<PAGE>
                                                                      
                                                                      
                               FORM 10-Q                              
                                                                      
                  SECURITIES AND EXCHANGE COMMISSION                  
                                                                      
                       Washington, DC      20549                      
                                                                      
    [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE      
                    SECURITIES EXCHANGE ACT OF 1934                   
                                                                      
    For the quarterly period ended September 29, 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  0-20040                       
                -------------------------------                       
                         THE KRYSTAL COMPANY                          
----------------------------------------------------------------------
         (Exact name of registrant as specified in its charter)       
                                                                      
             TENNESSEE                     62-0264140                 
             ---------                     ----------                 
 (State or other jurisdiction of  (IRS Employer identification        
 incorporation or organization)             Number)                   
                                                                      
          One Union Square, Chattanooga, TN   37402                   
----------------------------------------------------------------------
  (Address of principal executive offices, including zip code)        
                                                                      
                     (423) 757-1550                                   
----------------------------------------------------------------------
        (Registrant's telephone number, including area code)          
                                                                      
    Indicate by check mark whether the Registrant (1) has             
    filed all reports required to be filed by Section 13 or           
    15(d) of the Securities Exchange Act of 1934 during the           
    preceding 12 months (or for such shorter period that              
    Registrant was required to file such reports), and (2)            
    has been subject to such filing requirements for the              
    past 90 days.                                                     
                                                                      
             YES  X                     NO                            
                 ----                  ----                           
                                                                      
As of November 7, 1996, 7,491,768 shares of the Registrant's Common   
Stock were issued and outstanding.                                    
                                                                      
                                                                      

                                                                        
<PAGE>
                           THE KRYSTAL COMPANY                          
                           -------------------                          
                            SEPTEMBER 29, 1996                          
                            ------------------                             
                     PART I.  FINANCIAL INFORMATION                     
                     ------------------------------                     
                                                                        
                                                                        
The condensed financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission.  Certain information and footnote 
disclosures normally included in financial statements prepared in 
accordance with generally accepted accounting principles have been 
condensed or omitted pursuant to such rules and regulations, although 
the Company believes that the disclosures are adequate to make the 
information presented not misleading.  These condensed financial 
statements should be read in conjunction with the Company's latest 
annual report on Form 10-K.  In the opinion of management of the 
Company, all adjustments necessary to present fairly (1) the financial 
position of The Krystal Company and Subsidiary as of September 29, 1996 
and December 31, 1995, (2) the results of their operations, their 
changes in common shareholders' equity and their cash flows for the 
nine months ended September 29, 1996 and October 1, 1995, and (3) 
the results of their operations for the three months ended 
September 29, 1996 and October 1, 1995 have been included.  The results 
of operations for the interim period ended September 29, 1996 are not 
necessarily indicative of the results for the full year. 
                                                                        
                                                                        
                                                                        
<PAGE>
<TABLE>
        PART I. FINANCIAL INFORMATION                                  
        -----------------------------                                  
                                                                       
Item I.  Financial Statements                                          
                                                                       
                 THE KRYSTAL COMPANY AND SUBSIDIARY                    
                 ----------------------------------                    
                    CONSOLIDATED BALANCE SHEETS                        
                    ---------------------------                        
                           (In thousands)                              
<CAPTION>                                                              
                                          September 29,    December 31,
                                              1996            1995     
                                            --------       ---------   
                                           (Unaudited)     (Audited)   
<S>                                          <C>            <C>        
ASSETS                                                                 
-----------------                                                      
CURRENT ASSETS:                                                        
   Cash and temporary investments            $ 24,444       $ 13,713   
   Receivables                                  1,783          1,752   
   Income tax receivable                        1,203            609   
   Net investment in direct financing                                  
     leases-current portion                       676            856   
   Inventories                                  2,028          2,322   
   Deferred tax asset                           5,553          5,553   
   Prepayments and other                        1,082            830   
                                              -------        -------   
     Total current assets                      36,769         25,635   
                                              -------        -------   
NET INVESTMENT IN DIRECT FINANCING                                     
   LEASES, excluding current portion              404            867   
                                              -------        -------   
PROPERTY, BUILDINGS, AND EQUIPMENT, net        92,793         98,546   
                                              -------        -------   
LEASED PROPERTIES, net                          1,704          1,863   
                                              -------        -------   
OTHER ASSETS:                                                          
   Cash surrender value of life insurance       5,440          5,117   
   Other                                          776            667   
                                              -------        -------   
     Total other assets                         6,216          5,784   
                                              -------        -------   
       TOTAL ASSETS                          $137,886       $132,695   
                                              =======        =======   
<FN>                                                                   
See accompanying notes to consolidated condensed financial statements. 
</TABLE>


