U. S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                   FORM 10-QSB



(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996

                                       OR

[ ]         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                              EXCHANGE ACT OF 1934.


FOR THE TRANSITION PERIOD FROM __________ TO __________


            COMMISSION FILE NUMBER 0-24388


                          MANHATTAN BAGEL COMPANY, INC.
        (EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)



     NEW JERSEY                                             22-2981539
     (STATE OR OTHER JURISDICTION OF                       (I.R.S. EMPLOYER
     INCORPORATION OR ORGANIZATION)                        IDENTIFICATION NO.)



              246 INDUSTRIAL WAY WEST, EATONTOWN, NEW JERSEY 07724
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

                                 (908) 544-0155
                           (ISSUER'S TELEPHONE NUMBER)

CHECK  WHETHER  THE ISSUER  (1) HAS FILED ALL  REPORTS  REQUIRED  TO BE FILED BY
SECTION 13 OR 15(D) OF THE  EXCHANGE  ACT OF 1934  DURING THE LAST 12 MONTHS (OR
FOR SUCH SHORTER  PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS),
AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES  /X/   NO/ /

NUMBER OF SHARES OF COMMON  STOCK,  NO PAR VALUE,  OUTSTANDING  AT SEPTEMBER 30,
1996: 7,453,822.


<PAGE>



                 MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES

                                      INDEX
<TABLE>
<CAPTION>
<S>         <C>         <C>                                                                    <C>

                                                                                               Page No.

Part I                              Financial information

            Item 1.     Financial Statements

                                    Condensed Consolidated Balance Sheet -                            1
                                    September  30, 1996

                                    Condensed Consolidated Statements of Operations -                 3
                                    Three and nine months ended September 30, 1996 and 1995

                                    Condensed  Consolidated Statements of Cash Flows -                4
                                    Nine months ended September 30, 1996 and 1995

                                    Notes to Condensed Consolidated Financial Statements              5

            Item 2.     Management's Discussion and Analysis of                                       8
                                    Results of Operations and Financial Condition


Part II                             Other Information                                                 15



            Item 6.     Exhibits and Reports on Form 8-K                                              15

                                    Signatures                                                        15

</TABLE>

<PAGE>


Part 1 - Financial Information
             Item 1 Financial Statements

                          MANHATTAN BAGEL COMPANY, INC.
                                AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEET


                                                             SEPTEMBER 30,1996
                                                                (UNAUDITED)

             ASSETS

Current Assets
      Cash and cash equivalents                                $ 1,015,444
      Marketable securities                                     12,920,314
      Accounts receivable, net of allowance for
             doubtful accounts of $9,924                        10,616,193
      Inventories                                                1,369,164
      Current maturities of notes receivable                       103,335
      Income taxes receivable                                    1,595,646
      Prepaid expenses and other current assets                    802,762
                                                               -----------

             Total current assets                               28,422,858
                                                               -----------

Property and equipment, net of accumulated
      depreciation of $2,833,535                                11,472,459
                                                               -----------

Other assets
      Notes receivable, net of current maturities                6,373,905
      Goodwill, net of accumulated amortization  of $133,331     4,537,067
      Security deposits                                            810,725
      Other assets                                               3,202,461
                                                               -----------

             Total Assets                                      $54,819,475
                                                               ===========




     SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                      -1-
<PAGE>


                          MANHATTAN BAGEL COMPANY, INC.
                                AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEET


                                                            SEPTEMBER 30,1996
                                                               (UNAUDITED)
             LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
      Current maturities of long-term debt                   $ 1,596,445
      Current maturities of capital lease obligations            129,315
      Accounts payable and accrued expenses                    6,439,494
      Unearned franchise fee income                              276,379
      Franchise deposits                                         269,167
      Deferred income taxes                                        6,700
      Other current liabilities                                   49,336
                                                             -----------

             Total current liabilities                         8,766,836
                                                             -----------

      Other liabilities
      Long-term debt, net of current maturities                4,071,048
      Capital lease obligations, net of current maturities       453,259
      Security deposits                                          366,007
      Deferred income taxes and other liabilities                241,000
                                                             -----------
             Total other liabilities                           5,131,314
                                                             -----------

Stockholders' equity
      Preferred stock, 2,000,000 shares authorized,
             no shares issued or outstanding                        --
      Common stock, no par value, 25,000,000 shares
             authorized, 7,453,822 issued
             and outstanding                                  40,071,988
      Retained earnings                                          849,337
                                                             -----------

             Total stockholders' equity                       40,921,325
                                                             -----------

