for comparable stores (those stores open at the end of the
respective fiscal year which were also open as of the beginning of the
preceding fiscal year) based on the approximate average square footage per
comparable store of 161, 162 and 164 square feet, respectively. Average net
sales per square foot in fiscal 1993 and fiscal 1994 is based on the average
net sales per store divided by 153, the approximate average square footage
for all stores during both periods. Average net sales per store in fiscal
1993 and fiscal 1994 is based on net sales, less wholesale sales, divided by
the average of the total beginning and ending number of stores per period.
Due to the significant number of new store openings in the latest three
fiscal years, the Company believes comparable store data is a more
meaningful measure of the growth in sales per square foot at its stores than
total store data.
(7) Comparable store net sales data are calculated based on the change in net
sales of all stores open as of the beginning of the preceding fiscal year.
(8) As adjusted to reflect the receipt of the estimated net proceeds from the
issuance and sale of the 650,000 shares of Common Stock offered by the
Company hereby and the application of the net proceeds therefrom as
described under "Use of Proceeds."

5
<PAGE> 6

RISK FACTORS

The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements. A number of the matters and subject areas
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations," in the "Business" section and elsewhere in this
Prospectus are not limited to historical or current facts and deal with
potential future circumstances and developments. Prospective investors are
cautioned that such forward-looking statements, which may be identified by words
such as "anticipate," "believe," "expect," "estimate," "intend," "plan," and
similar expressions, are only predictions and that actual events or results may
differ materially. Forward-looking statements include those relating to: the
ability of the Company to successfully assimilate and increase the net sales
volume and profitability of recently acquired and newly opened stores,
anticipated store openings and closings, estimated capital expenditures, and the
absence of material adverse impact expected from the possible loss of any
current supplier, the possible termination of any current consignment
arrangement, the possible enactment of new legislation, the possible purchase of
the Company's stores in Florida by a licensee of the Company and legal
proceedings. A variety of factors could cause the Company's actual results to
differ materially from the expected results expressed in the Company's
forward-looking statements, including those set forth in the following risk
factors and elsewhere in this Prospectus. The following risk factors should be
considered carefully in evaluating the Company and its business before
purchasing the Common Stock.

RISKS RELATING TO EXPANSION

A significant portion of the Company's growth in recent years has resulted
from, and will continue to be dependent principally upon, the acquisition and
opening of new stores and increased net sales volume and profitability from the
Company's existing stores. From the beginning of fiscal 1997 through May 7,
1997, the Company added 221 net new stores, including a total of 136 stores
acquired in January and April 1997. Because recent acquisitions by the Company
included the two largest gold jewelry kiosk store operators other than the
Company and the Company is not aware of any other operators that own more than
20 gold jewelry kiosks, the Company does not expect to maintain the rate of
recent store acquisitions. Accordingly, the rate of the Company's net sales
growth is likely to moderate beginning in fiscal 1998 and moderate further in
fiscal 1999. In fiscal 1996 and fiscal 1997, the Company opened an aggregate of
167 new stores, excluding acquisitions. The Company plans to open approximately
60 to 70 new stores in fiscal 1998 and approximately 70 to 90 new stores in
fiscal 1999 (excluding any acquisitions), and to close an aggregate of
approximately 20 stores during that two-year period. However, the rate of new
store openings and the ability to operate these stores profitably is subject to
various contingencies, many of which are beyond the Company's control. These
contingencies include 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 existing operations. In addition,
there is a limited number of malls in the United States in which the Company's
stores can be located and the rate of construction of new malls has
significantly slowed in recent years. There is no assurance that suitable sites
will be available for new stores or that the new stores will be successfully
opened and integrated. The rate of the Company's expansion and net sales growth
may also be adversely affected to the extent that an independent store operator
that is a licensee of the Company exercises its right to purchase any or all of
the Company's stores in Florida. In fiscal 1997, the Company's stores in Florida
generated aggregate net sales of $12.5 million. See "Business -- Properties" and
Note 14 of Notes to Consolidated Financial Statements.

Moreover, the stores recently acquired or newly opened by the Company have
generally not generated net sales or store contribution at the levels generated
by the Company's other stores. The Company expects that a significant amount of
its growth will be generated by increasing the net sales volume and store
contribution of the recently acquired and newly opened stores. There is no
assurance that the Company will be able to enhance the net sales levels and
store contribution of the recently acquired or newly opened stores. The costs
associated with acquiring, assimilating and

6
<PAGE> 7

opening new stores have in the past and may in the future adversely affect the
Company's profitability. Additionally, acquiring or opening new stores in malls
or markets where the Company has existing stores may have the effect of
cannibalizing sales from those existing stores. Because the large number of
recently acquired and newly opened stores, which generally have lower net sales
volumes than the Company's other stores, will be entering into the base for the
computation of comparable store information during the current and future fiscal
years, average net sales per comparable store and average comparable store net
sales per square foot may decrease in the future, even if the Company
experiences increases in total and comparable store net sales. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Expansion Strategy."

ABILITY TO MANAGE GROWTH

The Company's significant recent growth and the expected future growth have
resulted in new and increased responsibilities for management personnel, have
placed and continue to place a significant demand upon the Company's management,
operating and financial systems and resources, and have increased the Company's
inventory levels. In order to compete effectively and manage this growth, the
Company will be required to continue to 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. In this regard,
there is no assurance that the Company will be able to implement successfully
its planned new management information systems or to otherwise successfully
manage the increased size of its operations. In particular, as a result of its
recent growth, the Company's operational capacity will be strained in its third
fiscal quarter which includes the holiday selling season. See
"Business -- Management Information Systems." Management of growth will also
require that the Company continuously expand, train, motivate and manage its
work force. These demands will require the addition of new management personnel.
Competition for qualified personnel is intense and employee turnover in the
retail industry has generally been high. Accordingly, there is no assurance that
the Company will be successful in attracting and retaining such personnel.
Furthermore, there is no assurance that the Company's personnel, systems,
procedures and controls will be adequate to support the Company's existing and
future operations. Any failure to implement successfully and improve the
Company's operating, financial and management systems or to expand, train,
motivate or manage employees could have a material adverse effect on the
Company's results of operations and financial condition. See "Business."

SEASONALITY AND EXPECTED QUARTERLY LOSSES

The Company's business is highly seasonal. The Company has generally
experienced relatively lower net sales and lower net income or net losses in
each of the first, second and fourth quarters of each fiscal year, and the
Company expects this trend to continue for the foreseeable future. During the
last two fiscal years, the Company's third quarter (ending December 31) has, on
average, accounted for 40% of the Company's annual net sales, 97% of its annual
income from operations and 102% of its annual net income. During the last two
fiscal years, the month of December, on average, has accounted for approximately
26% of the Company's annual net sales and 103% of its annual income from
operations. Any substantial decrease in third fiscal quarter net sales, and, in
particular, December sales, would have a material adverse effect on the
Company's profitability for the entire fiscal year. The Company's quarterly
results of operations may also fluctuate significantly as a result of a variety
of factors, including the amount and timing of acquisitions and new store
openings, the integration of recently acquired and newly opened stores into the
operations of the Company, the timing of promotions, fluctuations in the price
of gold, and changes in national and regional economic conditions. For example,
earnings from operations in the first, second and fourth quarters of fiscal 1997
were adversely affected by the integration and assimilation of 331 stores opened
or acquired during fiscal 1996 and fiscal 1997. This was due primarily to the
relatively fixed nature of rent and other occupancy costs and selling, general
and administrative costs associated with the recently acquired and newly opened
stores, which had a significant adverse impact on these lower net sales volume
quarters.

7
<PAGE> 8

See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality" and "-- Quarterly Data."

GOLD PRICES

The Company and the gold jewelry industry in general are affected by
fluctuations in the price of gold. The Company sets retail prices for its gold
merchandise based on the price the Company paid suppliers for the merchandise,
and generally does not reprice items based on normal fluctuations in the price
of gold. As a result, there may be an adverse effect on the Company's gross
profit margin if the price of gold either increases or decreases. For example,
gross profit margins may narrow if the price of gold increases after the retail
price of merchandise is established, as the Company's cost of goods would
increase; conversely, gross profit margins may also narrow if the price of gold
decreases substantially, as the Company may have to reduce retail prices after
the merchandise is purchased from suppliers, in order for its merchandise to
remain competitively priced. In addition, the Company's results of operations
may be adversely affected during periods of extreme volatility in the price of
gold since some customers may elect to defer purchases until the price of gold
has become relatively stable. Consequently, the Company's results of operations
could be adversely affected by significant increases, decreases or volatility in
the price of gold. The Company does not engage, and currently has no plans to
engage, in hedging transactions to protect against fluctuations in the market
value of the gold or to lock in prices for future purchases.

During the last two fiscal years, on average approximately 27% of the gold
content of the Company's merchandise was owned by the Company. The gold content
of merchandise owned by the Company is carried on its balance sheet at the lower
of cost or market, on a first-in, first-out basis. A decrease in the market
price of gold below the Company's cost would require the Company to reduce the
carrying value of the gold owned by it and recognize a charge against earnings
in the period in which the change in market price occurs.

The remaining approximately 73% of the gold content of the Company's
merchandise is generally subject to gold consignment arrangements, the principal
benefit of which is to allow the Company to finance its gold merchandise at
rates that are less than its traditional bank borrowing rates. The consigned
gold is not included in inventory on the Company's balance sheet, and there is
no related liability recorded. Under the consignment arrangements, the Company
sells to a consignor the gold content of merchandise that the Company owns and
simultaneously has the gold consigned to the Company. Title to consigned gold,
which is contained in the gold jewelry, remains with the consignor until the
Company repurchases the gold or substitutes other gold for it. The jewelry
containing the consigned gold is commingled with the gold jewelry owned by the
Company and the risk of loss or damage to the gold is borne by the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

The Company's obligation to the consignors is denominated in gold ounces
and is based on the price of gold at the time of the sale of consigned gold
contained in merchandise sold to the Company's customers. As a result, a change
in the price of gold will affect the dollar value of the Company's obligation to
the consignors. From time to time, the Company changes the number and percentage
of gold ounces which it consigns as part of its regular cash management program.
If the Company reduces the number of gold ounces which it has consigned, it may
decrease the Company's gross profit margin if the price of gold decreases below
the price of gold at the time of consignment. If the Company increases the
number of gold ounces which it has consigned, it may decrease the Company's
gross profit margin if the price of gold increases above the price of gold at
the time of consignment. Additionally, as gold prices change, assuming the
number of ounces consigned remains constant, fees payable by the Company for the
consignment arrangements will change in proportion to the change in the market
value of gold, as the fees are based on the dollar value of the gold consigned.
Therefore, if the price of gold increases, the Company's interest expense per
ounce of consigned gold would increase. In addition, the Company may have to
increase the amount of letters of credit that secure its obligations to the gold
consignors, thereby reducing the amount available under its line of credit with
its primary lender. The Company currently maintains consignment agreements with
two consignors.

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<PAGE> 9

One such agreement can be terminated by either party upon 30 days notice and the
other can be terminated by either party upon 45 days notice. There is no
assurance that, if the Company's present consignment arrangements were
terminated, the Company could enter into suitable consignment arrangements. A
failure by the Company to maintain its present consignment arrangements or enter
into suitable consignment arrangements with other parties could have a material
adverse effect on the Company's results of operations and financial condition.

COMPETITION

The retail jewelry business is highly competitive. The Company competes
with national and regional jewelry chains, department stores, local
independently owned jewelry stores and chains, catalog showrooms, discounters,
direct mail suppliers and televised home shopping networks. Certain of the
Company's competitors have significantly greater financial and other resources
than the Company. The retailing business is affected by changes in consumer
taste, demographic trends and the type, number and location of competing stores.
The Company also believes that it competes for store locations and for
consumers' discretionary spending dollars with retailers that offer merchandise
other than jewelry. The foregoing competitive conditions may adversely affect
the Company's results of operations and financial condition. See
"Business -- Competition."

SENSITIVITY TO GENERAL ECONOMIC CONDITIONS; IMPACT OF CONSUMER SPENDING

Jewelry purchases are discretionary for consumers and, as a result, are
likely to be particularly affected by adverse trends in the national economy or
in one or more regional economies. The success of the Company's operations
depends to a significant extent upon a number of factors relating to
discretionary consumer spending, including 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. There is no assurance
that consumer spending will not be adversely affected by national and regional
economic conditions, thereby negatively impacting the Company's results of
operations and financial condition.

DEPENDENCE ON KEY PERSONNEL

The Company's success depends to a significant extent upon the performance
of its senior management team, including Richard H. Penske, the Company's Chief
Executive Officer and Chairman of the Board, and John F. Eureyecko, the
Company's President and Chief Operating Officer. The loss of any of the
Company's existing key personnel or the inability to attract and retain such key
employees in the future could have a material adverse effect on the Company's
results of operations and financial condition. See "Management."

CONTROL OF COMPANY; ANTI-TAKEOVER PROVISIONS

After this offering, Mr. Penske is expected to own approximately 40.9% of
the outstanding Common Stock and all Named Officers (as defined below under
"Management -- Executive Compensation") and directors as a group are expected to
own approximately 45.2% of the outstanding Common Stock. As a result, Mr. Penske
is likely to continue to have effective control over the outcome of
substantially all issues submitted to the Company's stockholders, including the
election of all of the Company's directors. See "Principal and Selling
Stockholders" and "Shares Eligible for Future Sale." The Company is subject to
the anti-takeover provisions of Section 203 of the Delaware General Corporation
Law, which prohibit the Company from engaging in a "business combination" with
an "interested stockholder" for a period of three years following the time that
such person became an "interested stockholder" unless the business combination
is approved in a prescribed manner and in certain other specified circumstances.
These provisions, together with other provisions in the Company's Amended and
Restated Certificate of Incorporation (the "Certificate of Incorporation") and
the Company's Amended and Restated By-laws (the "By-laws") described below, may
have the effect of discouraging acquisition bids for the Company by persons
unrelated to certain existing stockholders. The effect of Mr. Penske's stock
ownership and these provisions may be to limit the price

9
<PAGE> 10

that investors might be willing to pay in the future for shares of the Common
Stock or prevent or delay a merger, takeover, or other change in control of the
Company and thus discourage attempts to acquire the Company. The Company's Board
of Directors has the authority to issue up to 3,000,000 shares of Preferred
Stock and to determine the designations, preferences, and relative,
participating, optional and other special rights, or qualifications, limitations
or restrictions of those shares without any future vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock could have the
effect of making it more difficult for a third party to acquire a majority of
the outstanding voting stock of the Company. The Company has no present plan to
issue any shares of Preferred Stock. The Certificate of Incorporation and
By-laws contain other provisions, such as provisions dividing the Board of
Directors into three classes serving staggered three-year terms, provisions
permitting only the Company's Chief Executive Officer or Board of Directors to
call special meetings of stockholders and notice requirements for stockholder
proposals and director nominations, all of which may have the further effect of
making it more difficult for a third party to gain control of or to acquire the
Company. See "Description of Capital Stock -- Delaware Law and Certain Charter
and By-Law Provisions."

GOVERNMENT REGULATION

To the Company's knowledge, no jurisdiction in which the Company operates
or in which it currently anticipates operating, other than the State of Oregon,
regulates ear piercing services. The legislation enacted in Oregon, in which the
Company operates one store, requires the Company, and any of its employees
administering ear piercing services in stores in Oregon, to be licensed by the
State. The Oregon legislation also deems piercing of the ear through anywhere
but the lobe to be body piercing, which is subject to additional restrictions,
including that it must be performed in a separate room. Accordingly, the Company
limits its ear piercing to the ear lobe in Oregon. The Company is aware of
legislation to regulate ear piercing establishments pending in approximately 31
jurisdictions, including legislation in the States of Maryland and Massachusetts
where the Company currently has 32 stores and 29 stores, respectively. The
proposed Maryland legislation would subject ear piercing through other than the
lobe to restrictions similar to those imposed by the Oregon legislation. The
proposed Massachusetts legislation directs regulators to develop procedures
applicable to body piercing, which the proposed legislation currently defines to
exclude the ear lobe, but to include all other parts of the ear. Generally,
however, pending legislation proposes requiring the consent of a parent or
guardian in order to pierce the ears of a minor (which the Company requires even
in the absence of legislation), the posting of certain notices, and the
obtaining of certain registrations and licenses, but does not require special
procedures for piercing portions of the ear other than the lobe. There is no
assurance that existing or pending legislation will not be modified in such a
manner as to restrict or prohibit the Company's ear piercing activities or that
other governmental bodies will not enact legislation that would adversely affect
the Company's ear piercing or other activities. See "Business -- Government
Regulation."

POSSIBLE VOLATILITY OF STOCK PRICE

The stock market has, from time to time, experienced extreme price and
volume fluctuations which could adversely affect the market price of the Common
Stock without regard to the operating performance of the Company. The price of
the Company's Common Stock has in the past and may in the future fluctuate
substantially in response to quarterly variations in the Company's operating
results, announcements by the Company, the failure of the Company's results of
operations to meet the estimates published by securities analysts, or other
developments affecting the Company, as well as in response to developments
relating to its competitors, the jewelry business and retailing generally and to
general economic and other external factors.

10
<PAGE> 11

SHARES ELIGIBLE FOR FUTURE SALE

Sales of a substantial number of shares of Common Stock in the public
market following this offering could adversely affect the market price for the
Common Stock. Upon completion of this offering, the Company will have 5,933,620
shares of Common Stock outstanding (6,031,120 shares if the Underwriters'
over-allotment option is exercised in full), assuming no exercise of options
after the date of this Prospectus. Substantially all of these shares will be
freely tradeable without restriction under the Securities Act of 1933, as
amended (the "Securities Act"), or may currently be sold in accordance with Rule
144 under the Securities Act ("Rule 144"). In addition, the Company has
registered or intends to register on registration statements on Form S-8 a total
of 920,330 shares of Common Stock reserved for issuance under the Company's 1994
Stock Option Plan, the Company's 1994 Restricted Stock Plan and the Company's
1995 Employee Stock Purchase Plan, of which an aggregate of 266,546 shares had
been issued as of the date of this Prospectus. The remaining 653,784 shares,
when and if issued, would be freely tradeable (unless acquired by an affiliate
of the Company, in which case they would be subject to volume and other
limitations under Rule 144). The Company, each of the Selling Stockholders and
each of the Company's executive officers, directors and key personnel listed
under "Management -- Executive Officers, Directors and Key Employees" have
entered into lock-up agreements with the Underwriters pursuant to which they
have agreed, subject to certain limited exceptions, not to sell, contract to
sell, offer to sell or otherwise dispose of any shares of Common Stock owned or
controlled by them for a period of 180 days (90 days as to all such persons
other than the Company and the Selling Stockholders) after the date of this
Prospectus without the prior written consent of Robertson, Stephens & Company.
However, Robertson, Stephens & Company may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to
lock-up agreements. Upon expiration or early termination of the lock-up period,
these shares will be eligible for immediate sale, subject, in the case of
affiliates, to volume and other limitations under Rule 144. See "Shares Eligible
for Future Sale" and "Underwriting."

