Securities and Exchange Commission
                             Washington, D.C. 20549

                                    FORM 10-Q

                   Quarterly Report Under Section 13 or 15(d)
                     Of the Securities Exchange Act of 1934

For Quarter Ended          September 30, 1997
                           ------------------
Commission file number:    0-22675
                           -------

                               800-JR CIGAR, INC.
                               ------------------
             (Exact name of registrant as specified in its charter)

         Delaware                                          52-2022117
         --------                                          ----------
State or other jurisdiction of                   IRS Employer Identification No.
Incorporation or organization

                      301 Route 10 East Whippany, NJ 07981
                      ------------------------------------
               (Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code: (973) 884-9555

Former name, former address and former fiscal year, if changed since last
report: N/A

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                  YES _____                          NO   X

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.

Common Stock, $.01 par value - 12,750,000 shares as of November 13, 1997
<PAGE>

                      800-J.R. Cigar, Inc. and Subsidiaries

                               Index to Form 10-Q

Part I - Financial Information
                                                                            Page
Item 1. Financial Statements (Unaudited)                                    ----
  Consolidated Statements of Income for the Three-Month Periods
    ended September 30, 1996 and 1997 and the Nine-Month Periods ended
    September, 1996 and 1997 (Unaudited).......................................3
  Consolidated Balance Sheets as of December 31, 1996 and September 30, 
    1997 (Unaudited)...........................................................4
  Consolidated Statements of Cash Flows for the Nine-Month Periods ended
    September 30, 1996 and 1997 (Unaudited)....................................5
  Notes to Consolidated Financial Statements...................................6

Item 2. Management's Discussion and Analysis of Financial Condition
  and Results of Operations...................................................14

Part II - Other Information

Item 2. Changes in Securities and Use of Proceeds.............................17

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

Signatures....................................................................19
<PAGE>

                      800-J.R. Cigar, Inc. and Subsidiaries

                        Consolidated Statements of Income
                                   (Unaudited)

                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                         Three-month period        Nine-month period
                                         ended September 30        ended September 30
                                      ------------------------  -------------------------
                                          1997        1996          1997         1996
                                      ------------------------  -------------------------
                                                 (Predecessor)              (Predecessor)

<S>                                    <C>          <C>          <C>           <C>      
Net sales                              $ 62,002     $ 50,856     $ 172,120     $ 137,282
Cost of goods sold                       49,131       41,966       137,819       113,233
                                      ------------------------  -------------------------
Gross profit                             12,871        8,890        34,301        24,049
                                                                             
Operating expenses:                                                          
  Selling                                 1,285        1,026         3,660         3,016
  General and administrative expenses     4,540        4,779        13,936        12,148
  Depreciation and amortization             219          150           601           488
                                      ------------------------  -------------------------
Income from operations                    6,827        2,935        16,104         8,397
                                                                             
Other income (expense):                                                      
  Interest expense                         (471)        (201)         (915)         (593)
  Interest income                           477           45           641           175
  Rental income                              51           96           152           159
  Insurance settlement                        -            -             -           373
  Other, net                                 15            -            76             -
                                      ------------------------  -------------------------
Income before income taxes                6,899        2,875        16,058         8,511
                                                                             
Provision (credit) for income taxes       2,815           36         1,476           106
                                      ------------------------  -------------------------
Net income                             $  4,084     $  2,839     $  14,582     $   8,405
                                      ========================  =========================
Pro forma:
  Historical income before provision 
    for income taxes                   $                         $  16,058
  Pro forma adjustments other than 
    income taxes                                                       977
                                       ----------                 ----------
  Pro forma income before income 
     taxes                                                          17,035

  Pro forma provision for income 
     taxes                                                          (6,951)
                                       ----------                 ----------
  Pro forma net income                 $                          $ 10,084
                                       ==========                 ==========
  Pro forma earnings per share         $                          $   0.91
                                       ==========                 ==========
  Pro forma common shares 
    outstanding                                                     10,855
                                       ==========                 ==========
Per share data 
Net income per share                      .32
                                       ==========                 ==========

Common shares outstanding                12,942
                                       ==========                 ==========
</TABLE>

See accompanying notes.