                                                                       
<PAGE>
<TABLE>
                 THE KRYSTAL COMPANY AND SUBSIDIARY                    
                 ----------------------------------                    
               CONSOLIDATED BALANCE SHEETS (CONTINUED)                 
               ---------------------------------------                 
                           (In thousands)                              
<CAPTION>                                                              
                                           September 29,  December 31, 
LIABILITIES AND SHAREHOLDERS' EQUITY           1996          1995      
-----------------------------------          -------       ---------   
                                           (Unaudited)     (Audited)   
<S>                                          <C>            <C>        
CURRENT LIABILITIES:                                                   
   Accounts payable                          $  3,785       $  1,681   
   Accrued liabilities                         15,662          9,427   
   Current portion of long-term debt              858            432   
   Current portion of capital                                          
     lease obligations                            530            653   
                                              -------        -------   
     Total current liabilities                 20,835         12,193   
                                              -------        -------   
LIABILITIES SUBJECT TO COMPROMISE              53,875         56,909   
                                              -------        -------   
LONG-TERM DEBT, excluding current portion       3,154          3,621   
                                              -------        -------   
CAPITAL LEASE OBLIGATIONS, excluding                                   
   current portion                              2,365          2,754   
                                              -------        -------   
DEFERRED INCOME TAXES                           2,719          2,719   
                                              -------        -------   
OTHER LONG-TERM LIABILITIES                     8,350          7,852   
                                              -------        -------   
SHAREHOLDERS' EQUITY:                                                  
   Preferred stock, without par value;                                 
     5,000,000 shares authorized:                                      
     no shares issued and outstanding             -              -     
   Common stock, without par value;                                    
     15,000,000 shares authorized;                                     
     issued and outstanding, 7,491,768 shares                          
     at September 29, 1996, and 7,526,808                              
     shares at December 31, 1995               40,556         40,830   
   Retained earnings                            7,864          8,195   
   Deferred compensation                       (1,832)        (2,378)  
                                              -------        -------   
     Total shareholders' equity                46,588         46,647   
                                              -------        -------   
       TOTAL LIABILITIES AND                                           
         SHAREHOLDERS' EQUITY                $137,886       $132,695   
                                              =======        =======   
<FN>                                                                   
See accompanying notes to consolidated condensed financial statements. 
</TABLE>

                                                                       
                                                                       
<PAGE>
<TABLE>
                     THE KRYSTAL COMPANY AND SUBSIDIARY                       
                     ----------------------------------                       
                    CONSOLIDATED STATEMENTS OF OPERATIONS                     
                    -------------------------------------                     
               (In thousands, except per share data)(Unaudited)               
<CAPTION>
                                     For The Three          For The Nine      
                                     Months Ended,          Months Ended,     
                                  ------------------     -------------------  
                                  Sept. 29,   Oct. 1,     Sept. 29,   Oct. 1, 
                                    1996       1995         1996       1995   
                                  --------   --------     --------   -------- 
<S>                               <C>        <C>          <C>        <C>    
REVENUES:                                                                     
  Restaurant sales                $ 60,658   $ 60,278     $175,401   $177,587 
  Franchise fees                        49        276          171        504 
  Royalties                            713        629        2,021      1,718 
  Other revenues                     1,012      1,325        3,409      4,396 
                                   -------    -------      -------    ------- 
                                    62,432     62,508      181,002    184,205 
                                   -------    -------      -------    ------- 
COST AND OTHER EXPENSES:                                                      
  Cost of restaurant sales          50,607     49,874      145,847    146,484 
  Depreciation and amortization                                               
    expenses                         2,845      3,206        8,447      9,277 
  General and administrative                                                  
    expenses                         6,578      6,757       19,567     19,234 
  Other expenses, net                  791      1,036        2,742      3,401 
  Special charge                       -       10,000          -       10,000 
                                   -------    -------      -------    ------- 
                                    60,821     70,873      176,603    188,396 
                                   -------    -------      -------    ------- 
OPERATING INCOME (LOSS)              1,611    ( 8,365)       4,399   (  4,191)
REORGANIZATION ITEM:                                                          
   Professional fees and                                                      
     other expenses                (   776)       -        ( 2,288)       -   
                                                                              