11
<PAGE> 12

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 650,000 shares of
Common Stock offered by the Company hereby are estimated to be $15.0 million
($17.2 million if the Underwriters' over-allotment option is exercised in full),
after deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company. The Company expects to use the net proceeds to
the Company to repay indebtedness outstanding ($33.4 million as of April 30,
1997) under its revolving credit facility obtained in March 1997. Amounts
borrowed under the facility generally accrue interest at the higher of (i) the
prime rate of the Company's primary lender minus 100 basis points (7.5% at March
31, 1997) or (ii) a rate based on overnight federal funds transactions with
Federal Reserve System members plus 50 basis points (5.9% at March 31, 1997);
however, the Company may elect to have all or any portion of the outstanding
balance under the facility accrue interest at a rate based on one, two, three or
six month LIBOR plus 110 basis points (6.79% at March 31, 1997 for a one month
maturity), subject to certain restrictions. The facility matures on July 31,
2000. Approximately $16.0 million of the indebtedness outstanding under the
facility was incurred to finance acquisitions by the Company and the remainder
was incurred primarily to fund internal expansion. To the extent that the
proceeds of this offering are used to reduce indebtedness under the facility,
the amount available for borrowing under the facility will be increased. Future
borrowings may be made under the facility for working capital and to finance
expansion through new store openings and acquisitions, although the Company is
not currently in negotiations with respect to any such acquisition. The Company
will not receive any of the proceeds from the sale of shares by the Selling
Stockholders. See "Principal and Selling Stockholders."

DIVIDEND POLICY

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

12
<PAGE> 13

PRICE RANGE OF COMMON STOCK

The Common Stock is traded on the Nasdaq National Market under the symbol
"PGDA." The following table sets forth, for the fiscal quarters indicated, the
high and low sales prices per share for the Common Stock, as reported by Nasdaq
for fiscal 1996, fiscal 1997 and fiscal 1998 (through June 24, 1997):

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL 1996

First Quarter...................................................... $10.63 $ 7.63
Second Quarter..................................................... 14.88 10.25
Third Quarter...................................................... 18.50 13.75
Fourth Quarter..................................................... 18.50 12.75

FISCAL 1997

First Quarter...................................................... $18.75 $13.25
Second Quarter..................................................... 22.25 17.00
Third Quarter...................................................... 24.25 20.00
Fourth Quarter..................................................... 26.63 21.00

FISCAL 1998

First Quarter (through June 24, 1997).............................. $28.00 $24.00
</TABLE>

As of June 24, 1997, the last reported sale price of the Common Stock as
reported by the Nasdaq National Market was $25.75 per share. As of such date,
there were approximately 128 holders of record of the Common Stock, and the
Company believes that there were in excess of 1,600 beneficial holders of the
Common Stock.

13
<PAGE> 14

CAPITALIZATION

The following table sets forth the actual capitalization of Piercing Pagoda
as of March 31, 1997 and as adjusted to reflect the receipt of the estimated net
proceeds from the issuance and sale of the 650,000 shares of Common Stock
offered by the Company hereby and the application of the net proceeds therefrom
as described under "Use of Proceeds."

<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
---------------------
ACTUAL AS ADJUSTED
------- -----------
(In thousands)
<S> <C> <C>
Long-term debt, less current installments (1)........................... $26,690 $11,736
Stockholders' equity:
Preferred stock, $.01 par value, 3,000,000 shares authorized; none
issued and outstanding............................................. -- --
Common stock, $.01 par value, 15,000,000 shares authorized; 5,273,994
shares issued and outstanding; 5,923,994 shares issued and
outstanding as adjusted(2)......................................... 53 59
Additional paid-in capital............................................ 22,588 37,536
Retained earnings..................................................... 14,881 14,881
------- -------
Total stockholders' equity.................................... 37,522 52,476
------- -------
Total capitalization..................................... $64,212 $64,212
======= =======
</TABLE>

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

(1) See Note 7 of Notes to Consolidated Financial Statements.

(2) Excludes 394,750 shares issuable pursuant to options to purchase Common
Stock which were outstanding as of March 31, 1997. See "Management -- 1994
Stock Option Plan."

14
<PAGE> 15

SELECTED FINANCIAL AND OPERATING DATA

The selected financial data for the five years ended March 31, 1997 (except
for the selected operating data and pro forma data) were derived from
Consolidated Financial Statements that have been audited by KPMG Peat Marwick
LLP, independent certified public accountants. The information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Consolidated Financial
Statements and Notes thereto and other financial information included elsewhere
in this Prospectus.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
--------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(In thousands, except per share and selected operating
data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales....................................... $ 58,725 $ 68,922 $ 86,076 $121,581 $166,885
Cost of goods sold and occupancy expenses
(excluding depreciation on kiosks)............ 31,766 37,961 48,069 67,440 92,308
-------- -------- -------- -------- --------
Gross profit.................................... 26,959 30,961 38,007 54,141 74,577
Selling, general and administrative expenses
(including depreciation on kiosks)............ 22,706 25,122 30,007 43,887 60,845
Restricted stock compensation bonus(1).......... -- 390 -- -- --
-------- -------- -------- -------- --------
Income from operations.......................... 4,253 5,449 8,000 10,254 13,732
Interest and other income....................... 228 370 307 282 386
Interest expense................................ 1,498 1,464 1,427 1,306 2,208
-------- -------- -------- -------- --------
Earnings before income taxes.................... 2,983 4,355 6,880 9,230 11,910
Income tax expense(2)........................... 112 121 3,352 3,553 4,372
-------- -------- -------- -------- --------
Net income(2)................................... 2,871 4,234 3,528 5,677 7,538
========= ========= ========= ========= =========
Earnings per share.............................. $ 1.07 $ 1.40
Weighted average shares outstanding............. 5,325 5,389
PRO FORMA DATA:
Pro forma net income(2)......................... 2,624 4,156
Pro forma net income per share(2)(3)............ $ 0.67 $ 0.91
Pro forma weighted average shares
outstanding(3)................................ 3,895 4,558
SELECTED OPERATING DATA:
Number of stores at beginning of period......... 285 279 295 366 513
Stores added (net of closures and sales)........ (6) 16 71 147 169
-------- -------- -------- -------- --------
Stores at end of period......................... 279 295 366 513 682
========= ========= ========= ========= =========
Average jewelry units sold per comparable store
(rounded)(4).................................. 8,300 9,500 10,800 11,600 12,000
Average net sales per comparable store(5)....... $208,000 $241,000 $266,000 $295,000 $303,000
Average comparable store net sales per square
foot(6)....................................... $ 1,333 $ 1,544 $ 1,652 $ 1,821 $ 1,848
Average comparable store square footage(6)...... 153 153 161 162 164
Percentage increase in comparable store net
sales(7)...................................... 14.2% 13.8% 9.8% 12.4% 7.6%
</TABLE>

<TABLE>
<CAPTION>
MARCH 31,
--------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................. $ 2,908 $ 3,464 $ 13,556 $ 15,948 $ 40,649
Inventory....................................... 11,378 12,413 15,128 25,390 43,109
Total assets.................................... 24,062 26,749 32,122 47,906 79,741
Current installments of long-term debt.......... 6,216 5,693 -- 5,910 234
Long-term debt, less current installments....... 6,104 10,628 -- 2,350 26,690
Stockholders' equity............................ 6,636 2,335 23,862 29,579 37,522
</TABLE>

15
<PAGE> 16

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

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

(2) For fiscal years 1993 and 1994 the Company was an "S" corporation for
federal and certain state income tax purposes and, accordingly, was subject
only to limited corporate income taxes. For fiscal 1995, income tax expense
includes the state tax expense for certain states in which the Company did
not elect "S" corporation status prior to the initial public offering in
October 1994, a one-time deferred tax charge for conversion from "S"
corporation to "C" corporation status for federal and certain state
purposes, and the current and deferred taxes applicable to the Company's
income as a "C" corporation for the period after the initial public
offering. Due to the allocation method utilized for tax return purposes, tax
expense for the post offering period includes taxes payable to taxing
authorities and payments to certain of the Company's stockholders pursuant
to a tax indemnification agreement between the Company and such
stockholders. See Notes to Consolidated Financial Statements.

(4) Fiscal 1995, fiscal 1996 and fiscal 1997 reflect average jewelry units sold
per comparable store based on 260, 283 and 355 comparable stores,
respectively, which represent the number of all stores open at the end of
such fiscal year which were also open as of the beginning of the preceding
year. Average jewelry units sold per store in fiscal 1993 and fiscal 1994 is
calculated by dividing the total jewelry units sold by the Company's stores
during the period by the average of the total beginning and ending number of
stores and is rounded to the nearest hundred. Due to the significant number
of new store openings in the last three fiscal years, the Company believes
comparable store data is a more meaningful measure of the growth in unit
sales at its stores than total store data.

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

(6) Fiscal 1995, fiscal 1996 and fiscal 1997 reflect average net sales per
square foot for comparable stores (those stores open at the end of the
respective fiscal year which were also open as of the beginning of the
preceding fiscal year) based on the approximate average square footage per
comparable store of 161, 162 and 164 square feet, respectively. Average net
sales per square foot in fiscal 1993 and fiscal 1994 is based on the average
net sales per store divided by 153, the approximate average square footage
for all stores during both periods. Average net sales per store in fiscal
1993 and fiscal 1994 is based on the net sales, less wholesale sales,
divided by the average of the total beginning and ending number of stores
per period. Due to the significant number of larger, new store openings in
the latest three fiscal years, the Company believes comparable store data is
a more meaningful measure of the growth in sales per square foot at its
stores than total store data.

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

16
<PAGE> 17

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

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 the following "Management's Discussion and Analysis of Financial
Condition and Results of Operations," in the "Business" section and elsewhere in
this Prospectus are not limited to historical or current facts and deal with
potential future circumstances and developments. Prospective investors are
cautioned that such forward-looking statements, which may be identified by words
such as "anticipate," "believe," "expect," "estimate," "intend," "plan," and
similar expressions, are only predictions and that actual events or results may
differ materially.

OVERVIEW

Founded in 1973 as a successor to a company that opened its first store in
1972, Piercing Pagoda operated 710 kiosk stores and 24 in-line stores in
regional malls in 43 states and Puerto Rico as of May 7, 1997. Prior to fiscal
1996, the Company expanded primarily through new store openings. Since the
beginning of fiscal 1996 through May 7, 1997, the Company has acquired an
aggregate of 204 stores. In fiscal 1996, the Company acquired 51 kiosks and 17
in-line stores previously operated by Earring Tree, Inc., which was then in
bankruptcy (the "Earring Tree Acquisition"). In January 1997 and April 1997, the
Company solidified its position as the largest operator of gold jewelry kiosk
stores by acquiring 93 and 43 kiosk stores, respectively, from the companies
that had been the second and third largest gold jewelry kiosk operators. The
stores purchased in both of these acquisitions were generally comparable in size
to the Company's other stores and sold similar merchandise. These acquisitions
included the leases, kiosks, fixtures and inventory of the acquired stores. The
purchase prices paid in connection with the January 1997 acquisition from
Gemstone Jewelry, Inc., and a related company (the "Gemstone Acquisition"), and
the April 1997 acquisition from The Silver & Gold Trading Company, Inc. (the
"Silver & Gold Acquisition"), were approximately $8.0 million and $8.2 million,
respectively (subject to certain post-closing adjustments relating primarily to
the cost of inventory), of which $6.0 million and $3.3 million, respectively,
was paid for inventory at the respective sellers' cost. In addition, the Company
agreed to pay $60,000 per year for five years to induce the principal
stockholder of each seller to enter into a non-competition agreement. Because
these acquisitions included the two largest gold jewelry kiosk store operators
other than the Company, the Company does not expect to maintain the rate of
recent store acquisitions. Accordingly, the rate of the Company's net sales
growth is likely to moderate beginning in fiscal 1998 and moderate further in
fiscal 1999.

The Company plans to increase the net sales and store contribution of the
acquired stores to more closely approximate the productivity of the Company's
average comparable store ($303,000 in net sales in fiscal 1997) by revising and
managing the product mix of the acquired stores to reflect the Company's
merchandising strategy, and by retraining sales associates and store management
personnel to provide the level of customer service emphasized in the Company's
other stores and to improve operational efficiencies. The Company also believes
that these acquisitions have the potential over the longer term to increase the
Company's profitability by spreading overhead over a significantly larger store
base.

Based on information provided by the respective sellers, the average net
sales of the stores acquired in the Gemstone Acquisition for the twelve months
ended December 31, 1996 were approximately $205,000, and the average net sales
of the stores acquired in the Silver & Gold Acquisition for the twelve months
ended January 31, 1997 were approximately $272,000. The Company believes that
the Gemstone Acquisition and the Silver & Gold Acquisition provide the Company
with many attractive store locations and that the Company's plan to convert the
acquired stores to the Company's format and to implement the Company's
merchandising strategies will result in increased net sales and profitability in
the acquired stores. The Company believes that its substantial experience in
opening new stores and recent experience in integrating the stores acquired in
the Earring Tree Acquisition will facilitate the integration of the acquired
stores. However, there is no assurance that

17
<PAGE> 18

the Company will successfully integrate the acquired stores and failure to do so
could have a material adverse effect on the Company's results of operations and
financial condition. Because a large number of recently acquired and newly
opened stores, which generally have lower net sales volumes than the Company's
other stores, will be entering into the base for the computation of comparable
store information during the current and future fiscal years, average net sales
per comparable store and average comparable store net sales per square foot may
decrease in the future, even if the Company experiences increases in total and
comparable store net sales.

The rate of the Company's expansion and net sales growth may also be
adversely affected to the extent that an independent store operator that is a
licensee of the Company (the "Florida Licensee") exercises its right to purchase
any or all of the Company's stores in Florida. See "Business -- Properties" and
Note 14 of Notes to Consolidated Financial Statements. Because the Company sells
merchandise to the Florida Licensee and receives a royalty from it, the Company
does not believe that its net income is likely to be materially adversely
affected by any such purchases.

As part of its ongoing operations, the Company continually evaluates the
performance of its stores and the malls in which they are located. Since kiosks
require a relatively low investment to open and can be moved relatively easily,
the Company's expansion philosophy includes closing stores where appropriate and
using the kiosks, when possible, to open stores in new locations. During the
past three fiscal years, the Company has closed 21 stores and expects to close
an aggregate of approximately 20 stores during fiscal 1998 and fiscal 1999.

Net sales are comprised primarily of sales generated by stores and, to a
much lesser extent, wholesale sales (primarily to the Florida Licensee). See
"Business -- Properties." Cost of goods sold and occupancy expenses include the
cost of merchandise, rent and other occupancy expenses and the cost of preparing
merchandise for sale. Selling, general and administrative expenses include store
and supervisory payroll, corporate overhead and non-occupancy store expenses,
including depreciation on kiosks.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
MARCH 31,
---------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Net sales............................................................... 100.0% 100.0% 100.0%
Cost of goods sold and occupancy expenses (excluding depreciation on
kiosks)............................................................... 55.8 55.5 55.3
----- ----- -----
Gross profit............................................................ 44.2 44.5 44.7
Selling, general and administrative expenses (including depreciation on
kiosks)............................................................... 34.9 36.1 36.5
----- ----- -----
Income from operations.................................................. 9.3 8.4 8.2
Interest and other income............................................... 0.4 0.2 0.2
Interest expense........................................................ 1.7 1.1 1.3
----- ----- -----
Earnings before income taxes............................................ 8.0 7.6 7.1
Income taxes............................................................ 3.9 2.9 2.6
----- ----- -----
Net income.............................................................. 4.1% 4.7% 4.5%
===== ===== =====
Pro forma net income (1)................................................ 4.8%
=====
</TABLE>

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

(1) Income tax expense in fiscal 1995 includes certain amounts relating to the
Company's conversion from an "S" corporation to a "C" corporation. See Notes
to Consolidated Financial Statements. In fiscal 1996 and fiscal 1997, the
Company was taxed as a "C" corporation in all jurisdictions. Pro forma net
income is computed as if the Company were subject to federal and all
applicable state corporate income taxes.

18
<PAGE> 19

COMPARISON OF FISCAL 1997 AND FISCAL 1996

Net Sales

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

Gross Profit

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

Selling, General and Administrative Expenses

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

Interest Expense

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

Income Tax Expense

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

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<PAGE> 20

Net Income

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

COMPARISON OF FISCAL 1996 AND FISCAL 1995

Net Sales

Net sales increased $35.5 million, or 41.2%, to $121.6 million in fiscal
1996 from $86.1 million in fiscal 1995. This increase was due primarily to an
increase in the number of stores open in fiscal 1996 as compared to fiscal 1995
and to a $9.2 million, or 12.4%, increase in comparable store net sales. At
March 31, 1996, the Company was operating 513 stores versus 366 at the end of
the prior fiscal year. The average jewelry units sold per comparable store
increased 7.4%, to 11,600 in fiscal 1996 from 10,800 in fiscal 1995. The average
price per jewelry unit sold for all of the Company's stores increased modestly
by $0.85, or 3.6%, to $24.15 in fiscal 1996 from $23.30 in fiscal 1995.
Wholesale sales (primarily to the Florida Licensee) increased 26.7% to $1.9
million in fiscal 1996 from $1.5 million in fiscal 1995 to support the increased
retail sales of the Florida Licensee, including sales at one additional location
purchased from the Company in the fourth quarter of fiscal 1995.