                                                                               3
<PAGE>

                      800-J.R. Cigar, Inc. and Subsidiaries

                           Consolidated Balance Sheets

                                 (In thousands)

<TABLE>
<CAPTION>
                                                                         (Predecessor)
                                                                         -------------
                                                              September    December
                                                               30, 1997    31, 1996
                                                          -----------------------------
<S>                                                            <C>         <C>     
Assets                                                       (Unaudited)   (Audited)
Current assets:
  Cash and cash equivalents                                    $41,121     $  6,056
  Investment in marketable securities                            4,922     
  Accounts receivable, net of allowance for doubtful accounts              
    of $118 and $172 (unaudited) at December 31, 1996 and                  
    September 30, 1997, respectively                             2,936        1,703
  Merchandise inventory                                         25,971       19,616
  Prepaid expenses and other current assets                      2,422          700
  Loans receivable - affiliates and other associated entities      975        1,070
  Loans receivable - stockholders                                    -        2,471
                                                          -----------------------------
Total current assets                                            78,347       31,616
                                                                           
Property, equipment and improvements, at cost, net of                      
  accumulated depreciation and amortization                     13,499       10,876
Other assets                                                       250          165
Deferred tax asset, net                                          1,250           25
                                                          -----------------------------
                                                               $93,346     $ 42,682
                                                          =============================
Liabilities and stockholders' equity                                       
Current liabilities:                                                       
  Current portion of long-term debt                            $ 7,933     $  2,167
  Current portion of capital lease obligations                      23           89
  Accounts payable                                               9,131        8,947
  Accrued expenses                                               2,953        1,891
                                                          -----------------------------
Total current liabilities                                       20,040       13,094
                                                                           
Long-term debt, less current portion                            15,883        6,112
                                                          -----------------------------
Total liabilities                                               35,923       19,206
                                                                           
Commitments and contingencies                                              
                                                                           
Stockholders' equity:                                                      
  Common stock                                                     128           21
  Additional paid-in capital                                    52,716           28
  Retained earnings                                              4,579       23,845
                                                          -----------------------------
                                                                57,423       23,894
  Less treasury stock, at cost                                       -         (418)
                                                          -----------------------------
Total stockholders' equity                                      57,423       23,476
                                                          -----------------------------
                                                               $93,346     $ 42,682
                                                          =============================
</TABLE>

See accompanying notes                                                  


                                                                               4
<PAGE>

                      800-J.R. Cigar, Inc. and Subsidiaries

                      Consolidated Statements of Cash Flows
                                   (Unaudited)

                                 (In thousands)

<TABLE>
<CAPTION>
                                                                 Nine-month period
                                                                ended September 30
                                                             -------------------------
                                                                  1997       1996
                                                             -------------------------
                                                                          (Predecessor)
<S>                                                            <C>          <C>    
Cash flows from operating activities
Net income                                                     $ 14,582     $ 8,405
Adjustments to reconcile net income to net cash provided                    
  by operating activities:                                                   
    Depreciation and amortization                                   604         674
    Provision for uncollectible accounts                             54           -
    Deferred income taxes                                        (1,225)          -
    Other                                                             -     
    Changes in operating assets and liabilities:                            
      Accounts receivable                                        (1,287)       (830)
      Merchandise inventory                                      (6,355)       (394)
      Prepaid expenses and other current assets                  (1,722)       (858)
      Other assets                                                  (85)         38
      Accounts payable and accrued expenses                       1,246      (1,467)
                                                             -------------------------
Net cash provided by operating activities                         5,812       5,568
                                                                            
Cash flows from investing activities                                        
Purchase of marketable securities                                (4,922)          -
Purchase of property and equipment                               (3,227)     (1,911)
Loans repaid by (extended to) affiliates and other                          
  associated entities                                                95        (641)
Loans extended to stockholders                                     (445)       (559)
                                                             -------------------------
Net cash used in investing activities                            (8,499)     (3,111)
                                                                            
Cash flows from financing activities                                        
Repayment of borrowings under revolving line of credit                -      (2,000)
Proceeds from common stock offering                              54,545           -
Expenses paid in connection with common stock offering           (1,275)          -
(Payments) proceeds of long-term debt                            (6,280)      1,666
Payments on distribution notes                                   (1,983)          -
Payments of capital lease obligations                               (66)        (62)
Distributions to stockholders                                    (7,189)          -
                                                             -------------------------
Net cash provided by (used in) financing activities              37,752        (396)
                                                             -------------------------
Net increase (decrease) in cash and cash equivalents             35,065       2,061
Cash and cash equivalents at beginning of period                  6,056       3,202
                                                             -------------------------
Cash and cash equivalents at end of period                     $ 41,121     $ 5,263
                                                             =========================
Supplemental disclosure of cash flow information                            
Interest paid                                                  $    520         579
                                                             =========================
Income taxes paid                                                 2,653     $    89
                                                             =========================
Non-cash distribution to stockholders                          $  2,959     
                                                             =========================
Distribution notes issued to stockholders                      $ 23,800     
                                                             =========================
</TABLE>

See accompanying notes


                                                                               5
<PAGE>

                      800-J.R. Cigar, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements
                                   (Unaudited)
                    (In thousands, except per share amounts)

                               September 30, 1997

1. Unaudited Financial Statements

The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnote disclosures
normally included in complete financial statements prepared in accordance with
generally accepted accounting principles. For further information, such as
significant accounting policies followed by the Company, refer to the notes to
the Company's audited predecessor consolidated financial statements.