             Total liabilities and stockholders' equity      $54,819,475
                                                             ===========


     SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                      -2-
<PAGE>



                 MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



<TABLE>
<CAPTION>

                                                    FOR THE THREE MONTHS ENDED    FOR THE NINE MONTHS ENDED
                                                              SEPTEMBER 30,             SEPTEMBER 30,
                                                   ---------------------------- -----------------------------
                                                      1996             1995            1996             1995
                                                      ----             ----            ----             ----
                                                   (UNAUDITED)       (UNAUDITED)    (UNAUDITED)      (UNAUDITED)

Revenues

<S>                                                 <C>             <C>             <C>             <C>         
      Product sales                                 $  7,329,800    $  4,623,232    $ 21,141,202    $ 11,793,530
      Franchise & license related revenue              1,849,466       1,680,967       6,571,226       3,834,088
      Other income                                       235,152          60,957         400,082         132,228
                                                    ------------    ------------    ------------    ------------

                     Total revenue                     9,414,418       6,365,156      28,112,510      15,759,846
                                                    ------------    ------------    ------------    ------------


Operating expenses
      Cost of goods sold                               3,909,148       2,170,986      11,045,410       6,089,547
      Selling, general & administrative expenses       5,654,791       2,989,275      15,815,094       7,794,903
      Write-off of investment                          3,100,000            --         3,100,000            --
      Non recurring charges                                 --              --           713,000            --
      Interest income                                   (272,286)         (3,013)       (791,860)        (24,117)
      Interest expense                                   122,424          42,694         308,675         105,650
                                                    ------------    ------------    ------------    ------------

                     Total operating expenses         12,514,077       5,199,942      30,190,319      13,965,983
                                                    ------------    ------------    ------------    ------------

(Loss) earnings before provision for income taxes     (3,099,659)      1,165,214      (2,077,809)      1,793,863

(Benefit)  provision for income taxes                   (677,748)        511,166        (490,954)        883,473
                                                    ------------    ------------    ------------    ------------

Net (loss) income                                   ($ 2,421,911)   $    654,048    ($ 1,586,855)   $    910,390
                                                    ============    ============    ============    ============

Net (loss) income per share                         ($      0.32)   $       0.12    ($      0.21)   $       0.17
                                                    ============    ============    ============    ============

Weighted average number of common &
      common equivalent shares outstanding             7,547,522       5,361,166       7,423,614       5,355,598
                                                    ============    ============    ============    ============
</TABLE>


      SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                      -3-
<PAGE>



                 MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                 FOR THE NINE MONTHS ENDED
                                                                        SEPTEMBER 30,
                                                                 -------------------------
                                                                     1996          1995
                                                                     ----          ----
                                                                 (UNAUDITED)    (UNAUDITED)


<S>                                                            <C>             <C>         
Net cash provided (used) by operating activities               ($ 4,175,595)   $    804,962
                                                               ------------    ------------


Cash flows from investing activities
      Purchases of marketable securities                         (1,911,150)           --
      Sales of marketable securities                             11,615,836            --
      Acquisition and construction of property and equipment     (9,069,489)     (4,473,355)
      Issuance of notes receivable                               (6,040,600)           --
      Other net cash (used) provided by
           investing activities                                  (2,622,359)         26,002
                                                               ------------    ------------

Net cash used by investing activities                            (8,027,762)     (4,447,353)
                                                               ------------    ------------


Cash flows from financing activities
      Proceeds from issuance of common stock                      5,091,466          83,835
      Other financing activities                                    112,816       2,630,762
                                                               ------------    ------------
Net cash provided by financing activities                         5,204,282       2,714,597
                                                               ------------    ------------

Net decrease in cash and cash equivalents                        (6,999,075)       (927,794)

Cash and cash equivalents - beginning                             8,014,519       2,071,766
                                                               ------------    ------------

Cash and cash equivalents - ending                             $  1,015,444    $  1,143,972
                                                               ============    ============

</TABLE>


      SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                      -4-
<PAGE>



                 MANHATTAN BAGEL COMPANY, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


NOTE 1 - BASIS OF PRESENTATION

            The  financial   information  in  this  report  should  be  read  in
conjunction  with the  financial  statements  included in the  Company's  Annual
Report on Form 10-KSB for the year ended December 31, 1995 and current report on
Form 8-K and Form 8-KA reporting the acquisition of Specialty Bakeries,  Inc. on
May 22, 1996 as amended. The balances for 1995 have been restated to reflect the
acquisition  of  Specialty  Bakeries,  Inc. on May 22, 1996  accounted  for as a
pooling of interest. See Note 3.

