FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549
(Mark One)

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 
     ACT OF 1934

For the quarterly period ended March 31, 1998

                                       OR

o  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: SEC #: 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
Incorporation or organization)                               Identification No.)

301 Route 10 East,  Whippany,  New  Jersey  07981,  USA  (Address  of  principal
executive offices) (Zip code)

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

                            Not applicable
(Former name, former address, and former fiscal year, if changed since last
report)

         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 X No ____

                   (APPLICABLE ONLY TO CORPORATE REGISTRANTS)

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

         Common Stock, $.01 par value - 12,750,000 shares as of May 13, 1998


<PAGE>



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

                               Index to Form 10-Q





Part I - Financial Information

Item 1.  Financial Statements                                               Page
   Consolidated Statements of Income for the Three-Month Periods
     ended March 31, 1998 and 1997.............................................3
   Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997......4
   Consolidated Statements of Cash Flows for the Three-Month Periods
     ended March 31, 1998 and 1997.............................................5
   Notes to Consolidated Financial Statements..................................6

   Item 2.  Management's Discussion and Analysis of Financial Condition
     and Results of Operations................................................11

Part II - Other Information

Item 2.  Change in Securities and Use of Proceeds.............................13

Item 6.  Exhibits and Reports on Form 8-K.....................................14
     Signatures...............................................................15



<PAGE>

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

                        Consolidated Statements of Income
                                   (Unaudited)

                    (In thousands, except per share amounts)


<TABLE>
<CAPTION>
                                                      Three-month period
                                                        ended March 31
                                            ------------------------------------
                                                      1998              1997
                                            ------------------------------------
                                                                   (Predecessor)

<S>                                                     <C>              <C>    
Net sales                                               $62,196          $49,683
Cost of goods sold                                       49,632           40,631
                                            ------------------------------------
Gross profit                                             12,564            9,052

Operating expenses:
   Selling                                                1,350            1,129
   General and administrative expenses                    4,966            3,681
   Depreciation and amortization                            367              187
                                             -----------------------------------
Income from operations                                    5,881            4,055

Other income (expense):
   Interest expense                                       (370)            (173)
   Interest income                                          399               90
   Rental income                                             42               45
   Other, net                                                13                8
                                            ------------------------------------
Income before income taxes                                5,965            4,025

Provision for income taxes                                2,433              141
                                            ------------------------------------
Net income                                             $  3,532        $   3,884
                                            ====================================

Pro forma:
   Historical income before provision for income taxes                 $   4,025
   Pro forma adjustments other than income taxes                           (274)
                                                             -------------------
   Pro forma income before income taxes                                    3,751
   Pro forma provision for income taxes                                    1,530
                                                             -------------------
   Pro forma net income                                                $   2,221
                                                             ===================

   Pro forma earnings per share                                         $    .21
                                                             ===================
   Pro forma common shares outstanding                                     9,882
                                                             ===================

Per share data
   Earnings per share - basic                          $    .28
                                            ====================================
   Earnings per share - diluted                        $    .27
                                            ====================================
   Common shares outstanding - basic                     12,750
                                            ====================================
   Common shares outstanding - diluted                   12,873
                                            ====================================

See accompanying notes.
</TABLE>

                                                                        Page 3.
<PAGE>


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

                           Consolidated Balance Sheets

                                 (In thousands)


<TABLE>
<CAPTION>
                                                  March           December
                                                 31, 1998         31, 1997
                                            ------------------------------------
Assets                                         (Unaudited)        (Audited)
Current assets:
<S>                                                  <C>               <C>    
   Cash and cash equivalents                         $13,799           $16,572
   Investments in marketable securities               18,760            14,981
   Accounts receivable, net of allowance for
     doubtful accounts of $78 at December 31,
     1997 and March 31, 1998, respectively             4,316             2,313
   Merchandise inventory                              38,685            34,779
   Prepaid expenses and other current assets           1,854             2,155
   Loans receivable - affiliates and other 
     associated entities                                 420               603
   Deferred tax assets - current                         995               996
                                            ------------------------------------
Total current assets                                  78,829            72,399

Property, equipment and improvements, at cost, 
     net of accumulated depreciation and amortization 20,033            18,518
Other assets                                             398               243
Deferred tax asset, net                                   92               102
                                             -----------------------------------
                                                     $99,352           $91,262
                                             ===================================

Liabilities and stockholders' equity
Current liabilities:
   Current portion of long-term debt               $   7,933         $   7,933
   Accounts payable                                   11,528             7,157
   Accrued expenses                                    4,266             2,096
                                             -----------------------------------
Total current liabilities                             23,727            17,186

Long-term debt, less current portion                  10,917            12,900
                                            ------------------------------------
Total liabilities                                     34,644            30,086

Commitments and contingencies

Stockholders' equity:
   Common stock                                          128               128
   Additional paid-in capital                         52,716            52,716
   Retained earnings                                  11,864             8,332
                                            ------------------------------------
Total stockholders' equity                            64,708            61,176
                                            ------------------------------------
                                                     $99,352           $91,262
                                            ====================================

See accompanying notes.
</TABLE>
                                                                        Page 4.