In the opinion of management, the unaudited financial statements include all
necessary adjustments (consisting of normal, recurring accruals) for a fair
presentation of the financial position, results of operations and cash flows for
the interim periods presented. The results of operations for the three-month and
nine-month periods ended September 30, 1996 and 1997, are not necessarily
indicative of the operating results to be expected for a full year.

2. Basis of Presentation, Pro Forma Adjustments and Summary of Accounting
    Policies

Basis of Presentation

800-JR Cigar, Inc. ("800-JR Cigar") was incorporated in Delaware in March 1997.
In connection with 800-JR Cigar's initial public offering of stock (the
"Offering") on June 26, 1997, the former principals of the predecessor group of
companies contributed to 800-JR Cigar all of the outstanding stock in the
entities that comprise the predecessor group of companies, in exchange for
9,300,000 shares of common stock of 800-JR Cigar (the "Reorganization"). The
accompanying financial statements include the results of operations for the
period January 1, 1996 to September 30, 1996, and from January 1, 1997 to June
26, 1997 of J. R. Tobacco of America, Inc., J.N.R. Grocery Corp., J&R Tobacco
(New Jersey) Corp., J. R. Tobacco Company of Michigan, Inc., Cigars by Santa
Clara N.A., Inc., J. R. Tobacco Outlet, Inc., J. R.-46th Street, Inc., J. R.
Tobacco NC, Inc., J. R. Statesville, Inc. and JR Cigar (DC), Inc. (together, the
"Company" or the "Predecessor Entities").


                                                                               6
<PAGE>

                      800-J.R. Cigar, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements
                                   (Unaudited)
                    (In thousands, except per share amounts)

                               September 30, 1997

2. Basis of Presentation, Pro Forma Adjustments and Summary of Accounting
    Policies (continued)

For the period from June 27, 1997 through September 30, 1997, the accompanying
consolidated financial statements include the results of operations of 800-JR
Cigar, as well as all companies that were included in the Predecessor Entities.

All significant intercompany balances and transactions have been eliminated.

The financial statements of the Predecessor Entities are being presented on a
consolidated basis because of their common ownership. The financial statements
have been prepared as if the Predecessor Entities had operated as a single
consolidated group since their respective dates of organization. All significant
intercompany balances and transactions have been eliminated. After the
Reorganization, the Predecessor Entities became subsidiaries of 800-JR Cigar,
Inc.

Pro Forma Adjustments

The unaudited pro forma net income for nine-month period ended September 30,
1997 reflects the Reorganization, the Offering and the following adjustments as
if they had occurred on January 1 of each period: a) a decrease in aggregate
compensation from $253 to $200 for the nine-month period ended September 30,
1997 for the two of the Company's executives pursuant to their new employment
agreements; b) an increase in interest expense of $798 for the nine-month period
ended September 30, 1997 assuming the issuance of the Distribution Notes; c) a
reduction in interest expense of $328 for the nine-month period ended September
30, 1997 and $155 for the three-month period ended September 30, 1997 assuming
the application of proceeds from the Offering to repay all of the Company's
indebtedness other than capital lease obligations; d) a reduction in interest
income of $106 for the nine-month period ended September 30, 1997 and assuming
the repayment to the Company of loans receivable from stockholders; e) an
increase of $1,500 for the nine-month period ended September 30, 1997, related
to signing bonuses paid to an officer of the Company and to MC Management in
connection with the execution of long-term service agreements; and f) an
increase of $5,475 for the nine-month period ended September 30, 1997 for income
taxes based upon pro forma pre-tax income as if the Company had been subject to
federal and additional state income taxes.


                                                                               7
<PAGE>

                      800-J.R. Cigar, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements
                                   (Unaudited)
                    (In thousands, except per share amounts)

                               September 30, 1997

2. Basis of Presentation, Pro Forma Adjustments and Summary of Accounting
    Policies (continued)

On June 6, 1997, the Company issued Distribution Notes to the former principal
stockholders of the Predecessor Entities in the amount of $23,800, representing
estimated undistributed cumulative S Corporation earnings through the date of
the Offering which were taxable to those stockholders. These notes bear interest
at the rate of 7.0% per annum, and are payable on a quarterly basis over the
three-year period following the Offering.