            In the opinion of management,  the accompanying financial statements
include all adjustments necessary for a fair presentation.  All such adjustments
are of a normal recurring  nature with the exception of those charges  discussed
in Note 4 and Note 6. The  results of  operations  for the three and nine months
ended  September  30, 1996 are not  necessarily  indicative of the results to be
expected for the full year.


NOTE 2 - INVENTORIES

                       September 30, 1996

Raw materials           $   299,308
Finished Goods            1,069,856
                        -----------

                         $1,369,164

NOTE 3 - ACQUISITIONS

            On January 9, 1996,  the Company  completed the  acquisition  of Bay
Area Bagels,  Inc., a private  company  which owned eight bagel bakery stores in
the San Francisco  Area. The purchase price was 65,500 shares of Common stock of
the  Company  and  $85,000.  The  transaction  was  treated  as a  purchase  for
accounting purposes.

            On January 17, 1996, the Company  completed the acquisition of three
stores in the Los Angeles market,  which were licensed  locations of I&J Bagels,
Inc.  Such stores are being  operated as company owned  locations.  The purchase
price was $1,500,000 and was treated as a purchase for accounting purchases.

            On May 22, 1996, the Company  completed the acquisition of Specialty
Bakeries,  Inc.  ("SBI") a private company which owned and franchised a total of
23 bagel  bakery  stores in the  Southern  New  Jersey  and  Philadelphia  areas

                                      -5-
<PAGE>


operating under the name Bagel Builders.  The Company  completed the acquisition
through the merging of a newly created,  wholly owned  subsidiary of the Company
with and into SBI and 132,500  shares of common stock of the Company were issued
to the  shareholders  of SBI. This  transaction  was structured to be a tax-free
reorganization  and is  being  accounted  for as a  pooling  of  interests.  Net
revenues and net income  included in the  Company's  Consolidated  Statements of
Operations are as follows ($ thousands):


                               Three Months             Nine Months
                               Ended September 30       Ended September 30
                               ------------------       ------------------
                                  1996       1995         1996      1995
                                  ----       ----         ----      ----

Net Revenues
Manhattan Bagel Company, Inc.   $  8,782    $  5,476    $ 25,608    $ 13,283
Specialty Bakeries, Inc.             632         889       2,505       2,477
                                --------    --------    --------    --------
                                $  9,414    $  6,365    $ 28,113    $ 15,760
                                ========    ========    ========    ========

Net Income
Manhattan Bagel Company, Inc.   $ (2,558)   $    728    $ (1,621)   $  1,323
Specialty Bakeries, Inc.             136         (74)         34        (413)
                                --------    --------    --------    --------
                                $ (2,422)   $    654    $ (1,587)   $    910
                                ========    ========    ========    ========

            On June 28, 1996, the Company completed a transaction under which it
added  23  Bagel  Brothers  stores  (including  two  under  development)  to its
franchise network. Under terms of the agreement, the Company purchased the Bagel
Brothers  bagel dough  factories in  Cleveland  and Buffalo for  $2,000,000  and
50,000 shares of the Company's  common stock.  This transaction was treated as a
purchase for  accounting  purposes.  Additionally,  the Company  provided  Bagel
Brothers with $6,000,000 in financing, which, among other things, provided funds
to retire existing loans, to pay franchise fees, and to remodel the 21 operating
stores to the Manhattan  Bagel format.  The Company has the right to convert the
loan to equity should certain profit targets be met.


NOTE 4 - NON-RECURRING CHARGE

            Following the  installation  of new management at its I&J West Coast
subsidiary and subsequent to the Company's  filing of its first quarter  10-QSB,
the Company uncovered certain improper  bookkeeping and accounting  practices at
the Los Angeles  subsidiary.  As a result,  the Board of Directors  authorized a
full investigation into the accounting  practices at the subsidiary and retained
special counsel to assist in the investigation.  Based on the conclusion of that
investigation,  the  Company  restated  its  first  quarter  1996  Statement  of
Operations.  Professional fees associated with the special investigation and the
class  action  lawsuits  (see Note 5), and  settlements  of  certain  consulting
agreements totaling approximately $713,000,  recorded in the second quarter, are
included  in the  Statement  of  Operations  for the  nine  month  period  ended
September 30, 1996.