INTEREST EXPENSE                   (   989)   ( 1,014)     ( 3,002)   ( 3,130)
                                                                              
INTEREST INCOME                        135        135          361        565 
                                   -------    -------      -------    ------- 
LOSS BEFORE BENEFIT FROM                                                      
  INCOME TAXES                     (    19)   ( 9,244)     (   530)   ( 6,756)
                                                                              
BENEFIT FROM INCOME TAXES          (     8)   ( 3,513)     (   199)   ( 2,567)
                                   -------    -------      -------    ------- 
NET LOSS                          $(    11)  $( 5,731)    $(   331)  $( 4,189)
                                   =======    =======      =======    ======= 
                                                                              
LOSS PER COMMON SHARE             $   0.00   $(  0.76)    $(  0.04)  $(  0.56)
                                   =======    =======      =======    ======= 
WEIGHTED AVERAGE NUMBER OF                                                    
  COMMON SHARES OUTSTANDING          7,492      7,510        7,502      7,510 
                                   =======    =======      =======    ======= 
<FN>
  See accompanying notes to consolidated condensed financial statements.      
</TABLE>
                                                                              
<PAGE>
<TABLE>
                 THE KRYSTAL COMPANY AND SUBSIDIARY                    
                 ----------------------------------                    
           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY             
           -----------------------------------------------             
                      FOR THE NINE MONTHS ENDED                        
                      -------------------------                        
                SEPTEMBER 29, 1996 AND OCTOBER 1, 1995                 
                --------------------------------------                 
                          (In thousands)                               
                           (Unaudited)                                 
<CAPTION>                                                              
                                     Common    Retained     Deferred   
                                      Stock    Earnings   Compensation 
                                     ------    --------   ------------ 
<S>                                  <C>        <C>         <C>        
BALANCE, December 31, 1995           $40,830    $ 8,195     $(2,378)   
                                                                       
  Net loss                               -        ( 331)        -      
                                                                       
  Forfeiture of 36,000 restricted                                      
   shares                             (  278)       -           278    
  Issuance of 960 common shares to                                     
   management and non-employee                                         
   director under restricted stock                                     
   plan                                    4        -        (    4)   
  Amortization of deferred                                             
   compensation                          -          -           272    
                                      ------     ------      ------    
BALANCE, September 29, 1996          $40,556    $ 7,864     $(1,832)   
                                      ======     ======      ======    
                                                                       
                                                                       
BALANCE, January 1, 1995             $40,909    $13,438     $(2,711)   
                                                                       
  Net loss                               -       (4,189)        -      
                                                                       
  Issuance of 73,440 common shares                                     
   to management and non-employee                                      
   directors under restricted                                          
   stock plan                            569        -        (  569)   
  Tax benefit of restricted                                            
   stock vested                          -           81         -      
  Forfeiture of 40,000 restricted                                      
   shares                             (  213)        -          213    
  Amortization of deferred                                             
    compensation                         -          -           320    
                                      ------     ------      ------    
BALANCE, October 1, 1995             $41,265    $ 9,330     $(2,747)   
                                      ======     ======      ======    
<FN>                                                                   
See accompanying notes to consolidated condensed financial statements. 
</TABLE>
                                                                       