Gross Profit

Gross profit increased $16.1 million, or 42.4%, to $54.1 million in fiscal
1996 from $38.0 million in fiscal 1995, while gross profit margin increased
slightly to 44.5% in fiscal 1996 from 44.2% in fiscal 1995. The gross profit
margin increase primarily reflects a slight improvement in rent expense as a
percentage of net sales, reflecting the leverage of a larger sales base. Also
contributing to the increase in gross margin was a reduction in wholesale sales
as a percentage of total net sales of the Company. Wholesale sales provide a
lower gross margin than the Company's own retail net sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $13.9 million, or
46.3%, to $43.9 million in fiscal 1996 from $30.0 million in fiscal 1995. As a
percentage of net sales, selling, general and administrative expenses increased
from 34.9% in fiscal 1995 to 36.1% in fiscal 1996. The increase in selling,
general and administrative expense as a percentage of net sales primarily
reflects higher expenses associated with new store growth, an increase in
staffing hours at the Company's stores and an improved incentive package for
store personnel implemented in the third quarter of fiscal 1996. Depreciation
and amortization expense increased 44.4% to $2.6 million in fiscal 1996 from
$1.8 million in fiscal 1995 due primarily to capital expenditures for new stores
and the upgrading of kiosks in existing locations.

Interest Expense

Interest expense decreased $121,000, or 8.6%, to $1.3 million in fiscal
1996 from $1.4 million in fiscal 1995, and as a percentage of net sales,
decreased to 1.1% in fiscal 1996 from 1.7% in fiscal 1995. The decline in
interest expense, which includes interest paid on bank borrowings, fees paid for
letters of credit as part of the Company's gold consignment program and gold
consignment rates, was due primarily to a decrease in the Company's total
average borrowings, including a $7.0 million stockholder note payable which was
outstanding during fiscal 1995 and not during fiscal 1996, and a reduction in
the average interest rate charged on the Company's revolving line of credit.
These decreases were partially offset by an increase in number of ounces
consigned under the Company's gold consignment program.

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<PAGE> 21

Income Tax Expense

Income tax expense increased $201,000 to $3.6 million in fiscal 1996 from
$3.4 million in fiscal 1995. As a percentage of earnings before income taxes,
income tax expense decreased to 38.5% in fiscal 1996 ]from 48.7% in fiscal 1995.
The increase in income tax expense is due to the increase in the Company's
earnings before income taxes. The decrease in income taxes as a percentage of
earnings before income taxes reflects a change in the Company's taxable status
which occurred during fiscal 1995. See Note 10 of Notes to Consolidated
Financial Statements.

Net Income

The Company's net income increased $2.2 million or 62.9% to $5.7 million in
fiscal 1996 from $3.5 million in fiscal 1995. The Company believes that such
increase resulted from the foregoing factors, among other things.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary ongoing short-term capital requirements have been to
fund an increase in inventory and to fund capital expenditures and working
capital (mostly inventory) for new and acquired stores. The Company's long-term
liquidity requirements relate principally to the maturity of its long-term debt
in July of 2000, operating lease commitments and store expansion. The Company's
primary sources of liquidity have been funds provided from operations, a gold
consignment program and bank borrowings. The Company had working capital of
$40.6 million and $15.9 million at the end of fiscal 1997 and fiscal 1996,
respectively. See "-- Seasonality."

Net cash provided by operating activities was $460,000 in fiscal 1997,
while net cash used in operating activities amounted to $850,000 in fiscal 1996.
Net cash provided by operating activities in fiscal 1997 primarily reflects net
earnings plus depreciation, partially offset by increases in working capital
requirements, including increases in inventory to support new and acquired store
growth. Net cash used in operating activities in fiscal 1996 primarily reflects
increases in inventory to support growth in new and acquired stores, partially
offset by increases in net earnings and depreciation.

Net cash used in investing activities was $17.1 million and $7.7 million in
fiscal 1997 and fiscal 1996, respectively. These amounts reflect $9.7 million
and $7.2 million of capital expenditures related to new and acquired store
expansion and the Company's investment in management information systems in
fiscal 1997 and fiscal 1996, respectively. Additionally, in fiscal 1997, the
Company paid $8.0 million for the acquisition of 93 locations in the Gemstone
Acquisition. In fiscal 1996, the Company acquired 68 store locations in the
Earring Tree Acquisition for approximately $1.2 million.

Net cash provided by financing activities was $18.9 million in fiscal 1997
and $8.1 million in fiscal 1996. Net cash provided by financing activities in
fiscal 1997 primarily reflects an increase of $18.5 million under the Company's
revolving line of credit and $400,000 of long-term industrial development
authority financing. Net cash provided by financing activities in fiscal 1996
reflects an increase of $5.7 million in borrowings under the Company's revolving
line of credit and $2.5 million of long-term industrial development authority
financing.

During fiscal 1997, the Company renegotiated its existing unsecured
revolving line of credit with its primary lender acting as agent for a syndicate
of banks. The new facility, which expires July 31, 2000, provides for maximum
borrowings of $75 million through a combination of cash advances (which may not
exceed $45 million) and letters of credit (which may not exceed $55 million) to
support the Company's gold consignment financing program. Amounts borrowed under
the facility generally accrue interest at the higher of (i) the prime rate of
the Company's primary lender minus 100 basis points (7.5% at March 31, 1997) or
(ii) a rate based on overnight federal funds transactions with Federal Reserve
System members plus 50 basis points (5.9% at March 31, 1997); however, the
Company may elect to have all or any portion of the outstanding balance under
the facility accrue interest at a rate based on one, two, three or six month
LIBOR plus 110 basis points (6.79% at March 31,

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<PAGE> 22

1997 for a one month maturity), subject to certain restrictions. Fees are paid
on letters of credit based on amounts outstanding at an annual rate of 0.75%. At
March 31, 1997, the Company had $19.0 million available for cash borrowings
under this revolving credit facility. Letters of credit in the amounts of
approximately $31.8 million and approximately $22.0 million were issued at March
31, 1997 and 1996, respectively.

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

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

During fiscal 1997 and fiscal 1996, average financing costs under the
consignment agreements were approximately 2.45% and 2.31% per annum,
respectively, of the market value of the gold held under consignment.
Additionally, the current consignment agreements require a letter of credit to
support the market value of the gold consigned to the Company. The financing
cost to the Company of the consignment program is substantially less than the
cost that would have been incurred if the Company financed the purchase of all
of its gold requirements with borrowings under its revolving credit facility.
The Company's current gold consignment arrangements are terminable by either
party upon either 30 or 45 days notice, depending on the consignor. Gold
consignment programs are common in the gold jewelry industry and the Company
believes that, if the institutions with which it currently has gold consignment
agreements were to terminate such agreements, it would have a number of
opportunities to establish gold consignment programs with terms similar to its
current arrangements.

During the last two fiscal years, the Company has financed an average of
approximately 73% of the gold content of its merchandise under the consignment
program. As of March 31, 1997, the amount of gold consigned was 88,300 ounces
with a value of $30.7 million versus 54,500 ounces with a value of $21.6 million
at March 31, 1996. The consigned gold is not included in inventory on the
Company's balance sheet and, therefore, there is no related liability recorded.
If the market value of gold increases, assuming the number of ounces consigned
remain constant, the financing costs incurred by the Company which are included
in interest expense, and the repayment obligations to the consignors under the
consignment arrangements, will increase in proportion to the increase in the
market value of gold. Additionally, the amount of the letters of credit would
need to be increased to support the increased market value of the consigned
gold, thereby reducing the amount which might otherwise be available for cash
borrowings under the Company's revolving credit facility.

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<PAGE> 23

The Company anticipates capital expenditures in fiscal 1998 to total
approximately $8.0 million, of which approximately $3.0 million is related
primarily to the construction of new stores and the renovation of existing
stores, and approximately $5.0 million is related to the construction of a new
warehouse and distribution facility, the implementation of new inventory
management and replenishment software, additional computer hardware associated
with this software and the upgrading of its financial and accounting systems.
The Company currently anticipates opening approximately 60 to 70 new stores in
fiscal 1998, excluding any potential acquisitions. Opening a new store generally
requires a total investment of approximately $107,000, including approximately
$70,000 of inventory (a portion of which is generally financed through
consignment arrangements), $30,000 for construction of the kiosk, fixtures,
point-of-sale register and other equipment and supplies and $7,000 for
pre-opening expenses which are expensed when incurred. The Company believes that
the expected net cash provided by operating activities, its gold consignment
program, bank borrowings under its revolving line of credit facility and the net
proceeds of this offering will be sufficient to fund the Company's currently
anticipated capital and liquidity needs.

SEASONALITY

The Company's business is highly seasonal. Due to the impact of the holiday
shopping season, the Company experiences a substantial portion of its total net
sales and profitability in its third fiscal quarter (ending December 31st), and
during the last two fiscal years, the month of December, on average, has
accounted for approximately 26% of the Company's annual net sales and 103% of
its annual income from operations. The Company has generally experienced lower
net sales in each of the first, second and fourth quarters of each fiscal year,
and lower net income or net losses in each of those quarters.

QUARTERLY DATA

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

<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1997
----------------------------------------- -----------------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales........................ $22,375 $23,012 $49,141 $27,053 $30,244 $32,439 $66,339 $37,863
Gross profit(1).................. 9,295 9,870 23,244 11,732 12,781 13,716 31,880 16,200
Selling, general and
administrative expenses(1)..... 8,927 9,528 13,491 11,941 12,421 13,477 18,477 16,470
Income (loss) from operations.... 368 342 9,753 (209) 360 239 13,403 (270)
Net income (loss)................ 162 45 5,700 (230) 35 (105) 7,824 (216)
Earnings (loss) per share........ $ 0.03 $ 0.01 $ 1.07 $ (0.04) $ 0.01 $ (0.02) $ 1.45 $ (0.04)

COMPARABLE STORE NET SALES
INCREASE......................... 18.0% 13.7% 7.3% 16.7% 5.6% 9.4% 9.1% 7.4%

AS A PERCENTAGE OF NET SALES:
Gross profit(1).................. 41.5% 42.9% 47.3% 43.4% 42.3% 42.3% 48.1% 42.8%
Selling, general and
administrative expenses(1)..... 39.9 41.4 27.5 44.1 41.1 41.5 27.9 43.5
Income (loss) from operations.... 1.6 1.5 19.8 (0.8) 1.2 0.7 20.2 (0.7)
Net income (loss)................ 0.7 0.2 11.6 (0.9) 0.1 (0.3) 11.8 (0.6)
</TABLE>

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

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

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

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<PAGE> 24

the end of November, when it reaches its highest level, and declines rapidly
through the holiday season.

The Company's results of operations may fluctuate significantly from
quarter to quarter as a result of a variety of factors, including fluctuations
in the price of gold, the amount and timing of acquisitions and new store
openings, the integration of recently acquired and newly opened stores into the
operations of the Company, the timing of promotions, fluctuations in the price
of gold, and changes in national and regional economic conditions. For example,
earnings from operations in the first, second and fourth quarters of fiscal 1997
were adversely affected by the integration and assimilation of 331 stores opened
or acquired during fiscal 1996 and fiscal 1997. This was due primarily to the
relatively fixed nature of rent and other occupancy costs and selling, general
and administrative costs associated with the recently acquired and newly opened
stores, which had a significant adverse impact on these lower net sales volume
quarters.

INFLATION

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

IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT

In February, 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings per Share ("SFAS No. 128"). This statement establishes standards
for computing and presenting earnings per share ("EPS") and simplifies the
standards for computing EPS previously found in APB Opinion No. 15, Earnings per
Share. It replaces the presentation of primary earnings per share with the
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures. The Company is required to adopt SFAS No. 128 during the
quarter ended December 31, 1997. The Company has not completed its evaluation of
the potential impact of the new standard on EPS. However, based on equity
instruments currently outstanding under existing stock compensations plans, the
new standard is not expected to have a material impact on the Company's EPS.

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<PAGE> 25

BUSINESS

GENERAL

Piercing Pagoda is the largest retailer of gold jewelry through kiosk
stores in the United States. At May 7, 1997, the Company operated 734 stores in
43 states and Puerto Rico, including 710 kiosk stores and 24 in-line stores. The
Company offers an extensive selection of popular-priced 14 karat and 10 karat
gold chains, bracelets, earrings, charms and rings, as well as a selection of
silver jewelry, all in basic styles at everyday low prices. The Company's stores
are generally located in high traffic concourses of regional shopping malls and
are primarily operated under the names Piercing Pagoda, Plumb Gold and Silver &
Gold Connection. The Company's kiosk stores average approximately 165 square
feet in size, typically carry approximately 3,300 SKUs, require a low initial
investment, can be opened quickly and are easily accessible and visible within
malls. During fiscal 1997, the average price of a jewelry item sold by the
Company was approximately $24 and average comparable store net sales per square
foot were approximately $1,848. The Company believes that its low price points
and focused merchandise selection differentiate it from other mall-based jewelry
retailers.

INDUSTRY OVERVIEW

Jewelry is mainly distributed through chain stores, independent jewelry
stores, department stores, catalog showrooms and discount stores, as well as
through non-store retailers, such as those utilizing direct mail and television
home shopping. Traditional jewelry retailers, including mall-based retailers and
departments within discount and department stores, generally offer a wide array
of jewelry and gift items, such as diamonds and other precious and semi-precious
stones, precious metals, watches and giftware. According to data from the World
Gold Council's 1996 Annual Report, total retail sales for gold jewelry in the
United States in 1996 were approximately $12.3 billion, representing a compound
annual growth rate of approximately 5.0% from 1993 to 1996. Unit sales of gold
jewelry were approximately 144.8 million in 1996 and have grown at a compound
annual rate of 6.5% during the same period. The average price per unit for gold
jewelry in 1996 was $85 with a range of $35 per unit for sales through discount
stores to $135 per unit for sales through independent jewelers. The fastest
growing segment of the gold jewelry industry has been at lower price points. For
example, in 1996, discount jewelers, with a 30% share of total industry unit
sales at an average price point of $35, have steadily been gaining market share
in each of the last seven years, with a 10% increase in dollar sales and a 9%
increase in unit sales from 1995. This represented growth rates that were three
times higher than those of traditional chain jewelers in 1996, which had a 19%
share of total industry unit sales at an average price point of $118.

OPERATING STRATEGIES

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

Focused Merchandise Selection. The Company differentiates its merchandise
selection from other jewelry retailers by focusing on basic styles of
lower-priced 14 karat and 10 karat gold jewelry, comprised primarily of chains,
bracelets, earrings, charms and rings. The Company offers an extensive selection
within each merchandise category, and its stores typically carry approximately
3,300 SKUs. The average price of a jewelry item sold by the Company in fiscal
1997 was approximately $24.

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<PAGE> 26

Approximately 73% of a typical store's merchandise is common to all stores, and
the remaining products are selected based upon the characteristics and local
preferences of the particular store's customer base.

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

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

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

Sophisticated Management Information Systems. The Company is committed to
maintaining sophisticated management information systems. Currently, the Company
utilizes a customized management information system that incorporates
point-of-sale computers in its stores with an inventory management and
replenishment system. These proprietary systems allow the Company to monitor and
control effectively the merchandise at its stores and enable the Company to
identify and react promptly to sales trends. Based on the sales data, the
Company tailors individual stores' merchandise levels, plans its purchasing in
order to benefit from volume purchasing discounts from its suppliers and
prioritizes the in-house preparation of merchandise. The Company is presently in
the process of upgrading its inventory management and financial and accounting
systems to accommodate its growth. The new inventory management software system
will utilize Windows NT-based client/server technology and will be modified to
replicate certain custom elements of the Company's current system. The new
financial and accounting and inventory management systems are expected to be
operational in the third quarter of fiscal 1998 and in early fiscal 1999,
respectively.

EXPANSION STRATEGY

Prior to fiscal 1996, the Company expanded primarily through new store
openings. The Company solidified its position as the largest operator of gold
jewelry kiosk stores in the United States by acquiring 93 stores in January 1997
and 43 stores in April 1997 from companies that had been the second and third
largest gold jewelry kiosk store operators. The Company believes that the
Gemstone Acquisition and the Silver & Gold Acquisition provide the Company with
many attractive store locations and that the Company's plan to convert the
acquired stores to the Company's format and to implement the Company's
merchandising strategies will result in increased net sales and profitability in
the acquired stores. The Company plans to achieve these results by revising and
managing the product mix of the acquired stores to reflect the Company's
merchandising strategy, and by retraining sales associates and store management
personnel to provide the level of customer service emphasized in the Company's
other stores and to improve operational efficiencies. Based on information
provided by the respective sellers, the average net sales of the stores acquired
in the Gemstone Acquisition for the twelve months ended December 31, 1996 were
approximately $205,000, and the average net sales of the stores acquired in the
Silver & Gold Acquisition for the twelve months ended January 31, 1997

26
<PAGE> 27

were approximately $272,000. For fiscal 1997, the Company's average net sales
per comparable store was $303,000. The Company believes that its substantial
experience in opening new stores and recent experience in integrating the stores
acquired in the Earring Tree Acquisition will facilitate the integration of the
acquired stores. However, there is no assurance that the Company will
successfully integrate the acquired stores and failure to do so could have a
material adverse effect on the Company's results of operations and financial
condition.

With a total of 734 stores in operation as of May 7, 1997, the Company
intends to focus its attention in fiscal 1998 on the assimilation of these
recently acquired stores, as well as on increasing the productivity of the 80
net new stores it has opened since the beginning of fiscal 1997. The Company
believes that, because the net sales volume and store contribution of the newly
acquired stores are generally below those in the Company's comparable store base
(currently, stores in operation since April 1995), the Company has an
opportunity to increase the net sales volume and store contribution of these
stores, as well as to better leverage central infrastructure costs (as adjusted
for increases resulting from the acquisitions). However, as the newly acquired
stores enter the Company's comparable store base (beginning after fiscal 1999 as
to the Gemstone Acquisition and fiscal 2000 as to the Silver & Gold
Acquisition), they are likely to have a negative initial impact on comparable
store productivity, even if the Company registers an increase in total and
comparable store net sales.

Because the recent acquisitions included the two largest gold jewelry kiosk
operators other than the Company, the Company does not expect to maintain the
rate of recent store acquisitions. Accordingly, the Company intends to return to
its core strategy of expanding primarily through opening new stores. The Company
plans to open approximately 60 to 70 new stores in fiscal 1998 and approximately
70 to 90 new stores in fiscal 1999 (excluding any acquisitions), and to close an
aggregate of approximately 20 existing stores during that two-year period. At
May 7, 1997, the Company had signed lease commitments for 25 new stores (none of
which is in Florida), substantially all of which it plans to open during fiscal
1998. Of these, 19 are in malls which are new to the Company.