NOTE 5 - CONTINGENCIES

            On  June  20,  1996,  the  Company   announced  that  following  the
installation of new management at its I&J West Coast subsidiary, the Company has

                                      -6-
<PAGE>


uncovered  certain  improper  bookkeeping  and  accounting  practices at the Los
Angeles subsidiary,  that it would be restating its first quarter 1996 Statement
of Operations to account for these  improper  practices and that it expected the
West  Coast  subsidiary  will  operate  at a close to  break-even  level for the
remainder of 1996. On the day following the  announcement the stock price of the
Company's  common stock declined from a closing price of $21.25 on June 20, 1996
to a closing price of $13.75 on June 21, 1996. As a result, certain class action
law suits have been filed.  The Company  believes it has acted  properly and has
adequate  defenses  to  such  actions.  Accordingly,  no  provisions  for  these
contingencies  have been made. Certain cost of the defense of these actions have
been included in the non-recurring charge (see Note 4).

NOTE 6 - WRITE OFF OF INVESTMENTS

            Based upon the results of a review of its West Coast operations, the
company has decided to close its bagel production facility in Los Angeles and to
temporarily  supply its West Coast  operations  from Eatontown to assure product
quality.  The  Company  has also  decided  to sell,  franchise  or close the San
Francisco  locations  acquired in January,  1996 operating  under the name Holey
Bagel.  As a result of these  decisions,  the company is writing off  $3,100,000
comprised  of the  goodwill  and fixed  assets  required  in the Bay Area  Bagel
acquisition  (see Note 3) and the Los Angeles  commissary  and operating  losses
through the sale or closure of the locations. This write-off is reflected in the
results of operations  for the three months and nine months ended  September 30,
1996.

                                      -7-
<PAGE>





ITEM 2 -    MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF 
                       OPERATIONS AND FINANCIAL CONDITION


            The Company's financial statements for the three and nine month 1996
periods reflect the recordation of two non-recurring  charges as well as several
acquisitions made by the Company during 1996.

            The Company's recently completed review of its West Coast operations
led to Managements' determination to record in the third quarter a write-down of
its investments of $3.1 million relating to such operations. As a result of this
review,  Management concluded that in the wake of escalating product demand from
the growing store base, the quality of the bagel dough being produced in the Los
Angeles  manufacturing  plant  was not up to the  Company's  current  standards.
Rather than  compromise on quality,  the Company  elected to shut down the plant
and to reopen its plant on Meridian Road in Eatontown, New Jersey, and to supply
bagels  to the West  Coast  from this  facility.  Approximately $500,000  of the
write-down  reflects the  write-down of  machinery,  equipment and the leasehold
improvements at the Los Angeles plant.

            Such review also led to the determination  that the eight Holy Bagel
stores in San Francisco acquired in January 1996 will be either franchised, sold
or closed by the end of the first half of 1997.  Accordingly,  the  Company  has
written off the good will and written down the assets associated with the stores
to their net realizable value, which write-off's are the balance of $2.6 million
included  in  the  write-down  of  investments.  The  write-off  of  investments
substantially impacts the comparability of the three and nine month 1996 periods
with the corresponding periods of 1995.

            Following the  installation  of new management at its I&J West Coast
subsidiary and subsequent to the company's  filing of its first quarter  10-QSB,
the Company uncovered certain improper  bookkeeping and accounting  practices at
the Los Angeles  subsidiary.  As a result,  the Board of Directors  authorized a
full investigation into the accounting  practices at the subsidiary and retained
special counsel to assist in the investigation.  Based on the conclusion of that
investigation,  the company has  restated its first  quarter  1996  Statement of
Operations  to  reduce  revenues  $90,000  and  record  additional  expenses  of
$290,000.  Such  adjustments  are reflected in the financial  statements for the
nine month period  ending  September  30, 1996.  Simultaneously  with the public
announcement  by  the  Company  of  the  improprieties   uncovered  at  the  I&J
subsidiary,  the Company  announced it expected the West Coast  subsidiary  will
operate at a close to  break-even  level for the  remainder of 1996.  On the day
following the  announcement,  the Company's common stock declined from a closing
price of $21.25 on June 20, 1996 to a closing  price of $13.75 on June 21, 1996.
As a result,  certain  class  action  law suits  have been  filed.  The  Company
believes  it has acted  properly  and has  adequate  defenses  to such  actions.
Accordingly,  no provisions for these contingencies have been made. Certain cost
of the defense of these actions have been included in the non-recurring  charge.
See Note 4,  Notes to the  Condensed  Consolidated  Financial  Statements.  This
non-recurring charge  substantially  effects the comparability of the results of
operations.