On June 6, 1997, the Predecessor Entities also paid a dividend in the form of
additional notes payable to the former principal stockholders with a nominal
initial principal amount, which amount shall be increased by an amount equal to
the S Corporation earnings of each of the Predecessor Entities in excess of the
principal amount of the Distribution Notes for the taxable period of 1997 that
such Predecessor Entity was an S Corporation based upon such Predecessor
Entity's final S Corporation tax returns or resulting from a final determination
by the Internal Revenue Service or a court increasing such Predecessor Entity's
S Corporation earnings, provided that in no event shall such amount exceed $1.0
million in the aggregate. The additional notes will mature on June 1, 2000 and
bear interest at the rate of 7.0% per annum.

Earnings Per Share

Earnings per share for the quarter ended September 30, 1997 is computed based
upon the weighted average number of common shares outstanding during the period
plus the dilutive effect of options using the treasury stock method and the
average market price for the period.

The 10,854,752 pro forma common shares outstanding is based on a weighted
average calculation derived by using 12,942,257, the weighted average common
shares outstanding for the three-month period ended September 30, 1997 and
9,811,327, the pro forma common shares outstanding for the six-month period
ended June 30, 1997. The net income used in the calculation of pro forma per
share information for the nine-month period ended September 30, 1997 consists of
the pro forma net income of $6,000 for the six-month period ended June 30, 1997
reduced by interest expense on debt of $328 ($194 on an after tax basis) for the
six-month period ended June 30, 1997, plus net income of $4,084 for the
three-month period ended September 30, 1997.

Supplementary pro forma earnings per share for the nine-month period ended
September 30, 1997 is .90 based on a weighted average of the 10,279,233 shares
of common stock outstanding for the six-month period ended June 30, 1997, and
12,942,257 shares outstanding for the three-month period ended September 30,
1997. The net income used in the calculation of supplementary pro forma earnings
per share is the pro forma net income of $6,000 for the six- 


                                                                               8
<PAGE>

                      800-J.R. Cigar, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements
                                   (Unaudited)
                    (In thousands, except per share amounts)

                               September 30, 1997

2. Basis of Presentation, Pro Forma Adjustments and Summary of Accounting
    Policies (continued)

month period ended June 30, 1997, increased by the net income of $4,084 for the
three-month period ended September 30, 1997.

In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings per Share," which the Company is required to adopt in the
fourth quarter of the fiscal year ending December 31, 1997. At that time, the
Company will be required to change the method currently used to compute earnings
per share and to restate all prior periods. Under the new standards, the Company
will be required to disclose both "basic" and "diluted" earnings per share. The
dilutive effect of stock options and other common stock equivalents is excluded
from the calculation of basis earnings per share but is included in the
calculation of diluted earnings per share using treasury stock method. The
Company does not expect that the application of SFAS No. 128 will have a
significant impact on its earnings per share.

3. Initial Public Offering

Effective June 26, 1997, the Company sold 3,450,000 shares of its common stock
at a price of $17 per share in an initial public offering. Net proceeds of the
Offering, after deducting underwriting discounts and commissions, and
professional fees aggregated $53,270. Proceeds of the Offering were used for the
following purposes: (i)to repay outstanding indebtedness of $5,247, (ii) $2,305
for the relocation and design of specialty stores, (iii) the quarterly principal
payment of distribution notes of $1,983, (iv) payment of signing bonuses to an
officer and to MC Management in connection with long-term service agreements,
(v) $1,270 for the upgrade of the Company's information systems, and (vi)
interest payments of $398 on the Distribution Notes. On October 14, 1997, the
Company paid the $2.0 million outstanding under its purchase money mortgagee,
subsequent to the expiration of a 3.0% prepayment penalty. The Company intends
to use approximately $5,917 to pay the remaining current portion of the
Distribution Notes, plus approximately $1,102 of interest related to the
distribution Notes due during the twelve-month period following the offering.
The remaining proceeds will be used for other general corporate purposes.


                                                                               9
<PAGE>

                      800-J.R. Cigar, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements
                                   (Unaudited)
                    (In thousands, except per share amounts)

                               September 30, 1997

4. Statement of Income Presentation

The statement of income of the Company for the nine-month period ended September
30, 1997 reflects the results of operations of the Predecessor Company for the
period January 1, 1997 through June 26, 1997 and the results of the Company from
June 27, 1997 (the date of the consummation of the Offering) through September
30, 1997.