In selecting sites for new stores, the Company generally seeks malls that
have at least 500,000 square feet, a high volume of shopping traffic, strong
anchor tenants and sites available in the higher traffic areas of the mall.
Opening a new store generally requires a total investment of approximately
$107,000, including approximately $70,000 of inventory (a portion of which is
generally financed through consignment arrangements), $30,000 for construction
of the kiosk, fixtures, point-of-sale register and other equipment and supplies
and $7,000 for pre-opening expenses which are expensed when incurred. New stores
can typically be opened within eight weeks after obtaining a lease commitment.
In addition to evaluating malls in which it does not operate stores, the Company
continually evaluates malls where its stores are located to determine whether
net sales volumes warrant another kiosk in such malls. The Company believes that
Piercing Pagoda's strong national retailing reputation, along with the
flexibility of its kiosk store format, make its stores attractive to mall
developers and managers.

As part of its ongoing operations, the Company continually evaluates the
performance of its stores and the malls in which they are located. Since kiosks
require a relatively low investment to open and can be moved relatively easily,
the Company's expansion strategy includes closing kiosks when appropriate and
relocating the kiosks to new locations. During the past three fiscal years, the
Company has closed 21 stores.

The Company's expansion may also include retail concepts and locations
other than the Company's standard kiosks in regional malls. As of May 7, 1997,
the Company operated 24 in-line stores, most of which were acquired as part of
the Earring Tree Acquisition, and expects to open less than five in-line stores
in fiscal 1998 as it evaluates whether to expand its in-line store operations.
The in-line store format may allow the Company to expand into malls where kiosks
are not utilized, as well as to increase its presence in malls where it already
operates kiosks; to offer a larger selection of merchandise, including higher
price points; and to take advantage of certain favorable lease opportuni-

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<PAGE> 28

ties if and when they are presented. During the 1996 holiday season, the Company
operated 50 seasonal retail mall carts, selling primarily silver jewelry under
the name Silver Station. In addition, the Company may consider limited expansion
into outlet malls or less traditional retail locations such as airport
terminals. In appropriate situations, the Company will continue to evaluate
potential acquisitions of existing stores or store sites from third parties.

MERCHANDISING AND MARKETING

Merchandising

The Company offers an extensive selection of popular-priced 14 karat and 10
karat gold chains, bracelets, earrings, charms and rings, as well as a selection
of silver jewelry. The Company focuses its merchandise selection, approximately
95% of which is gold jewelry, on basic styles at everyday low prices. The
Company believes that, by offering a broad assortment of basic styles, it
provides its customers with a wide variety of choices while limiting
merchandising risks associated with fashion trends. The Company maintains a
balance between new merchandise and proven successful styles. Prior to
introducing new items in all of its stores, the Company usually tests the items
in approximately 50 of its highest volume stores. The Company's stores typically
carry approximately 3,300 SKUs, approximately 82% of which have list prices
between $10 and $80, and during fiscal 1997 generated an average jewelry item
selling price of approximately $24. The Company also offers a selection of non-
jewelry items such as ear care products and jewelry cleaners. Approximately 73%
of a typical store's merchandise is common to all stores, and the remaining
products are selected based upon the characteristics and local preferences of
the particular store's customer base.

During fiscal 1997, the Company's store net sales by merchandise category
as a percentage of total store net sales were as follows:

<TABLE>
<CAPTION>
PERCENT OF TOTAL
MERCHANDISE CATEGORY STORE NET SALES(1)
------------------------------------------------------------------- ------------------
<S> <C>
Gold:
Chains and bracelets............................................. 35%
Charms and rings................................................. 27
Earrings......................................................... 25
Miscellaneous items.............................................. 1
---
Total gold............................................... 88
Silver jewelry and other items..................................... 12
---
Total store net sales.................................... 100%
===
</TABLE>

- ------------
(1) Excludes $2.7 million of wholesale sales to the Florida Licensee. See
"-- Properties."

Marketing

Piercing Pagoda's pricing policy is to maintain everyday low prices
complemented by selective promotions. The Company seeks to be the value leader
for popular-priced gold jewelry in the malls in which its stores are located.
The Company's stores display merchandise on pads in glass enclosed showcases
with clearly visible price tags that facilitate browsing and comparison
shopping, while minimizing the need for sales support. The modular merchandise
display trays in which the merchandise pads fit are configured so as to maximize
the number of items displayed and to minimize unused space in the showcases.
Generally, gold merchandise is priced based on the price the Company paid its
suppliers for such merchandise, and the items are not repriced based on normal
fluctuations in the price of gold. The Company regularly monitors price levels
at its competitors in order to ensure that its prices are competitive, and the
Company believes that its volume purchasing and established supplier
relationships contribute to its ability to remain competitive. In addition to
everyday low prices, the Company has a "buy-five-get-one-free" jewelry club. In
fiscal 1997, the Company increased its promotional events, such as events
featuring "Your Choice $19" and "Buy One, Get One at 1/2 Off," as well as
occasional clearance sales. The Company intends to continue to emphasize these
promotions and to monitor them in order to assess their relative success.

28
<PAGE> 29

In addition to emphasizing lower prices, extensive selection, 734
nationwide locations as of May 7, 1997 and over 20 years of retail experience,
the Company promotes the following:

- Complimentary ear piercing. With the purchase of earrings, the Company
offers complimentary ear piercing and a free check-up after four weeks.
The Company utilizes a state-of-the-art ear piercing system and requires
all employees performing ear piercing services to be trained and
recertified by the Company annually. The Company limits its ear piercing
service to the ear and will not pierce any other part of the body. During
fiscal 1997, approximately 11% of the Company's net sales were derived
from the sale of earrings in connection with complimentary ear piercing.

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

- Membership in the "buy-five-get-one-free" jewelry club. The Company
offers a customer incentive program pursuant to which, after five
purchases, a customer is entitled to a credit on the next purchase equal
to the average price paid for the five purchased items. During fiscal
1997, customers applied approximately $3.8 million of credits received
under the jewelry club to purchases.

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

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

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

Unlike many jewelry retailers, the Company does not extend credit to its
customers, thereby minimizing bad debt expense. Approximately 76% of all
purchases are cash transactions (including personal checks) with the remaining
purchases being credit card sales.

STORES

At May 7, 1997, the Company operated 734 stores in 43 states and Puerto
Rico, including 710 kiosk stores and 24 in-line stores, primarily under the
names Piercing Pagoda, Plumb Gold and Silver & Gold Connection. The Company's
kiosk stores average approximately 165 square feet, with approximately 37 linear
feet of display cases. The Company generally seeks to locate its kiosk stores in
high traffic areas of mall concourses, and has created several standard kiosk
store designs that can be adapted to a particular store's location or to the
design requirements of the mall. The kiosks are manufactured to the Company's
specifications by third party kiosk suppliers and typically can be completed so
that new stores can be opened within eight weeks after obtaining a lease
commitment. At May 7, 1997, the Company operated stores in 539 malls, and
operated more than one location in 163 of those malls. Of the stores operated,
24 were in-line stores, most of which were acquired as part of the Earring Tree
Acquisition.

In January 1997 and April 1997, the Company solidified its position as the
largest operator of gold jewelry kiosk stores by acquiring 93 and 43 kiosk
stores, respectively, from the companies that had been the second and third
largest gold jewelry kiosk operators. The stores purchased were generally
comparable in size to the Company's other stores and sold similar merchandise.
In addition, 113 of those stores are in malls where the Company is already
operating.

29
<PAGE> 30

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

<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
----------------------------------
1995 1996 1997 1998(1)
---- ---- ---- -------
<S> <C> <C> <C> <C>
Number of stores:
Beginning of period................................ 295 366 513 682
Opened/acquired:
Piercing Pagoda(2).............................. 63 121 108 18
Plumb Gold(3)................................... 14 34 66 2
Silver & Gold Connection(4)..................... -- -- -- 34
Other(5)........................................ -- -- 2 --
--- --- --- ---
Total opened(6)............................ 77 155 176 54
--- --- --- ---
Total closed(7)................................. 6 8 7 2
--- --- --- ---
Total at end of period.......................... 366 513 682 734
=== === === ===
</TABLE>

- ---------------
(1) Through May 7, 1997.
(2) Includes six stores in fiscal 1995, 42 stores in fiscal 1996, 41 stores in
fiscal 1997 and eight stores in fiscal 1998, respectively, that were
acquired and reopened under the Piercing Pagoda name. Includes stores
operated under the name Piercing Pagoda Too in malls where a store is
operated under the name Piercing Pagoda. Other than the acquisitions noted,
stores that change names are not included as new openings.
(3) Includes seven stores in fiscal 1995, 24 stores in fiscal 1996, 55 stores in
fiscal 1997 and two stores in fiscal 1998, respectively, that were acquired
and reopened under the Plumb Gold name. Other than the acquisitions noted,
stores that change names are not included as new openings.
(4) All of these stores were acquired in April 1997 and reopened in May 1997
under the same name.
(5) These stores are currently operated under the Gemstone name, although the
Company intends to change the name of these stores to one of its three
primary names.
(6) Includes one in-line store in fiscal 1995, 14 in-line stores in fiscal 1996
and seven in-line stores in fiscal 1997.
(7) Includes one store sold to the Florida Licensee in each of fiscal 1995 and
fiscal 1997, and two stores sold in fiscal 1998. Does not include three
stores that the Florida Licensee notified the Company in April 1997 it
intends to purchase. See "-- Properties."

STORE OPERATIONS

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

The Company believes that providing knowledgeable and responsive customer
service is a crucial element to its success and, accordingly, has developed and
implemented extensive employee training and incentive programs. In addition to
training during the first few weeks of employment and frequent field training,
the Company produces training videos for sales associates. The Company monitors
its training program by having sales associates complete worksheets after
viewing each video. Additionally, every August, all sales personnel complete
"Piercing University" where they are retrained in the state-of-the-art, safe,
sterile ear piercing method utilized by the Company. Store managers, most of
whom are promoted from within the Company and over 34% of whom (excluding
personnel hired in connection with the January and April 1997 acquisitions) have
been with the Company longer than three years, also complete extensive training
programs during which they receive training in management skills and employee
relations as well as in sales and customer service. The Company regularly
monitors customer service at its stores by using "secret shoppers" who complete
evaluation forms after visiting stores as customers. Regional managers and
district managers, over 57% of whom have been with the Company over five years,
generally spend approximately one week, two to four times per year, in the
Company's corporate headquarters where they receive ongoing administrative and
operational training.

The Company seeks to instill enthusiasm and dedication in its store
management personnel and sales associates through incentive programs and
regularly solicits employee suggestions regarding store

30
<PAGE> 31

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

PURCHASING AND DISTRIBUTION

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

The Company utilizes approximately 150 vendors, primarily in the United
States, Italy and Asia, who supply various jewelry products. The Company's
purchase agreements with its suppliers are all denominated in U.S. dollars.
During fiscal 1997, the Company's five largest suppliers accounted for
approximately 43% of the merchandise purchased by the Company. Two of these
suppliers accounted for 11% and 10%, respectively, of the Company's purchases
during fiscal 1997. The Company does not believe that the loss of any current
supplier would adversely affect its operations. The Company has no long-term
contracts for the purchase of merchandise. Management believes that the
relationships the Company has established with its suppliers are good. The
Company has not experienced any difficulty in obtaining satisfactory sources of
supply and believes that adequate alternative sources of supply exist for
substantially all types of merchandise sold in its stores.

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

MANAGEMENT INFORMATION SYSTEMS

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

In order to accommodate recent growth, the Company plans to implement new
inventory management and replenishment software that is currently used by
certain other major retailers, and to upgrade its financial and accounting
software. It is expected that the new inventory management software will be
modified to replicate certain custom elements of the Company's existing system.
Both the inventory management software and the financial and accounting software
that the Company plans to install utilize the SQL relational database and a
Windows NT-based client/server architecture. The Company believes that the
combination of the new software and client/server technology will provide the
Company with better analytical tools and enhance the information-sharing
capabilities of the Company's management information systems. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

31
<PAGE> 32

The Company anticipates that the new financial and accounting and inventory
management systems will be operational by the third quarter of fiscal 1998 and
the first quarter of fiscal 1999, respectively. It is expected that the new
systems will be run parallel with the existing systems until the quality of
performance of the new systems is confirmed. There is no assurance that the
Company will be able to successfully implement these new systems.

PROPERTIES

The Company leases all of its store locations, but owns the kiosks and
other fixtures. The Company's typical lease is for a period of five years and
includes a minimum base rent, a percentage rent based on store sales, a common
area maintenance charge and payments to a merchants' association. In addition,
substantially all of the Company's leases require the Company to contribute to
the cost of advertising for the mall in which the store subject to the lease is
located. The Company is generally required under the terms of its leases to
maintain and conform its stores to agreed upon standards. Of the Company's store
leases at March 31, 1997, approximately 128 expire before March 31, 1998. The
acquisitions of 93 stores in January 1997 and 43 stores in April 1997 were
completed without obtaining landlords' prior consent. Over 90% of the consents
have now been obtained with respect to the January 1997 acquisition. The Company
has recently begun pursuing consents in connection with the April 1997
acquisition and, as of May 14, 1997, had obtained four of such consents.
Although the Company believes that, as a result of its financial and operating
strength and its relationships with many major landlords, it will be able to
obtain substantially all the remaining consents on reasonable terms, there is no
assurance that its negotiations will be successful. Accordingly, there is a risk
that certain stores would have to be closed if consent is not obtained.

The Company also licenses the use of its store names and concept to an
independent store operator with 16 stores and one retail mall cart in Florida
(the "Florida Licensee"). In order to reach a negotiated resolution of rights of
the Florida Licensee who had been a franchisee of the Company, the Company
entered into an agreement with the Florida Licensee pursuant to which the
Florida Licensee generally has the right to acquire, at prices favorable to the
Florida Licensee, the Company's stores operating in the State of Florida and has
the right of first refusal with respect to new locations in that State. The
Florida Licensee purchases its inventory from the Company and pays the Company a
royalty on its net sales. In each of fiscal 1995 and fiscal 1997, the Florida
Licensee exercised its right to acquire one store from the Company. Since the
beginning of fiscal 1998, the Florida Licensee has delivered written notice to
the Company of its intention to acquire five additional stores, two of which the
Florida Licensee acquired in May 1997. In addition, the Florida Licensee has
recently expressed interest in acquiring another three stores from the Company.
Of the 38 stores which the Company currently operates in Florida, five were
acquired from the Florida Licensee. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview."

The Company owns a 73,000 square foot building in Bethlehem, Pennsylvania
which serves as its corporate headquarters and distribution center. As a result
of recent acquisitions, the Company's distribution facilities are near capacity.
Accordingly, it plans to begin construction during fiscal 1998 of an
approximately 50,000 square foot facility on approximately five acres of vacant
land it owns adjacent to the Bethlehem property. This new facility is planned to
be used primarily for additional distribution and warehousing functions.

COMPETITION

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

32
<PAGE> 33

EMPLOYEES

As of March 31, 1997, the Company had approximately 1,672 full-time and
approximately 2,053 part-time employees. Of these, 255 were employed full-time
and 82 part-time at the Company's corporate offices and distribution facility
while the balance were employed as part of the Company's field sales force. The
number of employees fluctuates depending on seasonal needs. During the fiscal
1997 peak holiday season, the Company had 3,053 part-time employees. None of the
Company's employees is covered by a collective bargaining agreement, and the
Company considers relations with its employees to be good.

TRADEMARKS

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

GOVERNMENT REGULATION

The Company's ear piercing service is not regulated by federal statute.
Currently, Oregon is the only state in which the Company operates that regulates
ear piercing activities. Legislation in Oregon requires the Company, and any of
its employees administering ear piercing services in stores in Oregon, to be
licensed by the State. The legislation also deems ear piercing through anywhere
but the lobe of the ear to be body piercing, which is subject to additional
restrictions, including that it must be performed in a separate room.
Accordingly, the Company limits its ear piercing to the ear lobe in Oregon. The
Company is aware of approximately 31 jurisdictions in which legislation to
regulate ear piercing establishments is pending, including Maryland and
Massachusetts where the Company currently operates 32 stores and 29 stores,
respectively. The proposed Maryland legislation would subject ear piercing
through other than the lobe to restrictions similar to those imposed by the
Oregon legislation. The proposed Massachusetts legislation directs regulators to
develop procedures applicable to body piercing, which the proposed legislation
currently defines to exclude the ear lobe but to include all other parts of the
ear. Generally, however, pending legislation proposes requiring the consent of a
parent or guardian in order to pierce the ears of a minor (which the Company
requires even in the absence of legislation), the posting of certain notices and
the obtaining of certain registrations and licenses, but does not require
special procedures for piercing of portions of the ear other than the lobe.
Management believes that the Company complies in all material respects with
applicable legislation. While the Company does not expect existing or proposed
legislation to have a material adverse effect on the Company's business, there
is no assurance that governmental bodies will not modify existing legislation in
such a way, or enact new legislation, that would restrict or prohibit the
Company from providing ear piercing services in its stores or otherwise
continuing to conduct its business as presently operated.

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

LEGAL PROCEEDINGS

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

33
<PAGE> 34

MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

The Company's executive officers, directors and key employees are as
follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Richard H. Penske................ 54 Chairman of the Board and Chief Executive Officer
John F. Eureyecko................ 48 President, Chief Operating Officer, Secretary and
Director
Barry R. Clauser................. 43 Senior Vice President -- Merchandise Operations
Sharon J. Zondag................. 42 Senior Vice President -- Store Operations
Brandon R. Lehman................ 45 Treasurer
Alan R. Hoefer................... 63 Director*
Mark A. Randol................... 62 Director*
Lisa E. Sankovsky................ 36 Vice President -- Real Estate
Richard J. McKeon................ 39 Director of Management Information Systems
Christopher J. Barone............ 32 Corporate Controller
</TABLE>

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

* Member of the Audit and Compensation Committees.

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

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

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

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

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

Alan R. Hoefer has served as a director of the Company since March 1994.
Since August 1988, Mr. Hoefer has been the Managing General Partner of Alan
Hoefer & Co., a private investment banking firm.