                                                                       
<PAGE>
<TABLE>
                 THE KRYSTAL COMPANY AND SUBSIDIARY                    
                 ----------------------------------                    
                CONSOLIDATED STATEMENTS OF CASH FLOWS                  
                -------------------------------------                  
                        (In thousands)                                 
                          (Unaudited)                                  
<CAPTION>                                                              
                                             For The Nine Months Ended,
                                            ---------------------------
                                              Sept. 29,       Oct. 1,  
                                                1996           1995    
                                             -----------   ------------
<S>                                            <C>            <C>      
OPERATING ACTIVITIES:                                                  
  Net loss                                     $ (  331)      $(4,189) 
  Adjustments to reconcile net loss to net                             
   cash provided by operating activities-                              
    Depreciation and amortization                 8,447         9,277  
    (Increase)decrease in receivables            (   31)          221  
    (Increase) in income tax receivable          (  594)       (  701) 
    Decrease in inventories                         294            48  
    (Increase) in deferred tax asset                 -         (3,800) 
    (Increase) in prepayments and other          (  252)       (  407) 
    Increase (decrease)in accounts payable        2,104        (1,586) 
    (Decrease) in income taxes payable              -          (  318) 
    Increase in accrued liabilities               6,235         9,316  
    Other                                        (  131)          440  
                                                 -------       ------- 
      Net cash provided by operating activities                        
        before reorganization activities         15,741         8,301  
    Changes in liabilities from reorganization                         
      activities:                                                      
      (Decrease) in accounts payable             (   11)          -    
      (Decrease) in accrued liabilities          (3,023)          -    
                                                 -------        ------ 
      Net cash provided by operating activities  12,707         8,301  
                                                 -------        ------ 
INVESTING ACTIVITIES:                                                  
    Additions to property, buildings,                                  
      and equipment                              (4,149)      (13,825) 
    Proceeds from sale of property,                                    
      buildings, and equipment                    2,083           500  
    Payments received on net investment in                             
      direct financing leases                       643           565  
                                                 -------       ------- 
      Net cash used in investing activities      (1,423)      (12,760) 
                                                 -------       ------- 
FINANCING ACTIVITIES:                                                  
    Repayments of long-term debt                 (   41)      ( 3,372) 
    Principal payments of capital                                      
      lease obligations                          (  512)      (   482) 
                                                 -------       ------- 
      Net cash used in financing activities      (  553)      ( 3,854) 
                                                 -------       ------- 
NET INCREASE(DECREASE) IN CASH AND                                     
  TEMPORARY INVESTMENTS                          10,731       ( 8,313) 
                                                                       
CASH AND TEMPORARY INVESTMENTS,                                        
   beginning of period                           13,713        14,804  
                                                 -------       ------- 
CASH AND TEMPORARY INVESTMENTS,                                        
   end of period                                $24,444       $ 6,491  
                                                 =======       ======= 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW                                  
   INFORMATION:                                                        
   Cash paid during the period for:                                    
     Interest                                   $   513       $ 3,379  
     Income taxes                                   637         2,175  
     Reorganization item: professional fees                            
      and other expenses                            618           -    
                                                 =======       ======= 
<FN>                                                                   
See accompanying notes to consolidated condensed financial statements.
</TABLE>
                                                                      


<PAGE>
                   THE KRYSTAL COMPANY AND SUBSIDIARY                 
                   ----------------------------------                 
     NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 
     ---------------------------------------------------------------- 

In July 1994, Krystal was named a defendant in a suit filed in the 
United States District Court for the Middle District of Tennessee, in 
which 41 plaintiffs who were current and former employees of Krystal, 
alleged violations of the Fair Labor Standards Act of 1938 ("FLSA") and 
sought back wages, liquidated damages, costs and attorney's fees.  The 
suit alleged that the plaintiffs were uncompensated for time which they 
worked on Krystal's behalf.  In February 1995, ten additional 
plaintiffs, also current and former employees of Krystal, filed a 
separate suit in the same court containing essentially the same 
allegations.  As a result, Krystal established a reserve of $2,000,000 
to cover the claims of the plaintiffs in the two suits, the costs 
associated therewith, and the claims of any other employees and the 
costs associated therewith.  Since the February 1995 action was 
originally filed, approximately 300 additional plaintiffs joined that 
suit.

On April 18, 1995, Krystal settled the July 1994 case by agreeing to pay 
$840,000 to the plaintiffs and their counsel.  By order dated 
August 28, 1995, the Court in the February 1995 case provisionally 
granted the plaintiffs' motion for court-supervised notice of the 
pendency of that action to prospective class members from among current 
and former employees of Krystal for the past three years.

In the third quarter of 1995, a total of 17 additional current and 
former employees of Krystal filed three additional suits in the United 
States District Courts for the Northern District of Georgia, the 
Northern District of Alabama and the Middle District of Florida, 
containing essentially the same allegations as set forth in the July 
1994 and February 1995 suits.

In light of the three new suits filed against Krystal during the third 
quarter of 1995 and the order entered in the February 1995 suit 
provisionally granting the plaintiffs' motion for court-supervised 
notice of the pendency of that action, Krystal established an additional 
$10,000,000 reserve to cover an estimate of the exposure resulting from 
(i) the claims of the plaintiffs in the four pending suits, (ii) the 
potential for additional claims of other current and former employees, 
(iii) related claims, and (iv) the costs associated therewith, the 
balance of which is $9,822,000 at September 29, 1996.