Selected statement of income data from the nine-month period ended September 30,
1997 are as follows ( the date of the offering has been deemed to be July 1,
1997):
                                                                   Nine-months
                                            January 1    July 1        ended
                                            to June     September   September
                                            30,1997      30,1997     30,1997
                                           ----------------------------------
                                          (Predecessor) (Company) (Consolidated)

     Net Revenues                             $110,118    $62,002    $172,120
                                           ==================================

     Gross Profit                             $ 21,430    $12,871    $ 34,301
                                           ==================================

     Operating income                         $  9,277    $ 6,827    $ 16,104
     Other (expense) income                       (118)        72         (46)
                                           ----------------------------------
     Income before provision for income taxes    9,159      6,899      16,058
                                                                     
     Provision (benefit) for income taxes       (1,339)     2,815       1,476
                                           ----------------------------------
     Net income                               $ 10,498    $ 4,084    $ 14,582
                                           ==================================

5. 1997 Long-Term Incentive Plan

Prior to the Offering, the Board of Directors ("Board") and Company's
stockholders approved the Company's 1997 Long-Term Incentive Plan (the
"Incentive Plan"). The purpose of the Incentive Plan is to provide executive
officers, key employees, and others with additional incentives enabling such
persons to increase their ownership interests in the Company. The maximum number
of shares of Common Stock that may be subject to outstanding awards may not be
greater than 800,000 shares. Awards may be settled in cash, shares, other awards
or other property, as determined by the Committee.


                                                                              10
<PAGE>

                      800-J.R. Cigar, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements
                                   (Unaudited)
                    (In thousands, except per share amounts)

                               September 30, 1997

5. 1997 Long-Term Incentive Plan (continued)

In connection with the Offering, Non-Qualified Stock Options to purchase a total
of 450,000 shares of Common Stock of the Company were granted to executives,
employees of MC Management, other employees and consultants of the Company. Each
of the foregoing options have an exercise price per share equal to the initial
public offering price. These options vest generally in three equal installments
on each of the first three anniversaries of the Offering, and generally will
expire on the earlier of 10 years after the date of grant or thirty days after
termination of employment. If termination is for cause, all options will
terminate immediately.

6. 1997 Non-Employee Directors' Stock Plan

Prior to the Offering, the Company adopted and the stockholders approved the
1997 Non-Employee Directors' Stock Plan (the "Directors' Plan"), which provides
for (i) the automatic grant to each non-employee director serving at the
commencement of the Offering of an option to purchase 10,000 shares, and (ii)
thereafter, the automatic grant to each newly elected non-employee director of
an option to purchase 10,000 shares upon such person's initial election as a
director; provided, however, that the number of options which may be granted to
newly elected non-employee directors upon such person's initial election after
the commencement of the Offering may be altered by the Board. A total of 100,000
shares are reserved for issuance under the Directors' Plan.

Options granted under the Directors' Plan will have an exercise price per share
equal to the fair market value of a share at the date of grant. Options will
expire 10 years from the date of grant. Options will vest and become exercisable
ratably, 20% per year, following the date of grant of the options, subject to
acceleration by the Board. The Directors' Plan permits non-employee directors to
elect to receive, in lieu of cash directors' fees, nonforfeitable shares or
nonforfeitable credits representing "deferred shares" settleable at future
dates, as elected by the director.

7. 1997 Employee Stock Purchase Plan

Prior to the Offering, the Company adopted and the stockholders approved, the
1997 Employee Stock Purchase Plan, effective on July 1, 1997. This plan permits
eligible employees of the Company and its subsidiaries (generally all full-time
employees who have completed one year of service) to purchase shares of Common
Stock at a discount. Employees who elect to participate will have amounts
withheld through payroll deduction during six-month purchase periods. At the end
of each purchase period, accumulated


                                                                              11
<PAGE>

                      800-J.R. Cigar, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements
                                   (Unaudited)
                    (In thousands, except per share amounts)

                               September 30, 1997

7. 1997 Employee Stock Purchase Plan (continued)

payroll deductions will be used to purchase stock at a price equal to 85% of the
market price at the beginning of the period or the end of the period, whichever
is lower. Stock purchased under the plan will be subject to a six-month holding
period. The Company has reserved 300,000 shares of Common Stock for issuance
under this plan.

8. Revolving Credit Facility

The Company, upon consummation of the Offering, entered into a new $15 million
revolving Credit Facility through May 31, 1998. Borrowings under this facility
are unsecured and bear interest at the bank's prime rate minus 1/2% or, at the
option of the Company, 1.5% over the London Interbank Offered Rate (LIBOR). No
amounts were outstanding under this facility at September 30, 1997.