Mark A. Randol has served as a director of the Company since March 1994.
Since 1979, Mr. Randol has been the President of Forrest City Management, Inc.,
a real estate development company.

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

34
<PAGE> 35

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

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

The Board of Directors of the Company is divided into three classes with
staggered three-year terms. Currently, the Board of Directors consists of four
persons. Messrs. Penske and Hoefer serve as Class I directors whose terms expire
on the date of the annual meeting of stockholders next following the end of
fiscal 1997; Mr. Randol serves as a Class III director whose term expires on the
date of the annual meeting of stockholders next following the end of fiscal
1998; and Mr. Eureyecko serves as a Class II director whose term expires on the
date of the annual meeting of stockholders next following the end of fiscal
1999. The officers of the Company are elected at each annual meeting of the
Board of Directors and serve at the discretion of the Board of Directors.

The current committees of the Board of Directors are the Compensation
Committee and the Audit Committee. Messrs. Hoefer and Randol are members of both
committees. The Compensation Committee and Audit Committee each met twice during
fiscal 1997.

DIRECTOR COMPENSATION

Members of the Board of Directors who are not employees of the Company are
compensated at the annual rate of $8,000. Non-employee directors will also
receive $1,000 for each meeting of the Board of Directors which they attend and,
if not held in conjunction with a Board meeting, a fee of $1,000 for each
meeting of a committee of the Board of Directors which they attend. The Company
also reimburses all directors for their expenses in connection with their
activities as directors of the Company. Directors who are also employees of the
Company do not receive any compensation for serving on the Board of Directors.
Pursuant to the Company's 1994 Stock Option Plan, each director who is a member
of the Compensation Committee also receives an annual grant of ten year options
to purchase 2,000 shares of Common Stock at the fair market value on the date of
grant, becoming exercisable on the first anniversary of the date of grant.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Alan R. Hoefer and Mark A. Randol, the members of the Compensation
Committee of the Company's Board of Directors, are each parties to the Tax
Indemnification Agreement which was entered into between the Company and the
stockholders of the Company prior to its initial public offering in connection
with the Company's change in status, immediately prior to the initial public
offering, from an "S" corporation to a "C" corporation subject to corporate
income taxation. Pursuant to that Tax Indemnification Agreement, during fiscal
1996, Messrs. Hoefer and Randol received $18,462 and $7,898, respectively. See
"Certain Transactions."

35
<PAGE> 36

EXECUTIVE COMPENSATION

The following table sets forth certain summary information concerning
compensation paid or accrued by the Company for services rendered in all
capacities during fiscal 1995, fiscal 1996 and fiscal 1997 for the Chief
Executive Officer of the Company and the other officers of the Company whose
total annual salary and bonus for fiscal 1997 exceeded $100,000 (the "Named
Officers"):

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------------------
RESTRICTED SHARES
NAME AND PRINCIPAL -------------------- STOCK UNDERLYING ALL OTHER
POSITION FISCAL YEAR SALARY BONUS AWARDS(5) OPTIONS COMPENSATION
- ------------------------ ----------- -------- ------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Richard H. Penske....... 1997 $181,491 $90,000 -0- -0- $ 50,323(1)
Chief Executive 1996 157,308 60,000 -0- -0- 48,764(1)
Officer 1995 150,000 50,000 -0- -0- 47,072(1)
John F. Eureyecko....... 1997 169,774 88,000 $15,401(6) 50,000 5,139(2)
President 1996 153,933 55,000 4,259 -0- 4,995(2)
1995 136,154 36,500 -0- 25,000 5,164(3)
Sharon J. Zondag........ 1997 107,661 35,000 8,024(7) 10,000 4,070(2)
Senior Vice 1996 96,164 22,000 2,658 -0- 3,393(2)
President -- 1995 79,106 12,000 -0- 25,000 2,601(2)
Store Operations
Barry R. Clauser........ 1997 107,576 30,000 8,024(7) 10,000 3,907(2)
Senior Vice 1996 95,587 15,000 2,658 -0- 3,425(2)
President -- 1995 87,115 7,500 -0- 25,000 3,121(4)
Merchandise Operations
Susan S. Iseminger...... 1997 79,029 19,205 5,870(8) 4,000 2,737(2)
Vice President -- 1996 68,596 19,040 1,918 -0- 3,064(2)
Store Operations 1995 63,731 15,000 -0- 8,000 1,701(2)
</TABLE>

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

(1) The compensation reported represents: (i) the Company's contributions and
matching payments under the Company's Retirement and Savings Plan in the
aggregate amounts of $5,013 in 1997, $4,590 in 1996 and $4,027 in fiscal
1995; (ii) the premiums on a life insurance policy on the life on Mr.
Penske, of which Mr. Penske's wife is the sole beneficiary, which were
$3,119 in fiscal 1997, $2,803 in fiscal 1996 and $1,570 in fiscal 1995; and
(iii) the amount, on a term loan approach, of the benefit of the whole-life
portion of the premiums for a split dollar life insurance policy paid by the
Company projected on an actuarial basis which was $42,191 in fiscal 1997,
$41,371 in fiscal 1996 and $41,475 in fiscal 1995.

(2) The compensation reported represents the Company's contribution and matching
payments under the Company's Retirement and Savings Plan.

(3) The compensation reported represents: (i) the Company's contribution and
matching payments under the Company's Retirement and Savings Plan in the
aggregate amount of $4,066; and (ii) $1,098 which is the value of an
interest-free loan made by the Company to Mr. Eureyecko.

(4) The compensation reported represents: (i) the Company's contribution and
matching payment under the Company's Retirement and Savings Plan in the
aggregate amount of $2,985 in fiscal 1995; and (ii) $136 in fiscal 1995
which equals one-half the premium on a term life insurance policy on the
life of Mr. Clauser of which Mr. Clauser's wife was a 50% beneficiary.

(5) At March 31, 1997: Mr. Eureyecko held an aggregate of 56,901 shares of
restricted stock, having a total value of $1,436,750; Ms. Zondag held an
aggregate of 18,481 shares of restricted stock, having a total value of
$466,645; Mr. Clauser held an aggregate of 28,481 shares of restricted
stock, having a total value of $719,145; and Ms. Iseminger held an aggregate
of 321 shares of restricted stock, having a total value of $8,105. All
restricted stock awards reported in the Summary Compensation Table vest in
whole in under three years from the date of grant. With respect to the
payment of dividends on the restricted stock reported in the Summary
Compensation Table, see "Dividend Policy."

36
<PAGE> 37

(6) The value of 112 shares of restricted stock for which salary was withheld in
the fourth quarter of fiscal 1997 has been determined based on the closing
market price of Common Stock on May 13, 1997, although as of such date such
shares had not been granted.

(7) The value of 70 shares of restricted stock for which salary was withheld in
the fourth quarter of fiscal 1997 has been determined based on the closing
market price of Common Stock on May 13, 1997, although as of such date such
shares had not been granted.

(8) The value of 51 shares of restricted stock for which salary was withheld in
the fourth quarter of fiscal 1997 has been determined based on the closing
market price of Common Stock on May 13, 1997, although as of such date such
shares had not been granted

STOCK OPTIONS

The following table contains information concerning the stock option grants
made to each of the Named Officers in fiscal 1997:

OPTION GRANTS IN FISCAL 1997

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM(2)
OPTIONS IN FISCAL PRICE PER EXPIRATION ---------------------
NAMED OFFICER GRANTED(1) 1997 SHARE DATE 5% 10%
- ------------------------- ---------- ---------- --------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Richard H. Penske........ -- -- -- -- -- --
John F. Eureyecko........ 25,000(3) 13% $ 18.00 June 24, 2006 $ 283,000 $ 717,250
25,000(4) 13 22.00 March 6, 2007 346,000 876,500
Sharon J. Zondag......... 10,000(4) 5 22.00 March 6, 2007 138,400 350,600
Barry R. Clauser......... 10,000(4) 5 22.00 March 6, 2007 138,400 350,600
Susan S. Iseminger....... 4,000(4) 2 22.00 March 6, 2007 55,360 140,240
</TABLE>

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

(1) Numbers shown represent options granted under the 1994 Stock Option Plan to
purchase Common Stock.

(2) Future value of current-year grants assuming appreciation in the market
value of the Common Stock of 5% and 10% per year over the ten-year option
period. The actual value realized may be greater than or less than potential
realizable values set forth in the table.

(3) One-fifth of these options were exercisable on June 24, 1996 and the
remaining four-fifths are exercisable in four equal installments on the
first four anniversaries of such date.

(4) One-fifth of these options were exercisable on March 6, 1997 and the
remaining four-fifths are exercisable in four equal installments on the
first four anniversaries of such date.

The following table provides information related to options exercised
during fiscal 1997 by each of the Named Officers and the number and value of
options held at March 31, 1997 by such individuals.

AGGREGATED OPTION EXERCISES IN FISCAL 1997
AND OPTION VALUES AT MARCH 31, 1997

<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES MARCH 31, 1997 MARCH 31, 1997
ACQUIRED VALUE --------------------------- ---------------------------
NAMED OFFICER ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard H. Penske........... -- -- -- -- -- --
John F. Eureyecko........... -- -- 25,000 50,000 $ 311,250 $ 382,500
Sharon J. Zondag............ -- -- 17,000 18,000 265,250 198,500
Barry R. Clauser............ -- -- 17,000 18,000 265,250 198,500
Susan S. Iseminger.......... -- -- 5,600 6,400 85,400 65,600
</TABLE>

37
<PAGE> 38

1994 STOCK OPTION PLAN

On May 18, 1994, the Board of Directors adopted, and the Company's then
current stockholders approved, the Piercing Pagoda, Inc. 1994 Stock Option Plan
(the "1994 Stock Option Plan"), the purpose of which is to recognize the
contributions made to the Company by its employees and certain consultants or
advisors, to provide these individuals with additional incentives to devote
themselves to the Company's future success, and to improve the Company's ability
to attract, retain and motivate individuals upon whom the Company's sustained
growth and financial success depend. The 1994 Stock Option Plan is also intended
as an additional incentive to directors of the Company who are not employees of
the Company to serve on the Board of Directors and to devote themselves to the
future success of the Company. Awards under the 1994 Stock Option Plan may be
made to all employees, directors, consultants or advisors of the Company.

The 1994 Stock Option Plan is administered by the Compensation Committee.
The aggregate maximum number of shares of Common Stock available for awards
under the 1994 Stock Option Plan is 600,000 shares (subject to adjustments to
reflect changes in the Company's capitalization and subject to stockholder
approval of the increase from 450,000 shares to 600,000 shares in May 1997).
Options granted under the 1994 Stock Option Plan may be either incentive stock
options ("ISOs") or non-qualified stock options. ISOs are intended to qualify as
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code. Unless an option is specifically designated at the time of grant
as an ISO, options under the 1994 Stock Option Plan will be non-qualified
options.

The exercise price of the options will be determined by the Board of
Directors or the Compensation Committee, although the exercise price of an ISO
will be at least 100% of the fair market value of a share of Common Stock on the
date the option is granted, or at least 110% of the fair market value of a share
of Common Stock on the date the option is granted if the recipient owns,
directly or by attribution under Section 424(d) of the Internal Revenue Code,
shares possessing more than 10% of the total combined voting power of all
classes of stock of the Company. No awards can be made under the 1994 Stock
Option Plan after May 17, 2004. The maximum term of an ISO granted under the
1994 Stock Option Plan shall not exceed ten years from the date of grant or five
years from the date of grant if the recipient on the date of grant owns,
directly or by attribution under Section 424(d) of the Internal Revenue Code,
shares possessing more than 10% of the total combined voting power of all
classes of stock of the Company.

The 1994 Stock Option Plan provides that each current member of the
Compensation Committee, which administers the 1994 Stock Option Plan with
respect to Options granted to persons who are "officers" under Rule 16a-1(f) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), will be
granted, on the later of June 1, 1994 or the date such person becomes a member
of the Compensation Committee (the "Initial Grant Date") and on each anniversary
of such person's Initial Grant Date during the term of the 1994 Stock Option
Plan, provided such person continues to serve as a member of the Compensation
Committee, non-qualified stock options to purchase 2,000 shares of Common Stock.
Each such option will become exercisable on the first anniversary of the date of
grant. The options will have an exercise price equal to 100% of the fair market
value of the shares of Common Stock on the date the options are granted.

As of May 7, 1997, the Company had granted options to purchase 426,700
shares of Common Stock at exercise prices ranging from $8.00 per share to $24.63
per share under the 1994 Stock Option Plan, of which 395,150 remained
outstanding as of such date, 150,550 of which were then exercisable.

1994 RESTRICTED STOCK PLAN

On March 31, 1994, the Board of Directors of the Company adopted, and the
Company's stockholders approved, the Piercing Pagoda, Inc. 1994 Restricted Stock
Plan (the "1994 Restricted Stock Plan"). The 1994 Restricted Stock Plan is
intended to recognize the contributions made to the Company by key employees,
members of the Board of Directors, consultants and advisors of the Company, to
provide such persons with additional incentive to devote themselves to the
future success of the Company, and to improve the ability of the Company to
attract, retain and motivate individuals

38
<PAGE> 39

upon whom the Company's sustained growth and financial success depend, by
providing such persons with an opportunity to acquire or increase their
proprietary interest in the Company through the transfer or issuance of shares
of the Company's Common Stock. The 1994 Restricted Stock Plan is administered by
the Compensation Committee. The aggregate maximum number of shares of Common
Stock available for awards under the 1994 Restricted Stock Plan is 224,330
shares (subject to adjustments to reflect changes in the Company's
capitalization). Awards under the 1994 Restricted Stock Plan may be made to all
employees, directors, consultants or advisors of the Company.

No stock award may be granted under the 1994 Restricted Stock Plan after
March 31, 2004. The purchase price, if any, applicable to any stock award will
be determined at the discretion of the Committee and will be specified in the
documentation of the stock award. All stock awards will be evidenced by a
document containing provisions consistent with the 1994 Restricted Stock Plan
and such other provisions as the Compensation Committee deems appropriate.
Notwithstanding any other provision of the 1994 Restricted Stock Plan, in the
event of a "Change of Control" of the Company, as defined in the 1994 Restricted
Stock Plan, the Compensation Committee may take whatever action it deems
necessary or desirable with respect to the stock awards. The restrictions, if
any, on stock awarded to employees and directors pursuant to a stock award under
the 1994 Restricted Stock Plan will lapse on a Change of Control.

As of May 7, 1997, the Company had issued an aggregate of 218,713 shares
under the 1994 Restricted Stock Plan.

1995 EMPLOYEE STOCK PURCHASE PLAN

On October 12, 1995, the Board of Directors of the Company adopted, and the
Company's stockholders approved, the Piercing Pagoda, Inc. Employee Stock
Purchase Plan (the "1995 Employee Stock Purchase Plan"). The purpose of the 1995
Employee Stock Purchase Plan is to assist the Company in retaining the
employment of employees by offering them a greater stake in the Company's
success and a closer identity with it, and to aid in obtaining the services of
individuals whose employment would be helpful to the Company and would
contribute to its success. The 1995 Employee Stock Purchase Plan is administered
by the Compensation Committee and is intended to comply with the provisions of
Section 423 of the Internal Revenue Code. An aggregate maximum of 96,000 shares
of Common Stock (subject to adjustments to reflect changes in the Company's
capitalization) are available for issuance under the 1995 Employee Stock
Purchase Plan. In addition, an employee may not purchase more than $25,000 worth
of Common Stock, and no more than an aggregate of 24,000 shares may be issued,
in any year under the 1995 Employee Stock Purchase Plan. Generally, any employee
of the Company who has been employed for more than 12 months is eligible to
participate, subject to certain exceptions, including if the employee owns, or
the issuance of any additional shares to him or her will cause the employee to
own, shares of Common Stock such that the employee has the power to vote five
percent or more of the Common Stock.

Employees participate in the 1995 Employee Stock Purchase Plan by utilizing
payroll deductions to purchase shares of Common Stock at a price equal to the
lower of 85% of the fair market value thereof on the first or last day of the
quarter in which the shares are purchased. The purchase price may be increased
but shall not exceed 100% of fair market value. Shares purchased under the 1995
Employee Stock Purchase Plan are generally restricted for a period of one year,
subject to certain exceptions. If an employee whose shares remain restricted is
terminated for a reason other than death, disability or retirement, the Company
may purchase his or her shares for the lesser of the then fair market value or
the price at which they were purchased. The 1995 Employee Stock Purchase Plan
terminates on December 31, 1999, unless earlier terminated by the Board of
Directors of the Company.

As of May 7, 1997, an aggregate of 9,757 shares had been purchased under
the 1995 Employee Stock Purchase Plan.

39
<PAGE> 40

ANNUAL INCENTIVE PLAN

The Company maintains an Annual Incentive Plan (the "Incentive Plan") to
provide incentive compensation opportunities, at the discretion of the Board of
Directors of the Company, to employees who have been selected to participate in
the Incentive Plan. Awards under the Incentive Plan are based on performance
measures over which the participating employee has some level of influence, as
well as the discretion of the Board. Mr. Clauser and Ms. Zondag are participants
in the Incentive Plan.

LIMITATION OF DIRECTORS' LIABILITY; INDEMNIFICATION

The Certificate of Incorporation limits the liability of its directors to
the full extent permitted by Delaware law. Delaware law provides that, if so
provided in the applicable certificate of incorporation, the directors of a
company will not be personally liable to such company or its stockholders for
monetary damages for breach of their fiduciary duties as directors, except for
liability for: (a) any breach of loyalty to the Company or its stockholders; (b)
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (c) unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the Delaware General
Corporation Law; or (d) any transaction from which the director derived an
improper personal benefit. The Certificate of Incorporation also provides that
the Company shall indemnify its directors and officers to the fullest extent
permitted by Delaware law.

40
<PAGE> 41

CERTAIN TRANSACTIONS

On March 30, 1994, the Company issued a subordinated note in the aggregate
principal amount of $7.0 million to its then current stockholders. Immediately
after the consummation of the Company's initial public offering in October 1994,
the $2.0 million principal amount of such notes plus accrued interest thereon of
approximately $313,000 was exchanged for 210,271 shares of Common Stock. $5.0
million of the net proceeds of the Company's initial public offering was used to
repay the remaining principal amount of such notes.