<PAGE>


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

                      Consolidated Statement of Cash Flows
                                   (Unaudited)

                                 (In thousands)
<TABLE>
<CAPTION>
                                                          Three-month period
                                                            ended March 31
                                               ---------------------------------
                                                       1998            1997
                                               ---------------------------------
                                                                   (Predecessor)
Cash flows from operating activities
<S>                                                  <C>                 <C>   
Net income                                           $     3,532         $3,884
Adjustments to reconcile net income to net cash
   provided by operating activities:
     Depreciation and amortization                           367            187
     Provision for uncollectible accounts                      -             55
     Deferred income taxes                                    11            (24)
     Changes in operating assets and liabilities:
       Accounts receivable                                (2,003)           (87)
       Merchandise inventor                               (3,906)          (696)
       Prepaid expenses and other current assets             301           (694)
       Other assets                                         (155)          (342)
       Accounts payable and accrued expenses               6,541            587
                                               ---------------------------------
Net cash provided by operating activities                  4,688          2,870

Cash flows from investing activities
Purchase of marketable securities                         (3,779)             -
Purchase of property and equipment                        (1,882)          (377)
Loans repaid by (extended to) affiliates and other
     associated entities                                     183           (132)
Loans extended to stockholders                                 -           (154)
                                               ---------------------------------
Net cash used in investing activities                     (5,478)          (663)

Cash flows from financing activities
Payments of long-term debt                                                 (522)
Payments on distribution notes                            (1,983)             -
Payments of capital lease obligations                                       (21)
                                               ---------------------------------
Net cash used in financing activities                     (1,983)          (543)
                                               ---------------------------------

Net (decrease) increase in cash and cash equivalents      (2,773)         1,664
Cash and cash equivalents at beginning of period          16,572          6,056
                                               ---------------------------------
                                               =================================
Cash and cash equivalents at end of period           $    13,799         $7,720
                                               =================================

Supplemental disclosures of cash flow information
Interest paid                                        $       347        $   200
                                               =================================
See accompanying notes.
</TABLE>

                                                                        Page 5.

<PAGE>


                       800-JR Cigar, Inc. and Subsidiaries

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

                                 March 31, 1998

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 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
periods  ended March 31, 1997 and 1998,  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, 1997 to March 31,  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").

For the period from January 1, 1998 through  March 31,  1998,  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.

                                                                        Page 6.

<PAGE>

                       800-JR Cigar, Inc. and Subsidiaries

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

                                 March 31, 1998

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

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 the  three-month  period ended March 31,
1997 reflects the Reorganization,  the Offering and the following adjustments as
if they had occurred on January 1: a) a decrease in aggregate  compensation from
$126 to $100 for the  three-month  period  ended  March 31,  1997 for two of the
Company's executives pursuant to their new employment agreements; b) an increase
in  interest  expense of $417 for the  three-month  period  ended March 31, 1997
assuming  the  issuance of the  Distribution  Notes;  c) a reduction in interest
expense of $173 for the  three-month  period  ended March 31, 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 $56 for the  three-month  period  ended  March 31, 1997  assuming  the
repayment  to the  Company  of loans  receivable  from  stockholders;  and e) an
increase of $1,389 for the  three-month  period  ended March 31, 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.

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 issued  additional  distribution
notes (the "Additional Notes") to the principal  stockholders of the Predecessor
Entities,  for a nominal  amount.  At December 31, 1997,  the initial  principal
amount of the additional notes was

                                                                        Page 7.
<PAGE>

                       800-JR Cigar, Inc. and Subsidiaries

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

                                 March 31, 1998

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

increased to $1 million,  the maximum  allowable.  Such increase  represents the
amount by which the final S  Corporation  earnings of the  Predecessor  Entities
exceeded the principal  amount of the  Distribution  Notes. The Additional Notes
mature on June 1, 2000 and bear interest at the rate of 7% per annum.

Earnings Per Share

In 1997, the Financial  Accounting Standards Board ("FASB") issued Statement No.
128,  Earnings per Share.  Statement 128 replaced the calculation of primary and
fully  diluted  earnings  per share with basic and diluted  earnings  per share.
Unlike  primary  earnings  per share,  basic  earnings  per share  excludes  any
dilative  effects of  options,  warrants  and  convertible  securities.  Diluted
earnings per share is calculated  similar to fully  diluted  earnings per share.
Pro forma earnings per share amounts conform to the Statement 128 requirements.