9. Historical and Pro Forma Income Taxes

The historical income tax provisions for the three- and nine-month periods ended
September 30, 1996 principally reflect taxes payable by the S Corporations which
were levied by certain state and local governments. The income tax provision for
the periods ended September 30, 1997 principally reflects the S Corporation tax
provision of approximately $361, for the period from January 1, 1997 through
June 26, 1997; federal and state income tax benefit of $491, for the period from
June 27, 1997 to June 30, 1997, which period includes $1,500 of expenses related
to signing bonuses, and a tax benefit of $1,209 for the deferred tax asset
recorded in accordance with the provisions of SFAS No. 109, and a federal and
state tax provision at $2,815 for the three-month period ended September 30,
1997.

The entities in the Predecessor Company were corporations that had elected to be
taxed as S Corporations pursuant to the Internal Revenue Code. In connection
with the Offering, the Company has become subject to federal and additional
state income tax. The pro forma provision for income taxes represents the income
tax provisions that would have been reported had the Company been subject to
federal and additional state income taxes.

Concurrent with becoming subject to federal and additional state income taxes,
the Company recorded a deferred tax asset and a corresponding tax benefit in the
statement of income in accordance with the provisions of SFAS No. 109. This was
approximately $1,209, and, as of the date of the offering, resulted in a total
deferred tax asset of approximately $1,258 which includes certain state and
local tax assets recorded on a historical basis.


                                                                              12
<PAGE>

                      800-J.R. Cigar, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements
                                   (Unaudited)
                    (In thousands, except per share amounts)

                               September 30, 1997

9. Historical and Pro Forma Income Taxes (continued)

Pro forma income tax expense for the nine-month periods ended September 30, 1997
includes a provision for federal, state and local taxes of $6,951 at an
effective rate of approximately 41%. This amount is comprised of current expense
of $7,295 and a deferred benefit of $344.


                                                                              13
<PAGE>

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

Except for historical matters, certain matters discussed in this Form 10-Q may
contain forward-looking statements. Such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties. Actual
results may differ from those projected in the forward-looking statements as of
result of various factors.

General

      The Company is the largest distributor and retailer of brand name premium
cigars in the United States. The Company operates in a large and highly
fragmented industry characterized by multiple and relatively underdeveloped
channels of distribution. Over its 27-year history in the cigar industry, the
Company has established itself as an important participant in the movement of
products from manufacturers to customers. Manufacturers benefit from the
Company's ability to perform a number of functions, such as distribution,
credit, customer support and marketing, which would otherwise be the
responsibility of the manufacturer. Customers benefit from the Company's
extensive variety of tobacco products, rapid order fulfillment and advantageous
pricing made possible through the Company's volume buying as an importer and
distributor.

Three-month Period Ended September 30, 1997 Compared to Three Month Period Ended
September 30, 1996

      Net sales were $62.0 million and $50.9 million for the third quarters of
1997 and 1996, respectively, an increase of $11.1 million or 21.9%. Retail sales
increased 22.4% to $35.2 million for the third quarter of 1997 from $28.8
million for the third quarter of 1996. The increase in retail sales was due
primarily to a $4.6 million or 50.6% increase in direct mail cigar sales and a
$1.3 million or 27.6% increase in cigar store sales. Wholesale sales increased
21.3% to $26.8 million for the third quarter of 1997 from $22.1 million over the
same period in the prior year. The increase in wholesale sales was due primarily
to a $1.3 million, or 12.7% increase in direct mail cigar sales and to a $3.4
million, or 30.0% increase in cash and carry cigarette sales. The total increase
in net sales was primarily attributable to increases in unit volume, primarily
for premium cigars and cigar-related products and to a lesser extent to price
increases.

      Gross profit was $12.9 million and $8.9 million for the third quarters of
1997 and 1996, respectively, an increase of $4.0 million or 44.8%. The increase
in gross profit was due primarily to the increase in premium cigar sales, which
have higher gross profit margins relative to the Company's other products. As a
percentage of net sales, gross profit increased to 20.8% for the third quarter
of 1997 from 17.5% for the third quarter of 1996, primarily due to an increase
in unit volume of higher margin, premium cigars.

      Selling, general and administrative expenses ("S, G&A") were $6.0 million
and 


                                                                              14
<PAGE>

$5.9 million for the third quarters of 1997 and 1996, respectively, an increase
of $.1 million or 1.5%. As a percentage of net sales, S,G & A expenses decreased
to 9.8% for the third quarter of 1997 from 11.7% for the third quarter of 1996.