Prior to the Company's initial public offering, Mr. Penske had pledged the
shares of Common Stock he owned at that time to the Company's then primary
lender as security for the Company's obligations to such lender at such time.
The Company repaid a portion of the loans obtained from its then primary lender
from a portion of the net proceeds of its initial public offering, which
resulted in the release of the lender's security interest in the shares of the
Common Stock that Mr. Penske had pledged.

On March 31, 1994, pursuant to the 1994 Restricted Stock Plan, Messrs.
Eureyecko, Hoefer, Clauser, Randol and Ms. Zondag purchased 28,041, 16,824,
5,608, 5,608 and 13,459 shares of Common Stock, respectively, for $4.40 per
share and 56,081, 22,432, 22,432, 11,216 and 14,581 shares of Common Stock,
respectively, for $3.67 per share. All such shares were paid for by the
purchasers agreeing to pay the purchase price per share less approximately $1.78
per share on or before May 15, 1994 and by the application of a bonus payable by
the Company of approximately $1.78 per share. As of May 15, 1994 the purchasers
paid all amounts due. In connection with the bonuses paid by the Company and
applied to the purchase price for the shares purchased under the 1994 Restricted
Stock Plan, the Company loaned Messrs. Eureyecko, Clauser and Ms. Zondag
$50,100, $18,358 and $17,991, respectively, to pay their respective tax
withholding liabilities. All such loans were interest-free and were paid in full
on July 15, 1994.

Prior to the Company's initial public offering, the Company was an "S"
corporation for federal and certain state tax purposes. Historically, the
Company paid distributions to its stockholders to enable them to pay their
income tax liability as a result of the Company's status as an "S" corporation.
In connection with the Company's change in status, immediately prior to the
initial public offering, to a "C" corporation subject to corporate income
taxation, the Company entered into a Tax Indemnification Agreement (the "Tax
Indemnification Agreement") with the stockholders of the Company prior to its
initial public offering which provides for: (i) the distribution to Mr. Penske
of cash equal to the product of the Company's taxable income for fiscal 1994 and
the sum of the highest effective federal and state income tax rates applicable
to any current stockholder (or, in the case of stockholders that are trusts, any
beneficiary of such trust) (the "Applicable Tax Rate"), less any prior
distributions to him to pay taxes for such year end, plus the amount of Mr.
Penske's deferred taxes attributable to the Company's income for fiscal 1993
that were deferred pursuant to the Omnibus Budget Reconciliation Act of 1993;
(ii) the distribution to each stockholder of cash equal to the product of the
Company's taxable income allocable to the period from April 1, 1994 through
October 12, 1994 and the Applicable Tax Rate; and (iii) an indemnification of
such stockholders for any losses or liabilities with respect to any additional
taxes (including interest, penalties and legal fees) resulting from the
Company's operations during the period in which it was an "S" corporation. Mr.
Penske received $1,346,128 from the Company pursuant to the Tax Indemnification
Agreement during fiscal 1995, in addition to a distribution to him of $408,920
applicable to (i) above paid prior to the execution of such agreement. Messrs.
Penske, Eureyecko, Clauser and Ms. Zondag received $1,467,276, $39,464, $13,187
and $13,187, respectively, from the Company pursuant to the Tax Indemnification
Agreement during fiscal 1996. Messrs. Hoefer and Randol, the members of the
Compensation Committee of the Board of Directors, also received payments
pursuant to the Tax Indemnification Agreement in fiscal 1996. See
"Management -- Compensation Committee Interlocks and Insider Participation."

41
<PAGE> 42

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Common Stock as of April 30,
1997 and as adjusted to reflect the sale of the Common Stock offered hereby,
assuming no exercise of the Underwriters' over-allotment option, by (i) each
person known by the Company to be the beneficial owner of more than 5% of the
Company's outstanding Common Stock, (ii) Richard H. Penske, the Company's Chief
Executive Officer and Chairman of the Board, certain Penske family trusts, and a
charitable trust and foundation established by Mr. Penske (collectively, the
"Selling Stockholders"); (iii) each director of the Company, (iv) each Named
Officer and (v) all directors and Named Officers of the Company as a group.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES TO BE
OWNED BENEFICIALLY
PRIOR TO OWNED AFTER
OFFERING(1) OFFERING(1)
------------------- -------------------
BENEFICIAL OWNER NUMBER PERCENT SHARES BEING OFFERED NUMBER PERCENT
- --------------------------------------- --------- ------- -------------------- --------- -------
<S> <C> <C> <C> <C> <C>
Richard H. Penske(2)................... 3,323,174 63.0% 900,000 2,423,174 40.9%
Piercing Pagoda, Inc.
3910 Adler Place
Bethlehem, PA 18017
Penske Family Trusts(3)................ 406,176 7.7 109,623 296,553 5.0
Richard H. Penske Charitable
Trust(4)............................. 25,000 * 25,000 -- *
Richard and Patricia Penske
Foundation(4)........................ 5,000 * 5,000 -- *
John F. Eureyecko...................... 81,901 1.6 -- 81,901 1.4
Barry R. Clauser(5).................... 45,681 * -- 45,681 *
Sharon J. Zondag....................... 35,481 * -- 35,481 *
Susan S. Iseminger..................... 5,921 * -- 5,921 *
Alan R. Hoefer(6)...................... 63,556 1.2 -- 63,556 1.1
Mark A. Randol......................... 20,824 * -- 20,824 *
All directors and Named Officers as a
group (7 persons)(2)(5)(6)........... 3,576,538 67.8 900,000 2,676,538 45.2
</TABLE>

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

* Less than 1%.

(1) Each stockholder possesses sole voting and investment power with respect to
the shares listed, except as otherwise noted. Shares of Common Stock subject
to options that are exercisable within 60 days after the date of this
Prospectus are deemed beneficially owned by the person holding such options
for the purpose of computing the percentage of ownership of such person but
are not treated as outstanding for the purpose of computing the percentage
of any other person. Accordingly, the information in the above table
includes the following number of shares of Common Stock underlying options
held by the following individuals, and all directors and Named Officers as a
group, when computing the percentage ownership of such individual, director
or group: Mr. John F. Eureyecko, 25,000 shares; Mr. Barry R. Clauser and Ms.
Sharon J. Zondag, 17,000 shares each; Ms. Susan S. Iseminger, 5,600 shares;
Messrs. Alan R. Hoefer and Mark A. Randol, 4,000 shares each; and all
directors and Named Officers as a group, 72,600 shares.

(2) Includes an aggregate of 271,188 shares divided equally among four annuity
trusts (the "Annuity Trusts"). Mr. Penske is a beneficiary of two of the
Annuity Trusts and Mr. Penske's wife is a beneficiary of the other two.
Victoria L. Penske and Crislyn A. Penske, Mr. Penske's two oldest children,
are the trustees of the Annuity Trusts. An aggregate of 60,015 shares from
the Annuity Trusts is being sold in this offering. Also includes an
aggregate of 134,988 shares divided equally among four trusts (the
"Children's Trusts"), one for the benefit of each of Mr. Penske's four
children, of which Victoria L. Penske and Crislyn A. Penske are the
trustees. 12,402 shares from each of the Children's Trusts are being sold in
this offering. Also includes 25,000 shares and 5,000 shares held in the
Richard H. Penske Charitable Trust and the Richard and Patricia Penske
Foundation, respectively. 25,000 shares from the Richard H. Penske
Charitable Trust, and 5,000 shares from the Richard and Patricia Penske
Foundation, are being sold in this offering. Mr. Penske disclaims beneficial
ownership as to all of such shares.

42
<PAGE> 43

(3) Includes the Annuity Trusts and the Children's Trusts. See note 2 above.

(4) See note 2 above.

(5) Includes 200 shares held by Mr. Clauser as custodian for his children, as to
which shares he disclaims beneficial ownership.

(6) Includes 4,000 shares held by a trust for the benefit of one of Mr. Hoefer's
children of which he is the trustee, 300 shares held by his wife and 11,000
shares held by a charitable foundation of which Mr. Hoefer is a trustee, as
to all of which shares he disclaims beneficial ownership.

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 15,000,000 shares
of Common Stock, $.01 par value per share, and 3,000,000 shares of Preferred
Stock, $.01 par value per share.

The following summary description relating to the Company's capital stock
does not purport to be complete and is qualified in its entirety by reference to
the Certificate of Incorporation and By-laws, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part.

COMMON STOCK

Holders of Common Stock are entitled to cast one vote for each share on all
matters on which stockholders may vote, including the election of directors. The
holders of Common Stock are entitled to participate in cash dividends, pro rata
based on the number of shares held, when, as and if declared by the Board of
Directors out of funds legally available therefor, subject to any dividend
preference which may be attributable to Preferred Stock which may be authorized.
Such holders do not have any preemptive or other rights to subscribe for
additional shares. Subject to the rights of holders of Preferred Stock, if any,
all holders of Common Stock are entitled to share ratably in any assets
available for distribution to stockholders upon the liquidation, dissolution or
winding up of the Company. There are no conversion, redemption or sinking fund
provisions applicable to the Common Stock. All outstanding shares of Common
Stock are fully paid and nonassessable and the shares of Common Stock offered
hereby, when issued and paid for in accordance with the Underwriting Agreement,
will be fully paid and nonassessable. The rights, preferences and privileges of
holders of Common Stock will be subject to the rights of the holders of shares
of Preferred Stock that the Company may issue in the future.

PREFERRED STOCK

The Board of Directors has the authority to issue up to 3,000,000 shares of
Preferred Stock in one or more classes or series and may fix and determine the
relative rights, preferences and limitations of each class or series so
authorized. No shares of Preferred Stock have been issued.

The ability of the Board of Directors to issue Preferred Stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things, adversely affect the voting power
of the holders of the Common Stock or could have the effect of discouraging or
making more difficult any attempt by a person or group to obtain control of the
Company.

The creation and issuance of any class or series of Preferred Stock, and
the relative rights and preferences of such class or series, if and when
established, will depend upon, among other things, the future capital needs of
the Company, then existing market conditions and other factors that, in the
judgment of the Board of Directors of the Company, might warrant the issuance of
Preferred Stock. As of the date of this Prospectus, there are no plans,
agreements or understandings for the issuance of any shares of Preferred Stock.

DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS

Certain provisions of the Delaware General Corporation Law and of the
Certificate of Incorporation and By-laws, summarized in the following
paragraphs, may be deemed to have an anti-takeover

43
<PAGE> 44

effect and may delay, deter or prevent a tender offer or takeover attempt that a
stockholder might consider in his or her best interest, including those attempts
that might result in a premium over the market price for the shares held by
stockholders.

Delaware Anti-Takeover Law. The Company, a Delaware corporation, is
subject to the provisions of the General Corporation Law of the State of
Delaware, including Section 203, an anti-takeover law. In general, this law
prohibits a public Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which such person became an interested
stockholder unless: (i) prior to such date, the board of directors approves the
business combination; or (ii) upon becoming an interested stockholder, the
stockholder then owns at least 85% of the voting stock, as defined in Section
203; or (iii) subsequent to such date, the business combination is approved by
both the board of directors and the stockholders. "Business combination" is
defined to include mergers, asset sales and other similar transactions with an
"interested stockholder." An "interested stockholder" is defined as a person
who, together with affiliates and associates, owns (or, within the prior three
years, did own) 15% or more of the corporation's voting stock. Although Section
203 permits the Company to elect not to be governed by its provisions, the
Company to date has not made this election.

Classified Board of Directors. The By-laws provide for the Board of
Directors to be divided into three classes of directors serving staggered
three-year terms. As a result, approximately one-third of the Board of Directors
will be elected each year. Moreover, under the Delaware General Corporation Law,
in the case of a corporation having a classified Board of Directors,
stockholders may remove a director only for cause. This provision, when coupled
with the provision of the By-laws authorizing only the Board of Directors to
fill vacant directorships, will preclude a stockholder from removing incumbent
directors without cause and simultaneously gaining control of the Board of
Directors by filling the vacancies created by such removal with its own
nominees.

Special Meetings of Stockholders. The By-laws provide that special
meetings of stockholders of the Company may be called only by the Chief
Executive Officer or the Board of Directors of the Company. This provision will
make it more difficult for stockholders to take action opposed by the Board of
Directors.

Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The By-laws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual or a special meeting of stockholders, must provide
timely notice thereof in writing. To be timely, a stockholder's notice must be
delivered to, or mailed and received at, the principal executive offices of the
Company (i) in the case of an annual meeting that is called for a date that is
within 30 days before or after the anniversary date of the immediately preceding
annual meeting of stockholders, not less than 60 days nor more than 90 days
prior to such anniversary date, and (ii) in the case of an annual meeting that
is called for a date that is not within 30 days before or after the anniversary
date of the immediately preceding annual meeting, or in the case of a special
meeting of stockholders called for the purpose of electing directors, not later
than the close of business on the tenth day following the day on which notice of
the date of the meeting was mailed or public disclosure of the date of the
meeting was made, whichever occurs first. The By-laws also specify certain
requirements for a stockholder's notice to be in proper written form. These
provisions may preclude some stockholders from bringing matters before the
stockholders at an annual or special meeting or from making nominations for
directors at an annual or special meeting.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company, New York, New York.

44
<PAGE> 45

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have 5,933,620 shares of
Common Stock outstanding (or approximately 6,031,120 shares if the Underwriters'
over-allotment option is exercised in full), assuming no exercise of options
after the date of this Prospectus. Substantially all of these shares will be
freely transferable without restriction under the Securities Act or may
currently be sold in accordance with Rule 144 promulgated under the Securities
Act. In addition, the Company has registered or intends to register on
registration statements on Form S-8 a total of 920,330 shares of Common Stock
reserved for issuance under the 1994 Stock Option Plan, the 1994 Restricted
Stock Plan and the 1995 Employee Stock Purchase Plan, of which an aggregate of
266,546 shares had been issued as of the date of this Prospectus. The remaining
653,784 shares, when and if issued, would be freely tradeable (unless acquired
by an affiliate of the Company, in which case they would be subject to volume
and other limitations under Rule 144).

The Company, each of the Selling Stockholders and each of the Company's
executive officers, directors and key personnel listed under
"Management -- Executive Officers, Directors and Key Employees" have entered
into agreements with the Underwriters pursuant to which they have agreed not to
sell, offer to sell, contract to sell or otherwise dispose of any shares of
Common Stock owned or controlled by them (except for sales described in or
contemplated by this Prospectus) for a period of 180 days (90 days as to all
such persons other than the Company and the Selling Stockholders) after the date
of this Prospectus without the prior written consent of Robertson, Stephens &
Company, subject to certain limited exceptions. Upon expiration of the lock-up
period, these shares will be eligible for immediate sale, subject, in the case
of affiliates, to volume and other limitations under Rule 144. See
"Underwriting."

Generally, shares of Common Stock that have not been registered under the
Securities Act or that are held by affiliates of the Company (whether or not
registered) are deemed "restricted" securities under Rule 144. In general, under
Rule 144 as currently in effect, a person (or persons whose shares are
aggregated) who has beneficially owned "restricted" shares for at least one
year, including a person who may be deemed an affiliate of the Company, is
entitled to sell within any three-month period a number of shares of Common
Stock that does not exceed the greater of one percent of the then outstanding
shares of Common Stock of the Company (approximately 59,336 shares after giving
effect to this offering) or the average weekly trading volume of the Common
Stock as reported through the Nasdaq National Market during the four calendar
weeks preceding such sale. Sales under Rule 144 are also subject to certain
restrictions relating to manner of sale, notice and the availability of current
public information about the Company. In addition, under Rule 144(k) of the
Securities Act, a person who is not an affiliate of the Company at any time
within 90 days preceding a sale, and who has beneficially owned shares for at
least two years, is entitled to sell such shares without regard to the volume
limitations, manner of sale provisions or notice or other requirements of Rule
144.

The effect, if any, that shares eligible for market sale will have on the
market price of Common Stock prevailing from time to time cannot be determined.
Nevertheless, sales of substantial amounts of shares of Common Stock in the
public market could adversely affect the market price of the Common Stock. See
"Risk Factors -- Shares Eligible for Future Sale."

45
<PAGE> 46

UNDERWRITING

The Underwriters named below acting through their representatives,
Robertson, Stephens & Company LLC, Wheat, First Securities, Inc., Furman Selz
LLC and Parker/Hunter Incorporated (the "Representatives"), have severally
agreed with the Company and the Selling Stockholders, subject to the terms and
conditions of the Underwriting Agreement, to purchase from the Company and the
Selling Stockholders the numbers of shares of Common Stock set forth opposite
their names below. The Underwriters are committed to purchase and pay for all of
such shares if any are purchased.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
------------------------------------------------------------------------- ---------
<S> <C>
Robertson, Stephens & Company LLC........................................ 524,000
Wheat, First Securities, Inc............................................. 393,000
Furman Selz LLC.......................................................... 196,500
Parker/Hunter Incorporated............................................... 196,500
NatWest Securities Corporation........................................... 80,000
Janney Montgomery Scott Inc.............................................. 80,000
Southcoast Capital Corp.................................................. 80,000
---------
Total.......................................................... 1,550,000
=========
</TABLE>

The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the price set forth
on the cover page of this Prospectus and to certain dealers at such price less a
concession of not more than $.78 per share, of which $.10 may be reallowed to
other dealers. After the public offering, the public offering price, concession
and reallowance to dealers may be reduced by the Representatives. No such
reduction shall change the amount of proceeds to be received by the Company as
set forth on the cover page of the Prospectus.

The Company and the Selling Stockholders have granted to the Underwriters
an option, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to 232,500 additional shares of Common Stock at the
same price per share as the Company and the Selling Stockholders will receive
for the 1,550,000 shares that the Underwriters have agreed to purchase. To the
extent that the Underwriters exercise such option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage of such
additional shares that the number of shares of Common Stock to be purchased by
it shown in the above table represents as a percentage of the 1,550,000 shares
offered hereby. If purchased, such additional shares will be sold by the
Underwriters on the same terms as those on which the 1,550,000 shares are being
sold.

The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Stockholders against certain civil
liabilities, including liabilities under the Securities Act.