On December 15, 1995, Krystal filed a voluntary petition under Chapter 11
of the United States Bankruptcy Code with the United States 
Bankruptcy Court for the Eastern District of Tennessee for the purpose 
of completely and finally resolving the various claims filed against the 
Company by current and former employees alleging violations of the FLSA. 
The four pending lawsuits filed against Krystal under the FLSA have been 
stayed by the bankruptcy filing.  Krystal is a debtor-in-possession for 
purposes of the bankruptcy case.  Approximately 8,000 current or former 
employees filed claims by the June 6, 1996 bar date alleging that they 

<PAGE>
worked time for which they were not compensated.  The Company has the 
exclusive right until November 15, 1996 to file a Chapter 11 Plan.  
Prior to that time, the Company is committed to make proposals for the 
resolution of valid FLSA claims.  A proposal to resolve approximately 
5,000 claims of crew members for a aggregate payment of approximately 
$1.6 million was made during the third quarter; counsel for the majority 
of these claimants has not communicated this proposal to its clients.  
The Company expects to contest any FLSA claims which it believes to be 
invalid.

The accrual for employee claims of $9,822,000 at September 29, 1996 is 
based on estimates made by management taking into consideration all
presently available facts and circumstances regarding the bankruptcy
proceedings and FLSA matters discussed above.  However, due to the
uncertainty surrounding the ultimate amount of employee claims,
additional reserves may be required.

The Company is party to other various legal proceedings incidental to 
its business.  The ultimate disposition of these matters is not 
presently determinable but will not, in the opinion of management, have 
a material adverse effect on the Company's financial condition or 
results of operations.



<PAGE>
Item 2.   Management's Discussion and Analysis of Financial      
          -------------------------------------------------      
                Condition and Results of Operations              
                -----------------------------------              
        Comparison of the Three Months Ended September 29, 1996  
        -------------------------------------------------------  
           to the Three Months Ended October 1, 1995             
           -----------------------------------------             

Total revenues decreased 0.1% to $62.4 million for the third quarter of 
1996 compared to $62.5 million for the same period of 1995. Restaurant 
sales increased $380,000.  Company-owned average same restaurant sales 
for the third quarter of 1996 were $242,000 compared to $238,000 for the 
same period in 1995, an increase of 1.7%.  The Company's management 
believes introduction of limited time offering products contributed to 
the third period improvement of sales.  The fast food industry continues 
to experience soft sales resulting in widespread heavy sales discounting 
and new product introductions.  The Company is uncertain as to how long 
the sales softness and resulting discounting will continue, but the 
Company will continue to be adversely affected as long as this 
industry condition persists.  The Company had 250 restaurants open at 
the end of the third quarter of 1996 compared to 255 at the end of the 
third quarter of 1995.

Franchise fees and royalties decreased $143,000 to $762,000 in the third 
quarter of 1996 versus the same period in 1995.  The franchise system 
had 83 restaurants open at the end of the third quarter of 1996 
compared to 78 open at the end of the third quarter of 1995.  The 
decrease is due to franchise fee income recognized on only one franchise 
restaurant opening in the third quarter of 1996, versus income 
recognized on 10 openings in the same period of 1995.

Other revenue, which comes from the Company's aviation subsidiary, was 
$1.0 million in the third quarter of 1996 compared to $1.3 million in 
the third quarter of 1995.  This decline was a result of discontinued 
outside parts sales and closing the maintenance shop in the third 
quarter of 1996.

The average customer check for Company-owned full size restaurants in 
the third quarter of 1996 was $3.65 as compared to $3.48 in the same 
period of 1995, an increase of 4.9%.  The average customer check for 
Company-owned double drive-thru restaurants in the third quarter of 
1996 was $3.94 as compared to $3.85 in the same period of 1995, an 
increase of 2.3%.  The changes in average customer check are due to 
product prices increasing approximately 1.7% in the third quarter of 
1996 over the same period in 1995, and the introduction of promotional 
products and menu combinations which increased the average customer 
check.  Customer counts per restaurant day decreased to 721 in the third 
quarter of 1996 compared to 738 in the same period of 1995, a decrease 
of 2.3%.