      Income from operations was $6.8 million and $2.9 million for the third
quarters of 1997 and 1996, respectively, an increase of $3.9 million or 132.6%.
As a percentage of net sales, income from operations increased to 11.0% for the
third quarter of 1997 from 5.8% for the third quarter of 1996, primarily due to
an increase in sales of higher margin, premium cigars.

      Interest expense was $.5 million and $.2 million for the third quarters of
1997 and 1996, respectively, an increase of $.3 million due to the issuance of
the Distribution Notes. Other income, primarily interest and rental income, was
$.5 million and $.1 million for the third quarters of 1997 and 1996,
respectively.

      Income before income taxes was $6.9 million and $2.9 million for the third
quarters of 1997 and 1996, respectively, an increase of $4.0 million or 140%.

      The provision for income taxes of $2.8 million for the three month period
ended September 30, 1997, represents federal and state income taxes accrued at
corporate rates since the company became a "C Corporation" effective with the
initial public offering of the company's common stock on June 26, 1997. The
income tax provision for the three months ended September 30, 1996 represents
taxes payable by the predecessor companies to state and local governments.

      As a result of the foregoing, the Company had net income of $4.1 million
in the third quarter of 1997, compared to $2.8 million for the third quarter of
1996, an increase of $1.2 million or 43.9%.

Nine month Period Ended September 30, 1997 Compared to Nine month Period Ended
September 30, 1996

      Net sales were $172.1 million and $137.3 million for the first nine months
of 1997 and 1996, respectively, an increase of $34.8 million or 25.4%. Retail
sales increased 27.5% to $98.1 million for the first nine months of 1997 from
$77.0 million for the first nine months of 1996. The increase in retail sales
was due primarily to a $12.1 million or 49.2% increase in direct mail cigar
sales and a $6.1 million or 59.4% increase in cigar store sales. Wholesale sales
increased 22.7% to $74.0 million for the first nine months of 1997 from $60.3
million over the same period in the prior year. The increase in wholesale sales
was due primarily to a $10.0 million, or 42.5% increase in direct mail cigar
sales and to a lesser extent to a $3.7 million or 10.1% increase in cash & carry
cigarettes. The total increase in net sales was attributable to increases in
unit volume and prices, primarily for premium cigars and cigar-related products.

      Gross profit was $34.3 million and $24.0 million for the first nine months
of 1997 


                                                                              15
<PAGE>

and 1996, respectively, an increase of $10.3 million or 42.6%. The increase in
gross profit was due primarily to the increase in premium cigar sales, which
have higher gross profit margins relative to the Company's other products. As a
percentage of net sales, gross profit increased to 19.9% for the first nine
months of 1997 from 17.5% for the first nine months of 1996, primarily due to an
increase in unit volume of higher margin, premium cigars.

      Selling, general and administrative expenses ("S, G& A") were $18.2
million and $15.7 million for the first nine months of 1997 and 1996,
respectively, an increase of $2.5 million or 16.3%. Included in S, G& A expenses
for 1997 was a one time, $1.5 million expense related to signing bonuses paid to
a key employee and MC Management, Inc., a service provider to the Company, in
connection with the execution of long term service agreements. The balance of
the increase in S, G& A expenses was related to increased staffing and other
costs. As a percentage of net sales, S, G& A expenses decreased to 10.6% for the
first nine months of 1997 from 11.4% for the first nine months of 1996.

      Income from operations was $16.1 million and $8.4 million for the first
nine months of 1997 and 1996, respectively, an increase of $7.7 million or
91.8%. As a percentage of net sales, income from operations increased to 9.4%
for the first nine months of 1997 from 6.1% for the first nine months of 1996,
primarily due to an increase in sales of higher margin, premium cigars.

      Interest expense increased to $.9 million for the first nine months of
1997 from $.6 million in 1996, due to the issuance of the Distribution Notes.
Other income, primarily interest and rental income, was $.9 million and $.76
million for the first nine months of 1997 and 1996, respectively. Other income
for 1996 included $.4 million from a business interruption insurance settlement
related to damages suffered at the company's Whippany location from severe
weather conditions.

      As a result of the foregoing, income before income taxes increased $7.5
million, or 88.7%, from $8.5 million for the first nine months of 1996 to $16.1
million for the same period in 1997. The tax provision of $1.5 million for the
nine months ended September 30, 1997 includes a provision of $2.7 million for
federal and state income taxes at corporate rates and a credit of $1.2 million
representing a deferred tax asset recorded concurrently with becoming subject to
federal and additional state income taxes. The Company had net income of $14.6
million in the first nine months of 1997, compared to $8.4 million for the first
nine months of 1996, an increase of $6.2 million or 73.5%.