Each of the Selling Stockholders and each of the Company's executive
officers, directors and key personnel listed under "Management -- Executive
Officers, Directors and Key Employees" have agreed with the Representatives for
a period of 180 days (90 days as to all such persons other than the Selling
Stockholders) from the date of this Prospectus not to offer to sell, contract to
sell, or otherwise sell, dispose of, loan, pledge or grant any rights with
respect to any shares of Common Stock, any options or warrants to purchase any
shares of Common Stock, or any securities convertible into or exchangeable for
shares of Common Stock, now owned or hereafter acquired directly by such holders
or with respect to which such holders have or hereinafter acquire the power of
disposition without the prior written consent of Robertson, Stephens & Company
LLC, which may, in its sole discretion and at any time or from time to time,
without notice, release all or any portion of the shares subject to the lock-up
agreements, subject to certain limited exceptions. In addition, the Company has
agreed that during the period of 180 days from the date of the Prospectus, it
will not, without the prior written consent of Robertson, Stephens & Company
LLC, issue, sell, contract to sell or otherwise dispose of any shares of Common
Stock, any options or warrants to purchase any shares of Common Stock or any
securities convertible into, exercisable for or exchangeable for shares of
Common Stock other than the issuance of Common Stock upon the exercise of
outstanding options, under the 1994 Restricted Stock Plan and under the 1995
Employee Stock Purchase Plan, and the Company's issuance of options under the
1994 Stock Option Plan.

46
<PAGE> 47

The offering price of the Common Stock has been determined by negotiations
among the Company and the Representatives, based largely upon the market price
for the Common Stock as reported on the Nasdaq National Market.

In connection with this offering, certain Underwriters and selling group
members (if any) who are qualified market makers on the Nasdaq Stock Market may
engage in passive market making transactions in the Common Stock on the Nasdaq
Stock Market in accordance with Rule 103 of Regulation M under the Exchange Act
during the business day prior to the pricing of the offering before the
commencement of offers or sales of the Common Stock. Passive market makers must
comply with applicable volume and price limitations and must be identified as
such. In general, a passive market maker must display its bid at a price not in
excess of the highest independent bid for such security; if all independent bids
are lowered below the passive market maker's bid, however, such bid must then be
lowered when certain purchase limits are exceeded.

Certain persons participating in this offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids or effecting syndicate covering
transactions. A stabilizing bid means the placing of any bid or effecting of any
purchase, for the purpose of pegging, fixing or maintaining the price of the
Common Stock. A syndicate covering transaction means the placing of any bid on
behalf of the underwriting syndicate or the effecting of any purchase to reduce
a short position created in connection with the offering. Such transactions may
be effected on the Nasdaq Stock Market, in the over-the-counter market, or
otherwise. Such stabilizing, if commenced, may be discontinued at any time.

LEGAL MATTERS

Wolf, Block, Schorr and Solis-Cohen, Philadelphia, Pennsylvania, counsel to
the Company, will render an opinion that the Common Stock offered by the Company
hereby, when issued and paid for pursuant to the terms of the Underwriting
Agreement, will be, and that the Common Stock offered by the Selling
Stockholders hereby, is, legally issued, fully paid and non-assessable. Certain
legal matters in connection with the offering will be passed upon for the
Underwriters by Sidley & Austin, Chicago, Illinois.

EXPERTS

The audited Consolidated Financial Statements for the Company as of March
31, 1996 and 1997, and for each of the years in the three-year period ended
March 31, 1997, have been included herein in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
herein and upon the authority of such firm as experts in accounting and
auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act with
respect to the Common Stock offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement, certain portions of
which have been omitted as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock, reference is made to the Registration Statement, including the exhibits
and schedules thereto. Statements contained in this Prospectus as to the
contents of any contract, agreement or any other document referred to herein are
not necessarily complete; with respect to each such contract, agreement or
document filed as an exhibit to the Registration Statement, reference is made to
such exhibit for a more complete description of the matters involved, and each
such statement shall be deemed qualified in its entirety by such reference. The
Registration Statement, including the exhibits and schedules thereto, may be
inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's regional offices located
at Seven World Trade Center, 13th Floor, New York, New York 10048, and Citicorp
Center, 500 West Madison Street,

47
<PAGE> 48

Chicago, Illinois 60661. The Registration Statement, including the exhibits and
schedules thereto, is also available on the Commission's website at
http://www.sec.gov.

The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy material and other
information concerning the Company can be inspected and copied at prescribed
rates at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
its regional offices at Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New York
10048. Copies of reports, proxy and information statements and other information
are available on the Commission's website at http://www.sec.gov.

48
<PAGE> 49

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditor's Report.......................................................... F-2
Consolidated Balance Sheets at March 31, 1996 and 1997................................ F-3
Consolidated Statements of Income for the Years ended March 31, 1995, 1996 and 1997... F-4
Consolidated Statements of Changes in Stockholders' Equity for the Years ended March
31, 1995, 1996 and 1997............................................................. F-5
Consolidated Statements of Cash Flows for the Years ended March 31, 1995, 1996 and
1997................................................................................ F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>

F-1
<PAGE> 50

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Piercing Pagoda, Inc.:

We have audited the accompanying consolidated balance sheets of Piercing
Pagoda, Inc. and subsidiary as of March 31, 1996 and 1997 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended March 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Piercing
Pagoda, Inc. and subsidiary as of March 31, 1996 and 1997 and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 1997, in conformity with generally accepted accounting
principles.

KPMG Peat Marwick LLP

Allentown, Pennsylvania
May 5, 1997

F-2
<PAGE> 51

PIERCING PAGODA, INC.

CONSOLIDATED BALANCE SHEETS
MARCH 31,
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash..................................................................... $ 1,864 $ 4,119
Accounts receivable...................................................... 794 2,233
Inventory................................................................ 25,390 43,109
Deposits for inventory purchases......................................... 361 850
Prepaid expenses and other current assets................................ 468 757
Prepaid income taxes..................................................... 883 1,494
Deferred tax assets...................................................... 693 1,530
------- -------
Total current assets............................................. 30,453 54,092
------- -------
Property, fixtures and equipment, net...................................... 15,806 22,572
Other assets............................................................... 1,647 3,077
------- -------
Total assets..................................................... $47,906 $79,741
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable........................................................... $ 1,811 $ 3,668
Current installments of long-term debt and revolving line of credit........ 5,910 234
Accrued expenses and other current liabilities............................. 6,784 9,541
------- -------
Total current liabilities........................................ 14,505 13,443
------- -------
Long-term debt, less current installments.................................. 2,350 26,690
Deferred tax liabilities................................................... 1,259 1,550
Other liabilities.......................................................... 213 536
------- -------
Total liabilities................................................ 18,327 42,219
------- -------
Commitments and contingencies
Stockholders' equity
Preferred stock, par value $.01 per share, authorized 3,000,000 shares.
None issued........................................................... -- --
Common stock, par value $.01 per share, authorized 15,000,000 shares.
Issued 5,240,293 and 5,273,994 shares at March 31, 1996 and 1997,
respectively.......................................................... 53 53
Additional paid-in capital............................................... 22,183 22,588
Retained earnings........................................................ 7,343 14,881
------- -------
Total stockholders' equity....................................... 29,579 37,522
------- -------
$47,906 $79,741
======= =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE> 52

PIERCING PAGODA, INC.

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Net sales....................................................... $86,076 $121,581 $166,885
Cost of goods sold and occupancy expenses (excluding
depreciation on kiosks)....................................... 48,069 67,440 92,308
------- -------- --------
Gross profit.................................................... 38,007 54,141 74,577
Selling, general and administrative expenses (including
depreciation on kiosks)....................................... 30,007 43,887 60,845
------- -------- --------
Income from operations.......................................... 8,000 10,254 13,732
Interest and other income....................................... 307 282 386
Interest expense................................................ 1,427 1,306 2,208
------- -------- --------
Earnings before income taxes.................................... 6,880 9,230 11,910
Income taxes.................................................... 3,352 3,553 4,372
------- -------- --------
Net income............................................ $ 3,528 $ 5,677 $ 7,538
======= ======== ========
Earnings per share.............................................. $ 1.07 $ 1.40
Weighted average common and equivalent shares outstanding....... 5,325 5,389
PRO FORMA DATA (UNAUDITED):
Earnings before income taxes, as reported..................... $ 6,880
Pro forma income taxes........................................ 2,724
-------
Pro forma net income.......................................... $ 4,156
=======
Pro forma net income per share................................ $ 0.91
Pro forma weighted average shares outstanding................. 4,558
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE> 53

PIERCING PAGODA, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31,
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
------------------ PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
--------- ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance -- March 31, 1994.................... 3,420,516 $ 34 $ 4,118 ($1,817) $ 2,335
Issuance of restricted stock................. 5,000 -- 39 -- 39
Cash dividends declared...................... -- -- -- (45) (45)
Initial public offering...................... 1,810,271 19 17,984 -- 18,003
Share transactions under stock option plan... 300 -- 2 -- 2
Net income................................... -- -- -- 3,528 3,528
--------- ------ ---------- -------- -------
Balance -- March 31, 1995.................... 5,236,087 53 22,143 1,666 23,862
Share transactions under employee stock
plans...................................... 4,206 -- 40 -- 40
Net income................................... -- -- -- 5,677 5,677
--------- ------ ---------- -------- -------
Balance -- March 31, 1996.................... 5,240,293 53 22,183 7,343 29,579
Share transactions under employee stock
plans, including tax benefit............... 33,701 -- 405 -- 405
Net income................................... -- -- -- 7,538 7,538
--------- ------ ---------- -------- -------
Balance -- March 31, 1997.................... 5,273,994 $ 53 $ 22,588 $14,881 $37,522
======== ======= ========= ======== =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE> 54

PIERCING PAGODA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31,
(IN THOUSANDS)

<TABLE>
<CAPTION>
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................................. $ 3,528 $ 5,677 $ 7,538
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization....................................... 1,770 2,639 3,636
Loss on disposal of property, fixtures and equipment................ 23 49 93
Addition to deferred tax liabilities upon conversion to "C"
corporation........................................................ 441 -- --
Common stock issued for interest expense on note to shareholders.... 312 -- --
Other changes in other assets....................................... 76 (61) (97)
Deferred income taxes............................................... (88) 168 335
Change in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable.............................................. (645) 329 (1,428)
Inventory........................................................ (2,715) (10,262) (12,951)
Deposits for inventory purchases................................. 638 (11) (489)
Prepaid expenses and other current assets........................ (90) (23) (289)
Prepaid income taxes............................................. -- (883) (514)
Accounts payable................................................. (922) 558 1,857
Accrued expenses and other current liabilities................... 321 2,488 2,697
Tax indemnification payable...................................... 1,530 (1,530) --
Other liabilities................................................ 80 12 72
------- -------- --------
Net cash provided by (used in) operating activities.............. 4,259 (850) 460
------- -------- --------
Cash flows from investing activities:
Additions to property, fixtures and equipment........................... (3,469) (7,175) (9,724)
Payments for purchase of businesses..................................... (652) (1,150) (8,010)
Proceeds from disposal of property, fixtures and equipment.............. 59 -- 22
Return of (addition to) deposit with Internal Revenue Service........... (434) 797 --
Noncurrent deposits, net................................................ 17 (251) 319
Collection of notes receivable from stockholders........................ 472 -- --
Collection of notes receivable from licensee............................ 78 75 255
------- -------- --------
Net cash used in investing activities............................ (3,929) (7,704) (17,138)
------- -------- --------
Cash flows from financing activities:
Repayments of long-term debt............................................ (6,104) -- (216)
Revolving line of credit, net........................................... (3,217) 5,720 18,480
Proceeds from issuance of long-term debt................................ -- 2,540 400
Debt issuance fees paid................................................. -- (157) (39)
Proceeds from issuance of common stock, net............................. 15,723 -- --
Payment of stockholders' note payable................................... (5,000) -- --
Net proceeds from the issuance of stock under employee share plans...... -- 40 308
Cash dividends paid..................................................... (1,755) (45) --
------- -------- --------
Net cash provided by (used in) financing activities.............. (353) 8,098 18,933
------- -------- --------
Net increase (decrease) in cash.................................. (23) (456) 2,255
Cash at beginning of period............................................... 2,343 2,320 1,864
------- -------- --------
Cash at end of period..................................................... $ 2,320 $ 1,864 $ 4,119
======= ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest......................................................... $ 1,427 $ 1,220 $ 2,100
======= ======== ========
Income taxes, net................................................ $ 1,404 $ 5,818 $ 4,551
======= ======== ========
</TABLE>

Supplemental disclosure of non-cash financing and investing activities:

During the year ended March 31, 1995, the Company exchanged of 210,271
shares of common stock in partial satisfaction of obligations under a $7,000,000
note payable to stockholders.

During the year ended March 31, 1997, the Company entered into a
noncompetition agreement for $300,000.

See accompanying notes to consolidated financial statements.

F-6
<PAGE> 55

PIERCING PAGODA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995, 1996 AND 1997

(1) STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

Operations

The Company is a national retailer of gold jewelry primarily through kiosk
stores in enclosed shopping malls. The Company operates stores primarily under
the names Piercing Pagoda and Plumb Gold. At March 31, 1997, the Company
operated 682 stores, including 24 in-line stores. The Company's home office
provides centralized administrative and warehousing services and assembles some
of the products sold at its stores.

In addition to its own retail units, the Company has licensed operations at
16 stores and one retail cart location in Florida. The Company provides the
licensee with merchandise and promotional and administrative services. Income
from licensee operations is based on a percentage of the licensee's sales and
earnings from the sale of merchandise to the licensee. See Note 13.

Sales

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

Accounts Receivable

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

Inventory and Cost of Goods Sold

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

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

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

F-7
<PAGE> 56

PIERCING PAGODA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In fiscal 1995, one vendor accounted for approximately 14% of total
merchandise purchased by the Company. No vendors supplied more than 10% of
purchases in fiscal 1996. In fiscal 1997, two vendors accounted for
approximately 11% and 10%, respectively, of total merchandise purchased by the
Company.

Property, Fixtures and Equipment

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

<TABLE>
<S> <C>
Depreciable lives are as follows:
Furniture and fixtures.................................................. 3-10 years
Building and improvements............................................... 10-39 years
Kiosks.................................................................. 8-10 years
Computer equipment, software and other equipment........................ 5-7 years
</TABLE>

Substantially all depreciation expense, including depreciation on kiosks,
is included in selling, general and administrative expense rather than occupancy
expense, since the Company believes that the primary function of its kiosks is
to display merchandise for sale. Depreciation expense for kiosks was $994,000,
$1,338,000 and $1,890,000 in fiscal 1995, fiscal 1996 and fiscal 1997,
respectively.

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

Goodwill

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

Leasing Expenses

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

Preopening Costs and Advertising Expense

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

Income Taxes

The Company records income taxes according to the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes,
which requires the use of the liability method of accounting for deferred income
taxes. The provision for income taxes includes federal, state, and local income
taxes currently payable and those deferred because of temporary differences
between the financial statement and tax basis of assets and liabilities.
Deferred income taxes are recorded at the enacted rates expected to apply to
taxable income in the periods in which the

F-8
<PAGE> 57

PIERCING PAGODA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

deferred tax liability or asset is expected to be settled or realized. The
effect of a change in tax rate is recognized as income or expense in the period
that includes the enactment date.

Prior to the completion of the Company's initial public offering in October
1994, the Company was taxed as an "S" corporation under the provisions of the
Internal Revenue Code. As such, the Company's taxable federal income was
included in the individual income tax returns of its stockholders. The Company
was also taxed as an "S" corporation in some states while remaining a taxable
corporation in others. Immediately prior to the consummation of the Company's
initial public offering, the Company's "S" corporation status terminated and the
Company became a "C" corporation subject to income taxes in all jurisdictions.
Pro forma income tax expense reflects the income tax expense the Company would
have recognized had it been taxed as a "C" corporation for all of fiscal year
1995.

Stock Option Plan

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

Use of Estimates

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

Net Income Per Share

Net income per share has been computed by dividing net income by the
weighted average number of common shares and common share equivalents
outstanding using the treasury stock method.

Pro Forma Net Income Per Share (Unaudited)

Pro forma net income per share has been computed by dividing pro forma net
income by the weighted average number of common shares and common share
equivalents outstanding during the year ended March 31, 1995, as adjusted to
give effect to the sale of 218,713 shares of restricted stock in March 1994, the
sale of 5,000 shares of restricted stock in June of 1994, the issuance of
454,545 shares at the initial public offering price to repay $5,000,000 of a
$7,000,000 note to the Company's primary stockholder and trusts for the benefit
of his children, and the issuance in June of 1994 of options for 221,000 shares
of common stock, using the treasury stock method at the average market price
(after the initial public offering) and the initial public offering price per
share (prior to the initial public offering), respectively.

F-9
<PAGE> 58

PIERCING PAGODA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Recent Accounting Pronouncement

In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings per Share ("SFAS No. 128"). This statement establishes standards
for computing and presenting earnings per share ("EPS") and simplifies the
standards for computing EPS previously found in APB Opinion No. 15, Earnings per
Share. It replaces the presentation of primary earnings per share with the
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures. The Company is required to adopt SFAS No. 128 during the
quarter ended December 31, 1997. The Company has not completed its evaluation of
the potential impact of the new standard on EPS. However, based on equity
instruments currently outstanding under existing stock compensations plans, the
new standard is not expected to have a material impact on the Company's EPS.

(2) INITIAL PUBLIC OFFERING

On October 20, 1994, the Company completed an initial public offering of
1,600,000 shares of its common stock. The transaction resulted in net proceeds
(after offering expenses) to the Company of approximately $15.7 million which
was used to repay certain indebtedness of the Company including a portion of a
note to certain stockholders representing undistributed "S" corporation
earnings.

(3) GOLD CONSIGNMENT AGREEMENTS

In connection with the acquisition of certain inventory, the Company
maintains gold consignment agreements. In accordance with these consignment
agreements, title to the gold remains with the gold consignors until purchased
by the Company. At March 31, 1995, 1996 and 1997, the Company had consigned
35,000, 54,500 and 88,300 ounces of gold, respectively, with values of
$13,720,000, $21,601,000 and $30,749,000, respectively. The purchase price per
ounce is based on the Second London Gold Fixing. This gold was generally in the
form of merchandise for sale held by the Company at its offices or in its
stores. Consigned gold is not included in inventory, and there is no related
liability recognized.