<PAGE>
Cost of restaurant sales increased $733,000, approximately 1.5%, to 
$50.6 million in the third quarter of 1996, from $49.9 million in the 
same period of 1995.  Cost of restaurant sales as a percentage of 
restaurant sales increased to 83.4% in the third quarter of 1996 from 
82.7% in the same period of 1995.  These increases are primarily the 
result of increases in food and paper costs and labor expenses that the 
Company was unable to pass through to customers.  Total food and paper 
costs were $20.1 million in the third quarter of 1996 as compared to 
$18.9 million in the third quarter of 1995.  Food and paper costs as a 
percentage of restaurant sales increased to 33.1% in the third quarter 
of 1996 compared to 31.4% in the same period of 1995.  Direct labor 
cost decreased $414,000 in the third quarter of 1996, approximately 
3.0%, to 21.9% of restaurant sales in the third quarter of 1996, versus 
22.7% in the third quarter of 1995.  Assistant restaurant manager labor 
cost increased $217,000, approximately 9.0%.  Assistant restaurant 
manager labor cost as a percentage of restaurant sales increased to 4.3% 
in the third quarter of 1996 from 4.0% in the same period of 1995.  As a 
plan to increase restaurant performance, the number of assistant 
managers has been increased to improve training and supervision with an 
offsetting decrease in direct labor.  Restaurant manager labor cost 
increased $32,000, approximately 1.8%, due to average salary increases 
for the third quarter of 1996.                

Depreciation and amortization expenses decreased $361,000, approximately 
11.3%, to $2.8 million in the third quarter of 1996 as compared to $3.2 
million for the same period in 1995.  This decrease in the third 
quarter of 1996 is due to some assets being fully depreciated in late 
1995 and during 1996.

General and administrative expenses decreased $179,000, approximately 
2.6%, to $6.6 million in the third quarter of 1996 as compared to $6.8 
million for the same period in 1995.  Advertising expense was 
approximately $2.6 million in the third quarters of 1996 and 1995.
Advertising expense as a percentage of restaurant sales was 4.3% in the 
third quarter of 1996 compared to 4.2% in the same period of 1995.
Salaries were approximately $1.9 million in the third quarters of 1996 
and 1995.

A special charge of $10.0 million was recorded in the third quarter of 
1995 in connection with the compensation of hourly employees as 
discussed in the Notes to Consolidated Condensed Financial Statements.

In accordance with Statement of Position 90-7, Financial Reporting by 
Entities in Reorganization Under the Bankruptcy Code, issued by the 
American Institute of Certified Public Accountants, the Company is 
expensing Reorganization Items as incurred.  The total of such 
professional fees and expenses during the third quarter of 1996 was 
$776,000. 

Benefit from income taxes decreased to $8,000 in the third quarter 
of 1996 from $3.5 million in the same period of 1995.  The effective tax 
rate of 38.0% is the approximate combined statutory federal and state 
income tax rates.



<PAGE>
      Comparison of the Nine Months Ended September 29, 1996     
      ------------------------------------------------------     
              to the Nine Months Ended October 1, 1995           
              ----------------------------------------           

Total revenues decreased 1.7% to $181.0 million for the first nine 
months of 1996 compared to $184.2 million for the same period of 1995. 
Restaurant sales accounted for $2.2 million of this $3.2 million 
decrease.  Company-owned average same restaurant sales for the first 
nine months of 1996 were $699,000 compared to $703,000 for the same 
period in 1995, a decrease of 0.6%.  The Company's management believes 
1996 first nine months results reflect a continuing softness in the fast 
food industry resulting in widespread heavy sales discounting throughout 
the industry in addition to more inclement weather in the first quarter 
of 1996 compared to the same period in 1995.  The Company is uncertain 
as to how long the sales softness and resulting discounting will 
continue, but the Company expects its revenues and same restaurant sales 
will continue to be adversely affected as long as this industry 
condition persists.  The Company had 250 restaurants open at the end of 
the first nine months of 1996 compared to 255 at the end of the same 
period in 1995.

Franchise fees and royalties were approximately $2.2 million in the 
first nine months of 1996 and 1995.  The franchise system had 83 
restaurants open at the end of the first nine months of 1996 compared to 
78 open at the end of the same period in 1995.

Other revenue, which comes from the Company's aviation subsidiary, was 
$3.4 million in the first nine months of 1996 compared to $4.4 million 
in the same period of 1995.  This decline was a result of discontinued 
outside parts sales and the closing of a maintenance shop.