Liquidity and Capital Resources

      The Company historically has financed its business through internally
generated funds, bank debt and loans from certain shareholders. The Company's
net cash provided by operating activities was $5.8 million for the nine-month
period ended 


                                                                              16
<PAGE>

September 30, 1997. Net cash used in investing activities during such period was
$8.5 million and net cash provided by financing activities was $37.8 million,
resulting from the net proceeds of $53.3 million from the initial public
offering.

As of September 30, 1997, the Company had working capital of $58.3 million
compared to $18.5 million at December 31, 1996. Working capital at September 30,
1997 is comprised primarily of cash and equivalents of $41.1 million, short term
investments of $4.9 million, accounts receivable of $2.9 million, $26.0 million
of inventory, $12.1 million of accounts payable and accrued expenses and $7.9
million of the current portion of long term debt. On July 1, 1997 the Company
received $54.5 million from the underwriting syndicate representing net proceeds
of the Company's Initial Public Offering.

At September 30, 1997 the Company had no funded indebtedness.

The Company has available a short term, unsecured line of credit in the amount
of $15.0 million through May 31, 1998 and will be charged interest at either the
bank's base rate minus 50 basis points or an increment over LIBOR , at the
Company's option.

At September 30, 1997 the Company had a purchase money mortgage in the amount of
$2.0 million, with a fixed interest rate of 8.25%, secured by certain property,
equipment and improvements at the Whippany location. The $2.0 million mortgage
was paid on October 14, 1997 with the proceeds of the offering subsequent to the
expiration of a 3% prepayment penalty.

On June 6, 1997 the Company issued notes in the aggregate amount of $23.8
million to shareholders of the predecessor companies, representing the estimated
cumulative undistributed earnings of the predecessor companies which operated
under Subchapter "S" of the Internal Revenue Service code. The notes have a
fixed interest rate of 7% and require quarterly payments in aggregate of $2.0
million plus interest through June 1, 2000. The first payment of principal and
interest was made effective September 1, 1997. The holders of the notes have
agreed to subordinate payment of principal and interest to senior lenders if
required by credit agreement. The new credit agreement does not require
subordination in the event of a default under the terms and conditions of the
agreement.

      The Company believes that the proceeds of the Offering, together with
internally generated funds and amounts available under lines of credit, will
provide sufficient cash to meet the Company's capital and other cash
requirements for the foreseeable future.

Part II - Other Information

Item 2. Changes in Securities and Use of Proceeds

      Securities Act Rule 229.463 ("Rule 463") required issuers to report on
Form SR their use of proceeds, following an initial public offering, within ten
days of the first three months following the effective date of the registration
statement, and every six months thereafter, until 


                                                                              17
<PAGE>

the application of all such proceeds was complete. Effective September 2, 1997,
pursuant to Release No. 34-38850, the Securities and Exchange Commission ("SEC")
amended Rule 463 to eliminate Form SR and now requires a first-time registrant
to report the application of proceeds in each of its periodic Exchange Act
reports until the application of such proceeds is complete.

      The information provided below represents a reasonable estimate of the
cumulative application, through September 30, 1997, of the net proceeds of $
$53,270 which were received following the Company's initial public offering on
June 26, 1997:

Relocation and design of specialty stores                   $ 2,305

Upgrade of information systems and graphics                 $ 1,270

Reduction of bank debt and mortgages                        $ 5,247

Payment of distribution notes                               $ 2,381

Payment of employment bonuses                               $ 1,500

Working capital and general corporate use                   $13,070

      Except for payments described in the following sentence, the cumulative
application of the net offering proceeds listed above represent direct payments
to others. Except for the payment of the distribution notes referred to in the
preceding paragraph, no payments were made to directors or officers or to their
associates except for payments made in the ordinary course of business which
include, but may not be limited to, the payment of officer salaries, fringe
benefits, and expense reimbursements or compensation paid to directors for their
attendance at board meetings or for their service provided to the Company under
consulting arrangements, if any.

      At September 30, 1997, the status of proceeds pending final application
are as follows:

Temporary investment in cash equivalents                    $22,575

Temporary investment of proceeds in marketable securities   $ 4,922

Item 6. Exhibits and Reports on Form 8-K

      The Company did not file any reports on Form 8-K during the three months
ended September 30, 1997.


                                                                              18
<PAGE>

                                   Signatures

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

                               800-JR CIGAR, INC.
                               ------------------
                                  (Registrant)


Date: November 13, 1997                              by: /s/ Lewis I. Rothman
                                                      Chairman and President


Date:  November 13, 1997                             by: /s/ Timothy P. Shannon
                                                      Chief Financial Officer


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