Included in interest expense for the years ended March 31, 1995, 1996 and
1997 are consignment fees of $261,000, $394,000 and $620,000, respectively,
based on approximately 2.28%, 2.31% and 2.45%, respectively, of the value of
consigned gold. The fee rates are adjusted periodically by the consignors upon
giving seven to thirty days advance notice to the Company. The gold financing
arrangements could be terminated by either the Company or the lender on 30 or 45
days notice, depending on the consignor.

(4) PROPERTY, FIXTURES AND EQUIPMENT

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

<TABLE>
<CAPTION>
MARCH 31,
-------------------
1996 1997
------- -------
<S> <C> <C>
Land............................................................. $ 688 $ 688
Furniture and fixtures........................................... 2,077 3,054
Kiosks........................................................... 13,908 19,832
Building and improvements........................................ 3,822 4,037
Computer equipment, software and other equipment................. 5,130 7,396
------- -------
25,625 35,007
Less accumulated depreciation and amortization................... 9,819 12,435
------- -------
$15,806 $22,572
======= =======
</TABLE>

F-10
<PAGE> 59

PIERCING PAGODA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(5) OTHER ASSETS

Other assets are summarized as follows (in thousands):

<TABLE>
<CAPTION>
MARCH 31,
-----------------
1996 1997
------ ------
<S> <C> <C>
Notes receivable -- licensee....................................... $ 283 $ 28
Noncurrent deposits, principally for leases, property, fixtures and
equipment........................................................ 435 116
Goodwill (net of accumulated amortization of $130 and $237 at March
31, 1996 and 1997, respectively)................................. 314 1,907
Deferred expenses, principally long-term maintenance agreements.... 333 394
Cash surrender value of officers life insurance.................... 282 342
Non-compete agreement (net of accumulated amortization of $10)..... -- 290
------ ------
$1,647 $3,077
====== ======
</TABLE>

The Company's notes receivable from its licensee in Florida are summarized
as follows (in thousands):

<TABLE>
<CAPTION>
MARCH 31,
-------------
1996 1997
---- ----
<S> <C> <C>
Note receivable, repaid in fiscal 1997................................ $263 $ --
Non-interest bearing royalty note receivable due in yearly
installments of $32................................................. 96 60
---- ----
359 60
Less current installments included in other current assets............ 76 32
---- ----
$283 $ 28
==== ====
</TABLE>

Included in accounts receivable at March 31, 1996 and 1997 are $337,000 and
$199,000, respectively, from the sale of merchandise and other supplies to the
licensee, and additionally, at March 31, 1997, $137,000 from the sale of one of
the Company's Florida locations to the licensee.

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

During the year ended March 31, 1995, the Company acquired 13 kiosks and
related operating locations and assumed related leases in three separate
transactions with unrelated third parties for a total of $652,000. The excess of
the net assets acquired over their fair market values has been recorded as
goodwill.

F-11
<PAGE> 60

PIERCING PAGODA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(6) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities are summarized as follow (in
thousands):

<TABLE>
<CAPTION>
MARCH 31,
---------------
1996 1997
------ ------
<S> <C> <C>
Accrued payroll, vacation and related taxes.......................... $3,011 $4,160
Sales tax payable.................................................... 543 704
Accrued rents payable................................................ 661 1,091
Liability under jewelry club program................................. 376 747
Liability under lifetime guarantee program........................... 671 1,211
Other accrued expenses............................................... 1,522 1,628
------ ------
$6,784 $9,541
====== ======
</TABLE>

(7) LONG-TERM DEBT AND REVOLVING LINE OF CREDIT

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

<TABLE>
<CAPTION>
MARCH 31,
----------------
1996 1997
------ -------
<S> <C> <C>
Revolving line of credit............................................ $5,720 $24,200
Industrial development authority financing.......................... 2,540 2,724
------ -------
Total long-term debt................................................ 8,260 26,924
Less current installments........................................... 5,910 234
------ -------
$2,350 $26,690
====== =======
</TABLE>

During fiscal 1997, the Company renegotiated its existing unsecured
revolving line of credit with its primary lender acting as agent for a syndicate
of banks. The new facility, which expires July 31, 2000, provides for maximum
borrowings of $75 million through a combination of cash advances (which may not
exceed $45 million) or letters of credit (which may not exceed $55 million) to
support the Company's gold consignment financing program. Amounts borrowed under
the facility generally accrue interest at the higher of the rates designated by
the Company's primary lender at its prime rate minus 100 basis points (7.5% at
March 31, 1997) and a rate based on the rates charged on overnight federal funds
transactions with Federal Reserve System members plus 50 basis points (5.9% at
March 31, 1997). However, the Company may elect to have all or any portion of
the outstanding balance under the facility accrue interest at a rate based on
one, two, three or six month LIBOR plus 110 basis points (6.79% at March 31,
1997 for a one-month maturity), subject to certain restrictions. Outstanding
letters of credit incur a fee charged at an annual rate of 0.75%. At March 31,
1997, the Company had $19.0 million available for cash borrowings under this
revolving credit facility. Letters of credit in the amounts of $21,988,000 and
$31,762,000 were issued at March 31, 1996 and 1997, respectively.

The loan agreement contains various covenants which, among other things,
limit certain corporate acts of the Company such as mergers and acquisitions;
requires the Company to maintain minimum ratios of indebtedness to equity,
current assets to current liabilities and cash flow (as defined) to debt
service; places limitations on the Company's ability to incur additional debt or
grant security interests in its assets and restricts the redemption, purchase or
retirement of its capital stock. The Company was in compliance with these
covenants as of March 31, 1997.

F-12
<PAGE> 61

PIERCING PAGODA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
MARCH 31,
------------------------------
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
Borrowings at period end............................... $ -- $ 5,720 $24,200
Interest rate on borrowings at period end.............. 9.00% 7.50% 7.50%
Maximum amount of borrowings outstanding at any month
end.................................................. $9,143 $20,360 $28,789
Average aggregate borrowings during the period......... $4,367 $ 8,051 $14,823
Weighted average interest rate during the period....... 8.35% 7.99% 7.50%
</TABLE>

In October 1995, the Company obtained a $2,540,000, ten-year term loan
through an industrial development authority. The loan is collateralized by a
letter of credit totaling $2,637,000 which is supported by a lien on the
Company's corporate headquarters and distribution center which has a net
carrying value of approximately $3.1 million at March 31, 1997. The terms of the
loan require semiannual interest payments at varying interest rates averaging
6.8% over the life of the loan. Principal payments, in varying amounts, are
required annually.

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

Maturities of the term loans are as follows at March 31, 1997 (in
thousands):

<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
1998....................................................................... $ 234
1999....................................................................... 250
2000....................................................................... 262
2001....................................................................... 278
2002....................................................................... 295
Subsequent to 2002......................................................... 1,405
------
Total payments................................................... $2,724
======
</TABLE>

(8) LEASES

The Company leases space primarily in shopping malls under operating leases
expiring in various years through fiscal 2005. In the normal course of business,
operating leases are generally renewed or replaced by other leases; thus, it is
anticipated that future annual lease expense will not be less than the amount
shown below for fiscal 1997. Generally, the leases also contain provisions for
contingent rental payments of approximately 10% of gross sales in excess of
specified amounts.

F-13
<PAGE> 62

PIERCING PAGODA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Minimum future rental payments as of March 31, 1997 under non-cancelable
operating leases having original terms in excess of one year are as follows (in
thousands):

<TABLE>
<CAPTION>
AMOUNT
-------
<S> <C>
1998....................................................................... $17,343
1999....................................................................... 13,442
2000....................................................................... 10,408
2001....................................................................... 6,056
2002....................................................................... 2,138
Subsequent to 2002......................................................... 951
-------
Total rental payments............................................ $50,338
=======
</TABLE>

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

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
Minimum rentals............................................ $9,201 $12,643 $17,292
Contingent rentals......................................... 763 1,191 1,498
------ ------- -------
Total rental expense............................. $9,964 $13,834 $18,790
====== ======= =======
</TABLE>

(9) EMPLOYEE BENEFIT PLANS

The Company has a defined contribution plan for Company employees who are
at least 21 years of age and have worked at least 1,000 hours in the past year.
The plan consists of a profit sharing fund and a 401(k) fund. Annual
contributions to the profit sharing fund are determined at the discretion of
management. Total contributions to this fund were $120,000, $220,000 and
$300,000 in fiscal 1995, fiscal 1996 and fiscal 1997, respectively.

The Company provides a matching contribution provision to the Company's
401(k) fund. The matching rate for Company contributions is $.50 per dollar
contributed by the employee up to 4% of the employee's income. The Company's
matching contributions totaled $42,000 in fiscal 1995, $107,000 in fiscal 1996,
and $181,000 in fiscal 1997. These matching contributions are 100% vested at the
time they are made.

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

(10) INCOME TAXES

For tax return purposes, taxable income for the year ended March 31, 1995
has been allocated to the periods the Company was either an "S" corporation or a
"C" corporation under the provisions of the Internal Revenue Code.

For financial statement purposes, income tax expense for the year ended
March 31, 1995 includes the state tax expense for certain states in which the
Company did not elect "S" corporation status prior to the initial public
offering, a one-time deferred tax charge for conversion from "S" corporation to
"C" corporation status for federal and certain state purposes (see below), and
the current and deferred taxes applicable to the Company's income for financial
reporting purposes for the period after the initial public offering. Due to the
allocation method utilized for tax return purposes, tax expense for the post "S"
corporation period includes taxes payable to taxing authorities and payments to

F-14
<PAGE> 63

PIERCING PAGODA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

certain of the Company's stockholders pursuant to a tax indemnification
agreement between the Company and such stockholders. See Note 14.

Income taxes in the consolidated statements of income consists of the
following components (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Current tax expense:
Payable to taxing authorities:
Federal................................................. $1,065 $2,877 $3,703
State................................................... 404 508 334
Payable under tax indemnification agreement................ 1,530 -- --
------ ------ ------
2,999 3,385 4,037
------ ------ ------
Deferred tax expense:
Conversion from "S" to "C" corporation..................... 441 -- --
Other:
Federal................................................. (55) 133 251
State................................................... (33) 35 84
------ ------ ------
353 168 335
------ ------ ------
$3,352 $3,553 $4,372
====== ====== ======
</TABLE>

As a result of the conversion from an "S" corporation to a "C" corporation,
the provision for income taxes for the year ended March 31, 1995 includes a
one-time charge totaling $441,000 for the addition to deferred tax liabilities
reflecting certain differences between book and tax accounting for depreciation,
inventory and certain accrued expenses.

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

<TABLE>
<CAPTION>
MARCH 31,
-----------------
1996 1997
------- -------
<S> <C> <C>
Deferred tax liabilities:
Excess of tax over book depreciation............................. $(1,378) $(1,754)
Inventory........................................................ (158) --
------- -------
Total gross deferred tax liabilities..................... (1,536) (1,754)
------- -------
Deferred tax assets:
Inventory........................................................ -- 129
Accrual for lifetime guarantee costs............................. 265 484
Accrued vacation expense......................................... 238 381
Accrual for jewelry club costs................................... 149 298
Other............................................................ 318 442
------- -------
Total gross deferred tax assets.......................... 970 1,734
Less valuation allowance........................................... -- --
------- -------
Net deferred tax assets............................................ 970 1,734
------- -------
Net deferred tax liability......................................... $ (566) $ (20)
======= =======
</TABLE>

Based upon the Company's current and historical taxable history and the
anticipated level of future taxable income, management of the Company believes
the existing deductible differences will,

F-15
<PAGE> 64

PIERCING PAGODA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

more likely than not, reverse in future periods in which the Company generates
net taxable income. Accordingly, the Company does not believe a valuation
allowance is necessary at March 31, 1997.

The following unaudited pro forma information reflects the income tax
expense that the Company would have incurred if it had been subject to federal
and state income taxes for the year ended March 31, 1995 (in thousands):

<TABLE>
<S> <C>
Current
Federal................................................................... $2,337
State..................................................................... 625
Deferred.................................................................... (238)
------
$2,724
======
</TABLE>

Income tax expense in 1997 and 1996 and pro forma income tax expense in
1995 differs from the amounts computed by applying the federal statutory rate of
34% to income before taxes as follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Tax expense at statutory rates............................... $2,339 $3,138 $4,049
State income taxes, net of federal benefit................... 380 358 276
Other........................................................ 5 57 47
------ ------ ------
$2,724 $3,553 $4,372
====== ====== ======
</TABLE>

(11) TRANSACTIONS WITH RELATED PARTIES

The Company performs certain administrative functions for entities owned by
the Company's Chief Executive Officer and its President. The Company charged to
the entities $27,000, $14,000 and $10,000 in fiscal 1995, fiscal 1996, and
fiscal 1997, respectively, representing certain direct expenses and the
estimated fair value of providing administrative services, primarily allocations
of salary and overhead.

On March 30, 1994, the Company declared a dividend to its then current
stockholders in the form of a $7,000,000 note which bore interest at 8% per
annum. The note was payable in annual installments of $700,000 beginning March
1, 1995. Pursuant to an agreement between the Company and the stockholders, the
Company used a portion of the proceeds from the initial public offering to fund
$5,000,000 of this distribution. The remainder, plus accrued interest, was
exchanged for shares of common stock at the initial public offering price.

On March 31, 1994, the Company sold certain directors, officers and
employees 218,713 shares of its common stock for $862,000. The difference of
$390,000 between the cash price and the fair market value of the shares at the
date issued, as determined by an independent appraisal, was recognized as
restricted stock compensation bonus expense for the year ended March 31, 1994. A
receivable of $472,000 for the cash was subsequently collected in full by the
Company in May 1994.

(12) STOCKHOLDERS' EQUITY

The Company has a stock option plan which provides for the grant of common
stock options to eligible employees and others. The aggregate maximum number of
shares of common stock available for awards under the plan is 450,000. Stock
options granted may be the fair market value of the stock or at a price
determined by a committee of the Board of Directors. The options vest over a
four year period and are exercisable over a period determined by the committee,
but not longer than ten years.

F-16
<PAGE> 65

PIERCING PAGODA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C> <C>
Net income.............................................. As reported $5,677 $7,538
Pro forma $5,614 $7,089
Earnings per share...................................... As reported $ 1.07 $ 1.40
Pro forma $ 1.05 $ 1.32
</TABLE>

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

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

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

Summarized stock option data is as follows:

<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE SHARES
EXERCISE PRICE UNDER OPTION
-------------- ------------
<S> <C> <C>
Outstanding at March 31, 1994............................ $ -- --
Granted................................................ 8.15 234,000
Exercised.............................................. 8.00 (300)
Canceled............................................... 8.00 (7,400)
------ -------
Outstanding at March 31, 1995............................ 8.15 226,300
Granted................................................ 14.62 40,000
Exercised.............................................. 8.00 (2,600)
Canceled............................................... 9.91 (14,100)
------ -------
Outstanding at March 31, 1996............................ 9.09 249,600
Granted................................................ 20.79 186,000
Exercised.............................................. 8.28 (25,550)
Canceled............................................... 13.58 (15,300)
------ -------
Outstanding at March 31, 1997............................ 14.48 394,750
------ -------
Exercisable.............................................. $11.67 152,950
====== =======
</TABLE>

F-17
<PAGE> 66

PIERCING PAGODA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes information concerning currently outstanding
and exercisable options:

<TABLE>
<CAPTION>
EXERCISE PRICE
---------------------------------
$8.00 - $10.625 $18.00 - $24.50
--------------- ---------------
<S> <C> <C>
Options outstanding at March 31, 1997................... 195,450 199,300
Weighted average remaining contractual life (years)..... 7.27 9.56
Weighted average price.................................. $ 8.28 $ 20.56
Options exercisable at March 31, 1997................... 110,050 42,900
Weighted average price.................................. $ 8.26 $ 20.41
</TABLE>

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

On May 18, 1994, the Company's Board of Directors declared a stock split,
effective June 1, 1994, of 5,336 for 1 and a reduction in the par value of the
Company's stock from $.10 per share to $.01 per share. All references to common
shares have been adjusted to reflect this stock split and adjustment of par
value.

On June 9, 1994, the Company sold 5,000 shares of its common stock to the
owner of its licensee for $6.00 per share.

(13) FAIR VALUE OF FINANCIAL INSTRUMENTS

Cash, Accounts Receivable, Accounts Payable and Gold Consignment Agreements

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

Long-term Debt

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

(14) COMMITMENTS AND CONTINGENCIES

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

At March 31, 1997, the Company had commitments outstanding of approximately
$1,425,000 to fund capital expenditures, primarily for the construction and
installation of new kiosks.

Pursuant to the agreement between the Company and its licensee, the
licensee has the right to acquire, under certain circumstances, the Company's
kiosk stores operating in the state of Florida (40 at March 31, 1997) and has
the right of first refusal with respect to new locations in the state. Upon 90
days notice, the licensee may purchase any or all locations in certain Florida
counties. Locations

F-18
<PAGE> 67

PIERCING PAGODA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

outside these counties may be purchased only during the first seven months of
any calendar year provided they have been open for two full calendar years. The
purchase price of a location is due within 30 days of closing and is determined
based upon the cost of assets acquired at the closing date. In each of fiscal
1995 and 1997, the Licensee exercised its right to acquire one store from the
Company, and as of March 31, 1997, has delivered written notice to the Company
of its intention to acquire five additional stores from the Company in fiscal
1998.

The Company entered into a tax indemnification agreement in June of 1994
with certain current stockholders which provides for distributions relating to
tax liabilities for allocable taxable income for fiscal 1994 and 1995 and an
indemnification of such stockholders for any losses or liabilities with respect
to any additional taxes resulting from the Company's operations during the
period in which it was an "S" corporation. Liabilities of $1,755,000 and
$1,530,000 were accrued at March 31, 1994 and 1995, respectively, relating to
the tax indemnification agreements.

(15) SUBSEQUENT EVENT

In April 1997, the Company purchased substantially all of the operations of
Silver and Gold Connection, a kiosk retailer of gold and silver jewelry, for
approximately $8.2 million, subject to certain post-closing adjustments related
primarily to the valuation of acquired inventory.

F-19
<PAGE> 68

[PICTURES OF THE COMPANY'S MERCHANDISE WILL APPEAR ON
THE INSIDE OF THE BACK COVER OF THE PROSPECTUS.]
<PAGE> 69

[PIERCING PAGODA, INC. LOGO]