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

                              FORM 10-QSB / A NO. 1

(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

                                                                        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



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

                   Signatures                                                 15


<PAGE>



Part 1 - Financial Information
         Item 1 Financial Statements

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


                                                               SEPTEMBER 30,1996
                                                               -----------------
                                                            (RESTATED 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                                          1,559,646
     Prepaid expenses and other current assets                          802,762
                                                                    -----------
          Total current assets                                       28,386,858
                                                                    -----------

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                                              $54,783,475
                                                                    ===========

     SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                      -1-

<PAGE>


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


                                                               SEPTEMBER 30,1996
                                                               -----------------
                                                            (RESTATED 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                            6,349,494
     Unearned franchise fee income                                      276,379
     Franchise deposits                                                 269,167
     Deferred income taxes                                                6,700
     Other current liabilities                                           49,336
                                                                    -----------
          Total current liabilities                                   8,676,836
                                                                    -----------

     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                                                  903,337
                                                                    -----------

          Total stockholders' equity                                 40,975,325
                                                                    -----------

          Total liabilities and stockholders' equity                $54,783,475
                                                                    ===========


     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
                                                          ----            ----            ----            ----
                                                       (RESTATED       (RESTATED       (RESTATED       (RESTATED
                                                       UNAUDITED)      UNAUDITED)      UNAUDITED)      UNAUDITED)

<S>                                                 <C>             <C>             <C>             <C>

Revenues

     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                           3,010,000            --         3,010,000            --
     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              12,424,077       5,199,942      30,100,319      13,965,983
                                                    ------------    ------------    ------------    ------------

(Loss) earnings before provision for income taxes     (3,099,659)      1,165,214      (1,987,809)      1,793,863

(Benefit)  provision for income taxes                   (641,748)        511,166        (454,954)        883,473
                                                    ------------    ------------    ------------    ------------

Net (loss) income                                   ($ 2,367,911)   $    654,048    ($ 1,532,855)   $    910,390
                                                    ============    ============    ============    ============

Net (loss) income per share                               ($0.31)   $       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
                                                                    ------------    ------------
                                                                     (RESTATED       (RESTATED
                                                                     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            --
     Acquisitions and construction of property and equipment          (7,329,176)     (4,473,355)
     Other net cash (used) provided by
         investing activities                                         (2,622,359)         26,002
                                                                    ------------    ------------

Net cash used by investing activities                                   (246,849)     (4,447,353)
                                                                    ------------    ------------


Cash flows from financing activities
     Issuance of notes receivable                                     (6,040,600)           --
     Proceeds from issuance of common stock                            3,351,153          83,835
     Other financing activities                                          112,816       2,630,762
                                                                    ------------    ------------
Net cash (used) provided by financing activities                      (2,576,631)      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.

                                      -5-

<PAGE>


         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.  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.      $ (2,504)   $    728    $ (1,567)   $  1,323
Specialty Bakeries, Inc.                136         (74)         34        (413)
                                   --------    --------    --------    --------
                                   $ (2,368)   $    654    $ (1,533)   $    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.

                                      -6-

<PAGE>


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 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  $3,010,000
comprised of the goodwill  ($1,711,000) fixed assets ($874,000) and other assets
and accruals  ($425,000) acquired in the Bay Area Bagel acquisition (see Note 3)
and the Los Angeles  commissary  and the sale or closure of the  locations.  The
amount of goodwill was reflective of the price of the Company's  common stock at
the time of the  acquisition.  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 Management's determination to record in the third quarter a write-down of
its investments of $3.0 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  $700,000  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 goodwill and written down the assets  associated with the stores
to their net realizable value, which write-off's are the balance of $2.3 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, on 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. New stores  generally show greater  increases
in their sales from period to period during their first years of  operation.  As
stores mature, the relative increase in their sales from period to period can be
expected to decline.  Although the number of new stores in the  Company's  chain
continues to grow, new stores will increasingly  constitute a smaller percentage
of total  sales.  Accordingly,  on average  the  increase in same store sales is
expected to be at the more moderate levels than reported in prior periods.

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
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.

                                      -10-

<PAGE>



         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 $3,010,000 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  $3,009,659,
compared  with income of  $1,165,214  for the three months ended  September  30,
1995. This decrease is  attributable to the $3,010,000  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.

                                      -11-


<PAGE>


         INCOME  TAX.  Provision  for income  taxes for the three  months  ended
September 30, 1996 was a benefit of $641,748 compared to expense of $511,166 for
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  $2,367,911  ($.31 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 $3,010,000 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  $1,987,809
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 $3,010,000
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  $454,954  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 22.9% 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  $1,532,855  ($.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 an
over-allotment  option in connection  with an  underwritten  public  offering of

                                      -13-


<PAGE>


shares owned by  shareholders of the Company.  In addition the Company  received
$1,440,003  from the sale of stock to  employees  and  consultants  through  the
Company's  stock  option  plan.  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.
The aggregate  liability of the Company under this arrangement is the greater of
(i) $1,500,000 or (ii) 20% of the first $10,000,000  aggregate  principal amount
of loans to franchisees and 10% of the remaining  $15,000,000 principal of loans
to  franchisees.  At  September  30, 1996 the  Company's potential liability was
$676,131 constituting the full amount of the loans  outstanding  to  franchisees
under the franchise financing program.

         On August 8, 1996 the Company obtained a $7.5 million revolving line of
credit  from First Union  Bank,  N.A.  The  agreement  provides  for a number of
negative financial  covenants,  including minimum requirements with respect to a
fixed charge  coverage ratio, a current ratio,  leverage (as defined),  tangible
net  worth  requirements  and that the  Company  will not incur  losses  for two
consecutive  quarters.  The Company  believes that it is in compliance  with all
ratios and requirements as of September 30,1996.

         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
$732,964.  The decrease in cash and cash equivalents of $6,999,075 was primarily
due to the  acquisition  of Bagel  Brothers  factories for $2,000,000 and 50,000
shares of the Company's  common stock (non-cash item). The Company also provided
Bagel Brothers with $6,000,000 in financing (see note 3 - Acquisition). .

         The Company had working  capital of  $19,710,022 at September 30, 1996,
which represents a decrease of $11,125,501 from December 31, 1995. This decrease
in working capital is primarily a result of the Bagel Brothers  transaction.  At
September  30,1996,  the accounts  receivable balance was greater than the total
revenue  for the  three  months  ended  September  30,1996  primarily  due to an
increase in the  construction  receivable which in turn increased as a result of
increased  starts on new stores.  The Company  believes  there are no  long-term
trends or events that would have a material negative impact on working capital.

         The Company  intends to  construct a new bagel dough and cheese  spread
manufacturing  facility to supply its West Coast  stores.  The costs to complete
this facility are estimated to be $1.3 million.

         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 including the construction of
the new West Coast bagel dough and cheese spread manufacturing facility.

                                      -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:    January 30, 1997                  By: S/N Jack Grumet
                                                ----------------
                                            Jack Grumet,
                                            Chairman of the Board and
                                            Chief Executive Officer
                                            Chief Financial Officer

                                      -15-