            On June 29, 1995, the Company acquired I&J Bagels Inc. ("I&J").  I&J
was a private company which owned and licensed a total of 17 bagel bakery stores
in the Los Angeles area operating under the name of I & Joy Bagels.  The Company
completed the acquisition  through the merging of a newly created,  wholly-owned

                                      -8-
<PAGE>


subsidiary of the Company with DAB Industries Inc.,  ("DAB") whose sole asset is
all of the stock of I&J, in exchange  for 1.5 million  shares of Common Stock of
the Company.  Accordingly,  the  consolidated  financial  statements for periods
prior to June 29, 1995 have been restated to include the accounts and results of
operations of I&J for all the periods presented.

            On January 9, 1996,  the Company  completed the  acquisition  of Bay
Area Bagels,  Inc., a private  company  which owned eight bagel bakery stores in
the San Francisco  Area. The purchase price was 65,500 shares of Common stock of
the  Company  and  $85,000.  The  transaction  was  treated  as a  purchase  for
accounting purposes.

            On January 17, 1996, the Company  completed the acquisition of three
stores in the Los Angeles market,  which were licensed  locations of I&J Bagels,
Inc.  Such stores are being  operated as company owned  locations.  The purchase
price was $1,500,000 and was treated as a purchase for accounting purchases.

            On May 22, 1996, the Company  completed the acquisition of Specialty
Bakeries,  Inc.  ("SBI") a private company which owned and franchised a total of
23 bagel  bakery  stores in the  Southern  New  Jersey  and  Philadelphia  areas
operating under the name Bagel Builders.  The Company  completed the acquisition
through the merging of a newly created,  wholly owned  subsidiary of the Company
with and into SBI and 132,500  shares of common stock of the Company were issued
to the  shareholders  of SBI. This  transaction  was structured to be a tax-free
reorganization and is being accounted for as a pooling of interests.
See Note 3, Notes to Condensed Consolidated Financial Statements.

            On June 28, 1996, the Company completed a transaction under which it
added  23  Bagel  Brothers  stores  (including  two  under  development)  to its
franchise network. Under terms of the agreement, the company purchased the Bagel
Brothers  bagel dough  factories in  Cleveland  and Buffalo for  $2,000,000  and
50,000 shares of the Company's  common stock.  This transaction was treated as a
purchase for  accounting  purposes.  Additionally,  the Company  provided  Bagel
Brothers with $6,000,000 in financing, which, among other things, provided funds
to retire existing loans, to pay franchise fees, and to remodel the 21 operating
stores to the Manhattan  Bagel format.  The Company has the right to convert the
loan to equity should certain profit targets be met.

RESULTS OF OPERATIONS

            The total number of operating  Manhattan  Bagel  Company  stores has
increased from four at December 31, 1990 to 271 at September 30, 1996.

            The following  total number of stores were open and operating on the
following dates:

     December 31, 1990......................          4
     December 31, 1991......................         11
     December 31, 1992......................         27
     December 31, 1993......................         41
     December 31, 1994......................         73
     December 31, 1995......................        152
     September 30, 1996.....................        271

                                      -9-
<PAGE>


            In  addition,  at  September  30,  1996,  the  Company  had over 100
additional stores in various stages of development.

            The rapid  expansion  significantly  affects  the  comparability  of
results of operations in several ways. Total royalty income and frozen raw bagel
dough sales rise  significantly  as new franchised and licensed stores open. New
store revenues are not usually as high in the first periods following opening as
they  are in later  periods  as  evidenced  by the same  store  sales  increases
discussed  below.  Total expenses have also risen  significantly  as the Company
expanded its corporate  infrastructure.  The number of employees as of September
30, 1996 was 562,  while the number of employees  as of  September  30, 1995 was
342.

            The Company has also granted  several master  franchises.  Under the
terms of the master franchise agreement,  a master franchisee is required to pay
the Company an initial fee based on the  population of the territory  covered by
such master franchise.  The granting of new master franchises and the payment of
the initial fees also affects the comparability of results to prior periods.

            The Company also grants area development rights.  Under the terms of
the area  development  agreements,  the area  developer  is  required to pay the
Company an initial  fee based on the number of stores to be  developed  within a
specified  time  period.  The  granting of new area  development  rights and the
payment of  initial  fees also  affects  the  comparability  of results to prior
periods.

            The Company's  revenues are  primarily  derived from (i) the sale of
frozen raw bagel dough and cream cheese  spreads to  franchisees  and licensees,
(ii) retail and  wholesale  sale of products by the  Company-owned  stores,  and
(iii)  royalties,  franchise and license fees,  including master franchise fees,
and area development fees. The percentage of revenues derived from product sales
to total sales for the first nine months of 1996 was 75.2%  compared to 74.8% in
1995.