The average customer check for Company-owned full size restaurants in 
the first nine months of 1996 was $3.54 as compared to $3.43 in the same 
period of 1995, an increase of 3.2%.  The average customer check for 
Company-owned double drive-thru restaurants in the first nine months of 
1996 was $3.85 as compared to $3.78 in the same period of 1995, an 
increase of 1.9%.  The changes in average customer check are due to 
product prices increasing approximately 1.8% in the first nine months of 
1996 over the same period in 1995, and introducing promotional products 
and menu combinations which increased the average customer check.  
Customer counts per restaurant day decreased to 709 in the first nine 
months of 1996 compared to 738 in the same period of 1995, a decrease 
of 3.9%.

Cost of restaurant sales decreased $637,000, approximately 0.4%, to 
$145.8 million in the first nine months of 1996, from $146.5 million in 
the same period of 1995.  Cost of restaurant sales as a percentage of 
restaurant sales increased to 83.2% in the first nine months of 1996 
from 82.5% in the same period of 1995.  These increases are primarily 
the result of increases in food and paper costs and labor expenses that 
the Company was unable to pass through to customers.  Total food and 
paper costs were $56.2 million in the first nine months of 1996 as 


<PAGE>
compared to $55.4 million in the same period in 1995.  Food and paper 
costs as a percentage of restaurant sales increased to 32.0% in the 
first nine months of 1996 as compared to 31.2% in the same period of 
1995.  Direct labor cost decreased $839,000 in the first nine months of 
1996, approximately 2.1%, to 22.4% of restaurant sales in the first nine 
months of 1996, versus 22.6% in the same period of 1995.  Assistant 
restaurant manager labor cost increased $450,000, approximately 6.1%.  
Assistant restaurant manager labor cost as a percentage of restaurant 
sales increased to 4.5% in the first nine months of 1996 from 4.2% in 
the same period of 1995.  As a plan to increase restaurant performance, 
the number of assistant managers has been increased to improve training 
and supervision with an offsetting decrease in direct labor.  Restaurant 
manager labor cost increased $100,000, approximately 1.8%, due to 
average salary increases for the first nine months of 1996.

Depreciation and amortization expenses decreased $830,000, approximately 
8.9%, to $8.4 million in the first nine months of 1996 as compared to 
$9.3 million for the same period in 1995.  This decrease in the first 
nine months of 1996 is due to some assets being fully depreciated in 
late 1995 and in 1996.

General and administrative expenses increased by $333,000, approximately 
1.7%, to $19.6 million in the first nine months of 1996 versus $19.2 
million in the same period of 1995.  Advertising expense was 
approximately $7.6 million in the first nine months of 1996 and 1995.  
Advertising expense as a percentage of restaurant sales was 4.4% in the 
first nine months of 1996 compared to 4.3% in the same period of 1995.  
Salaries increased $323,000 approximately 6.0%, to $5.7 million in the 
first nine months of 1996 from $5.4 million in the same period 
of 1995.  This increase in salaries was primarily the result of normal 
cost of living increases given to staff employees and the addition of 
key management personnel during 1995.                                

A special charge of $10.0 million was recorded in the third quarter of 
1995 in connection with the compensation of hourly employees as 
discussed in the Notes to Consolidated Condensed Financial Statements.

In accordance with Statement of Position 90-7, Financial Reporting by 
Entities in Reorganization Under the Bankruptcy Code, issued by the 
American Institute of Certified Public Accountants, the Company is 
expensing Reorganization Items as incurred.  The total of such 
professional fees and expenses during the first nine months of 1996 was 
$2.3 million.

Benefit from income taxes decreased to $199,000 in the first nine months 
of 1996 from $2.6 million in the same period of 1995.  The effective tax 
rate of 38.0% is the approximate combined statutory federal and state 
income tax rates.


<PAGE>
                 LIQUIDITY AND CAPITAL RESOURCES                      
                 -------------------------------                      

The filing of the voluntary petition for reorganization under Chapter 11 
of the Federal Bankruptcy Code on December 15, 1995 had a significant 
impact on the Company's liquidity.  The filing stayed payment of 
pre-petition outstanding obligations as of December 15, 1995, resulting 
in a one-time cash benefit of approximately $7.0 million to the Company.
The Bankruptcy Court approved the payment of pre-petition sales taxes 
and real and personal property taxes on owned property totaling 
approximately $2.8 million, which was paid during the first nine months 
of 1996.  Principal payment on senior notes in the amount of $3.0 
million due May 31, 1996, is stayed by the Chapter 11 filing, thus 
providing an additional temporary cash benefit to the Company.  While 
the Company is in Chapter 11, it is prohibited from paying interest or 
principal on pre-petition obligations without the approval of the 
Bankruptcy Court.  To the extent cash generated from operations exceeds 
capital expenditures, working capital requirements, payments approved by 
the Bankruptcy Court and administrative expenses of the reorganization, 
the Company will continue to accumulate cash.