            For the comparative  nine month periods ending September 30 1996 and
September 30, 1995,  same store retail sales as reported by the Company's  bagel
franchisees  (which are  unaudited),  increased  1.9%, and total sales rose from
$26.2  million to $59.6  million,  an increase of $33.4  million or 127.4%.  The
amounts so reported are exclusive of three  original  stores that are on a fixed
royalty  basis and are not required to report sales to the Company.  The amounts
so reported  also exclude the I & Joy stores which were  previously  operated by
I&J and acquired on June 29, 1995.





THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED 
SEPTEMBER 30, 1995

            REVENUES.  Total  revenues of the Company for the three months ended
September 30, 1996 were  $9,414,418 as compared to total  revenues of $6,365,156
for the three months ended  September 30, 1995, a $3,049,262  or 47.9%  increase
over the three months of the prior year. The increase is primarily  attributable
to the  increased  product  sales  resulting  from the increase in the number of
franchised stores opened as well as an increase in retail and wholesale sales by
the Company owned stores. The company recorded $466,981 of area development fees
for the three months ended  September 30, 1996 as compared to $489,360 of master

                                      -10-
<PAGE>


franchise  fees in the prior year  quarter.  Ongoing  royalties  and  continuing
license fees  increased  from $462,327 in the quarter to $770,177 in the current
quarter, a $307,850 or 66.6% increase.

            COSTS OF GOODS SOLD.  Cost of goods sold for the three  months ended
September 30, 1996  increased  80.1% to $3,909,148 as compared to $2,170,986 for
the  three  months  ended   September  30,  1995.   This  increase  is  directly
attributable to the increase in product sales.  Costs of goods sold increased to
53.3% of product sales for the three months ended September 30, 1996 compared to
47.0% of product  sales for the three months  ended  September  30,  1995.  This
increase is due to a combination of the temporary  transfer of bagel  production
for the West Coast stores to the East Coast to assure product quality, including
cost  associated with opening the Meridian Road plant in Eatontown and increases
in raw material costs not absorbed by price increases.

            SELLING, GENERAL AND ADMINISTRATIVE  EXPENSES.  Selling, general and
administrative expenses increased 89.2% to $5,654,791 for the three months ended
September  30,  1996,  compared  with  $2,989,275  for the  three  months  ended
September 30, 1995. As a percentage of total  revenues,  selling,  general,  and
administrative  expenses increased to 60.1% for the three months ended September
30, 1996 from 47% for the three months ended September 30, 1995. The increase in
both absolute dollars and percentage of revenues is  attributable,  in addition,
to the  growth of the  Company  to the  consolidation  of  acquired  businesses,
addition of senior and middle  level  personnel  to manage the  growth,  and the
addition  of  Company  owned  stores  which  have a  negative  impact on S.G.&A.
margins.

            WRITE-OFF OF INVESTMENTS. Write-off of Investments of $3,100,000 for
the three months  ended  September  30, 1996 were  comprised of the goodwill and
fixed assets  acquired in the Bay Area Bagel  acquisition  (see Note 3, Notes to
the  Condensed  Consolidated  Financial  Statements)  and the Los Angeles  (I&J)
commissary  (see  Note  6,  Notes  to  the  Condensed   Consolidated   Financial
Statements).

            INTEREST  INCOME.   Interest  income  for  the  three  months  ended
September  30, 1996 was  $272,286  compared to $3,013 for the three months ended
September  30,  1995.  The  increase of $269,273  was due to the proceeds of the
November 23, 1995 public  offering  and proceeds  received on April 9, 1996 from
the exercise of the over  allotment  option in connection  with an  underwritten
March 22, 1996 public  offering by selling  shareholders  invested in marketable
securities.   The  majority  of  these   securities  are   short-term   tax-free
investments.


            INTEREST  EXPENSE.  Interest expense  increased from $42,694 for the
three  months  ended  September  30, 1995 to $122,424 for the three months ended
September  30,  1996.  The  $79,730  increase  was  primarily  due  to  interest
associated with the EDA loan for the new Eatontown  manufacturing facility which
became operational in April, 1996.

            LOSS BEFORE  PROVISION FOR INCOME TAXES.  Loss before  provision for
income  taxes for the three  months  ended  September  30, 1996 was  $3,099,659,
compared  with income of  $1,165,214  for the three months ended  September  30,
1995. This decrease is  attributable to the $3,100,000  write-off of investments
(see Note 6,  Notes to the  Condensed  Consolidated  Financial  Statements)  and
increases in cost of sales and SG&A expenses as a percentage of sales  discussed
above.