Under court order, the Company has the exclusive right to file a 
proposed plan of reorganization until November 15, 1996.  The Company 
intends to fairly and finally settle the FLSA claims and fully discharge 
its pre-petition obligations.

The Company does not maintain significant inventory or accounts 
receivable since substantially all of its restaurants' sales are for 
cash.  The Company's receivables from franchisees are closely monitored 
and collected weekly.  Approximately $26.4 million of liabilities 
classified as Liabilities Subject to Compromise after the Chapter 11 
filing would otherwise be classified as Current Liabilities at 
September 29, 1996.  The Company normally operates with working capital 
deficits (current liabilities exceeding current assets); however, as a 
result of the reclassification of pre-petition Current Liabilities to 
Liabilities Subject to Compromise, the Company had a working capital 
surplus of $15.9 million at September 29, 1996 compared to a working 
capital deficit of $12.2 million at October 1, 1995. 

Capital expenditures totaled approximately $4.1 million in the first 
nine months of 1996 compared to $13.8 million for the same period in 
1995.  The Company opened no new restaurants during the first nine 
months of 1996 compared to six new restaurants opened during the same 
period of 1995.  Approximately $2.7 million is budgeted for capital 
expenditures in the fourth quarter of 1996 for refurbishing of certain 
restaurants and ongoing capital improvements.  The Company owns 
approximately 54.0% of its restaurant sites and leases the remainder.

Management believes that existing cash and cash flow from operations 
will be sufficient to meet its anticipated capital expenditures and 
other obligations for the remainder of 1996, subject however to the 
terms of any Chapter 11 plan which may be approved in 1996.




<PAGE>
PART II       OTHER INFORMATION


Item l.    Legal proceedings

On December 15, 1995, the Company filed a voluntary petition under 
Chapter 11 of the United States Bankruptcy Code with the United States 
Bankruptcy Court for the Eastern District of Tennessee, for the purpose 
of completely and finally resolving the various claims filed against the 
Company by current and former employees alleging violations of the Fair 
Labor Standards Act of 1938 (FLSA).  The Company is debtor-in-possession 
for purposes of the bankruptcy case.  Approximately 8,000 current and 
former employees filed claims by the June 6, 1996 bar date alleging that 
they worked time for which they were not compensated.  The Company 
expects to contest any claims which it believes to be invalid.  The 
Company has the exclusive right until November 15, 1996 to file a 
Chapter 11 Plan.  Four pending lawsuits filed against the Company under 
the FLSA have been stayed by the bankruptcy filing.

The terms and provisions of any reorganization plan and the timing 
of the final confirmation of such a plan are unknown at this time.  The
Company intends to fairly and finally settle the FLSA claims and fully
discharge its pre-petition obligations.

The Company is party to other various legal proceedings incidental 
to its business.  The ultimate disposition of these matters is not 
presently determinable but will not, in the opinion of management, have 
a material adverse effect on the Company's financial condition or 
results of operations.


Item 6.    Exhibits and Reports on Form 8-K

(a)   Exhibits-

      Exhibit-27 Financial Data Schedule is filed with this 10-Q.
      Computation of per share earnings is shown on the Registrant's
      Consolidated Statements of Operations.

(b)   Reports on Form 8-K-

      No form 8-K was filed during the third quarter of 1996 by the 
      Registrant.

                                                             
<PAGE>                                                             
                                                             
             THE KRYSTAL COMPANY AND SUBSIDIARY              
             ----------------------------------              
                        SIGNATURES                           
                        ----------                           
Pursuant to the requirements of the Securities Exchange Act 
of 1934, the registrant has duly caused this report to be 
signed on its behalf by the undersigned thereunto duly 
authorized.                                                
                                                           
                                                           
                                                           
                                                           
                         THE KRYSTAL COMPANY               
                         (Registrant)                      
                                                           
Dated: 11/7/96           Camden B Scearce                  
--------------           ------------------------          
                         Camden B. Scearce                 
                        (Vice President and Chief Financial
                         and Accounting Officer)           


<PAGE>