            INCOME TAX.  Provision  for income  taxes for the three months ended
September 30, 1996 was a benefit of $677,748 compared to expense of $511,166 for

                                      -11-
<PAGE>


the three months ended  September 30, 1995.  The benefit is a result of the loss
for the quarter and the tax-free status of the majority of interest income.

            NET LOSS. The Company  generated a net loss of $2,421,911  ($.32 per
share) for the three months ended  September 30, 1996, as compared to net income
of $654,048 ($.12 per share) for the three months ended  September 30, 1995 as a
result of the factors discussed above.

NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED 
SEPTEMBER 30, 1995.

            REVENUES.  Total  revenues of the Company for the nine months  ended
September 30, 1996 were $28,112,510 as compared to total revenues of $15,759,846
for the nine months ended  September 30, 1995, a $12,352,664  or 78.4%  increase
over the nine months of the prior year.  The increase is primarily  attributable
to the  increased  product  sales  resulting  from the increase in the number of
franchised stores opened as well as an increase in retail and wholesale sales by
the company  stores.  For the nine  months  ended  September  30,  1996,  master
franchise and area development  fees were $1,000,000 and $591,360  respectively.
For the nine months ended September 30, 1995 master franchise fees were $591,360
and no area development fees were recorded.
Ongoing  royalty and  continuing  license  fees  increased  from  $1,147,506  to
$1,998,733 or 74.2% increase.

            COST OF GOODS  SOLD.  Cost of goods sold for the nine  months  ended
September 30, 1996 increased  81.4% to $11,045,410 as compared to $6,089,547 for
the nine months ended September 30, 1995. This increase is directly attributable
to the  increase in product  sales.  Costs of goods sold  increased  to 52.2% of
products sales for the nine months ended September 30, 1996 compared to 51.6% of
product sales for the nine months ended September 30, 1995. This increase is due
to a combination of increased purchasing and distribution costs partially offset
by  manufacturing  efficiencies  from the  automation of the existing  Eatontown
factory and the  operation  of the new  Eatontown  factory,  and the addition of
company  owned  stores  which have a positive  impact on gross  profit  margins.
During the quarter, the Company ceased operation of its California commissary to
supply the Los Angeles market,  and transferred  production to Eatontown,  which
increased its production costs.


            SELLING,   GENERAL   AND   ADMINISTRATIVE.   Selling,   general  and
administrative  expenses  increased  102.9% to  $15,815,094  for the nine months
ended  September 30, 1996,  compared with  $7,794,903  for the nine months ended
September 30, 1995. As a percentage of total  revenues,  selling,  general,  and
administrative  expenses  increased to 56.3% for the nine months ended September
30, 1996 from 49.5% for the six months ended June 30, 1995. The increase in both
absolute dollars and percentage of revenues is attributable to the growth of the
company,  addition of senior and middle level personnel to manage the growth and
the addition of company  owned  stores  which have a negative  impact on S.G.&A.
margins.

            NON-RECURRING  CHARGES.  Non-recurring  charges of $713,000  for the
nine  months  ended  September  30, 1996 were  comprised  of  professional  fees
associated with the investigation  (see Note 4, Notes to Condensed  Consolidated
Financial  Statements)  and the class  action  lawsuits  (See  Note 5,  Notes to
Condensed  Consolidated Financial Statements) and related settlements of certain
consulting agreements.

                                      -12-
<PAGE>



            WRITE-OFF OF INVESTMENTS. Write-off of Investments of $3,100,000 for
the three months  ended  September  30, 1996 were  comprised of the goodwill and
fixed assets  acquired in the Bay Area Bagel  acquisition  (see Note 3, Notes to
the  Condensed  Consolidated  Financial  Statements)  and the Los Angeles  (I&J)
commissary  (see  Note  6,  Notes  to  the  Condensed   Consolidated   Financial
Statements).

            INTEREST INCOME. Interest income for the nine months ended September
30, 1996 was $791,860  compared to $24,117 for the nine months  ended  September
30,  1995.  The increase of $767,743 was due to the proceeds of the November 23,
1995 public offering and proceeds received on April 9, 1996 from the exercise of
the over  allotment  option in connection  with an  underwritten  March 22, 1996
public offering by selling shareholders invested in marketable  securities.  The
majority of these securities are short-term tax-free investments.

            INTEREST  EXPENSE.  Interest expense increased from $105,650 for the
nine months  ended  September  30, 1995 to  $308,675  for the nine months  ended
September  30,  1996.  The  $203,025  increase  was  primarily  due to  interest
associated with the EDA loan for the new Eatontown  manufacturing facility which
became operational in April, 1996.

            LOSS BEFORE  PROVISION FOR INCOME TAXES.  Loss before  provision for
income  taxes  for the nine  months  ended  September  30,  1996 was  $2,077,809
compared  with earnings of  $1,793,863  for the nine months ended  September 30,
1995.  This decrease was  attributed to a non recurring  charge of $713,000 (See
Note 4, Notes to Condensed Consolidated  Financial  Statements),  the $3,100,000
write off of investments (See Note 6, Notes to Condensed  Consolidated Financial
Statements)  and the increase in cost of sales and SG&A expenses as a percentage
of sales discussed above.

            INCOME TAX.  Income tax benefit for the nine months ended  September
30, 1996 was  $490,954  compared  to an expense of $883,473  for the nine months
ended  September  30,  1995.  The  effective  tax rate for the nine months ended
September  30,  1996 of 23.6% is due to the tax free  status of the  majority of
interest  income  offset  by the  non-deductible  portion  of the  write-off  of
investments.

            NET LOSS. The Company  generated a net loss of $1,586,855  ($.21 per
share) for the nine months ended  September  30, 1996, as compared to net income
of $910,390 ($.17 per share) for the nine month period ended  September 30, 1995
as a result of the factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

            On  November  20,  1995,  completed a public  offering of  1,500,000
shares of Common  Stock at a public  offering  price of $19.625  per share.  The
proceeds  of  such  offering,  net  of  discounts  and  offering  expenses  were
$27,084,440.  The Company also  received  additional  proceeds of  $2,176,509 on
December 14, 1995 from the sale of 118,000  shares of Common Stock to the public
pursuant  to  the  underwriters'  over-allotment  option.  The  proceeds  of the
offering  are being used to finance  the  expansion  of the  Company's  business
through remodeling stores,  constructing and equipping manufacturing  facilities
and  acquiring  existing  bagel  businesses  as well as providing  financing for
future franchisees, and for general corporate and working capital purposes.

            On April 9, 1996 the Company  received  net  proceeds of  $1,911,150
from the sale of 90,000  shares of common  stock  pursuant to the exercise of a

                                      -13-
<PAGE>


n
over-allotment  option in connection  with an  underwritten  public  offering of
shares owned by shareholders of the Company. These proceeds will be utilized for
general corporate and working capital purposes.

            On May 24, 1996 the Company executed a $25 million dollar franchisee
financing  agreement with Atlantic  Financial  Services.  Under the terms of the
Agreement,  the Company has agreed to guarantee  certain portions of these loans
in exchange for more favorable terms and rates for the Company's franchisees.

            On August 8, 1996 the Company obtained a $7.5 million revolving line
of credit from First  Union  Bank,  N.A.  Under the terms of the  agreement  the
Company must maintain certain liquidity ratios and earnings.

            The  Company's  cash flow used by  operating  activities  during the
first nine  months of 1996 was  $4,175,595  compared  to a cash flow of $804,962
provided by operating activities during the nine months of 1995. During the nine
months ended September 30, 1996,  cash flow used from net loss and  depreciation
was $913,352. .

            The Company had working  capital of  $19,656,022  at  September  30,
1996,  which  represents a decrease of $10,722,083  from December 31, 1995. This
decrease  in  working  capital  is  primarily  a result  of the  Bagel  Brothers
transaction.  The Company  believes there are no long-term trends or events that
would have a material negative impact on working capital.

            Management  believes  that the  Company's  working  capital,  credit
facilities and anticipated  funds  generated  internally from operations will be
sufficient to finance the Company's anticipated growth and to meet the Company's
liquidity requirements for the foreseeable future.

                                      -14-
<PAGE>





                           PART II - OTHER INFORMATION


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

            None




                                   SIGNATURES

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

                                                  MANHATTAN BAGEL COMPANY, INC.
                                                  (Small Business Issuer)



Dated:       November 14, 1996                     By: S/N Jack Grumet
                                                   ----------------
                                                   Jack Grumet,
                                                   Chairman of the Board and
                                                   Chief Executive Officer



Dated:       November 14, 1996                     By: S/N Leonard Johnson
                                                   --------------------
                                                   Leonard Johnson
                                                   Chief Financial Officer

                                      -15-