Pro Forma Earnings Per Share (Unaudited)

Pro forma  earnings  per  share is based on  9,300,000  shares  of common  stock
outstanding  prior to the Offering,  increased by the sale of 581,738  shares of
common  stock  assuming  an initial  public  offering  price of $15.00 per share
($13.58,  net of underwriting  discounts and commissions and estimated  offering
expenses), the proceeds of which would be necessary to pay approximately $7,900,
the  current  portion of the  Distribution  Notes.  The net  income  used in the
calculation  of pro forma  earnings  per share  represents  pro forma net income
decreased by the interest  expense on debt of $173 ($102 on an after-tax  basis)
for the three-month period ended March 31, 1997.

Supplementary  pro forma  earnings  per share for the  three-month  period ended
March 31, 1997 are $.21 based on 9,300,000  shares of common  stock  outstanding
prior to the  Offering,  increased  by (a) the sale of 581,738  shares of common
stock assuming an initial public offering price of $15.00 per share ($13.58, net
of underwriting discounts and commissions and estimated offering expenses),  the
proceeds of which would be necessary to pay  approximately  $7,900,  the current
portion of the Distribution  Notes, and (b) the sale of 571,208 shares of common
stock assuming an initial public offering price of $15.00 per share ($13.58, net
of underwriting discounts and commissions and estimated offering expenses),  the
proceeds of which would be necessary to repay approximately

                                                                        Page 8.

<PAGE>

                       800-JR Cigar, Inc. and Subsidiaries

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

                                 March 31, 1998


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

$7,800, the amount of outstanding debt at March 31, 1997. The net income used in
the calculation of  supplementary  pro forma earnings per share is the pro forma
net income of $2,221 for the three-month period ended March 31, 1997.

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 (the "Offering").  Net
proceeds  of  the  Offering,   after   deducting   underwriting   discounts  and
commissions,  and  professional  fees aggregated  $53,270.  As of March 31, 1998
proceeds of the  Offering  were used for the  following  purposes:  (i) to repay
outstanding indebtedness of $7,300, (ii) $4,900 for the relocation and design of
specialty  stores,  (iii) $4,100 for the purchase of land and building for a new
discount  outlet store and  warehouse  distribution  center,  (iv) the quarterly
principal  payment  of  distribution  notes of  $6,000,  (v)  payment of signing
bonuses to an officer and to MC Management in connection with long-term  service
agreements,  (vi) $1,800 for the upgrade of the Company's  information  systems,
(vii) interest payments of $1,100 on the Distribution  Notes, and (viii) $14,900
for working capital and general corporate  purposes.  The remaining  proceeds of
$11,670 are expected to be used for the following purposes: (i) $4,370 for a new
discount  outlet store and warehouse  distribution  center,  (ii) $5,000 for the
expansion of retail  selling space at existing  discount  outlet  stores,  (iii)
$1,900 for the payment of  distribution  notes,  and (iv) $400 for the  interest
payments on distribution notes.

4.  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 March 31, 1998.

                                                                        Page 9.

<PAGE>

                       800-JR Cigar, Inc. and Subsidiaries

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

                                 March 31, 1998


5.  Historical and Pro Forma Income Taxes

The historical  income tax provision for the three-month  period ended March 31,
1997 principally reflects taxes payable by the S Corporations, which were levied
by certain state and local governments.  The income tax provision for the period
ended March 31, 1998 represents federal and state income taxes.

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.  The
deferred tax asset recorded on the date of the Offering was $1,209.

Pro forma income tax expense for the  three-month  periods  ended March 31, 1997
includes  a  provision  for  federal,  state  and  local  taxes of  $1,530 at an
effective rate of approximately 41%. This amount is comprised of current expense
of $1,800 and a deferred benefit of $270.

6.  Acquisitions

On January 27, 1998,  the Board of Directors  approved the purchase of the stock
of Nicaraguan  America  Tobacco Inc.  ("NATCO"),  the exclusive  importer of all
cigars produced by Nicaragua American Tobacco S.A. ("NATSA"),  a manufacturer of
hand made cigars in Nicaragua. NATCO is owned 50% by an officer/director and 50%
by another  director of the Company,  and 49% and 36% of NATSA is owned by these
same  individuals.  The purchase price is based on a  predetermined  multiple of
earnings of NATCO for the year ended December 31, 1997.

On January  27,  1998,  the  Company  purchased  for a nominal  amount  Casa  
Blanca,  Inc.  ("Casa  Blanca"),  the owner/operator  of the El Rey del Mundo  
Smokers Bar and Lounge within one of the Company's  retail  outlets.  Casa
Blanca was owned by an officer/director of the Company.

                                                                        Page 10.

<PAGE>

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


         This  report  contains  certain  "forward-looking   statements."  Those
statements  appear in a number of places in this report and  include  statements
regarding  the  intent,  belief or  current  expectations  of the  company,  its
directors  and its  officers  with respect to,  among other  things:  (i) trends
affecting the Company's financial  condition or results of operations;  (ii) the
Company's  financing plans;  (iii) the Company's business and growth strategies;
(iv)  the  use of the  proceeds  of the  Offering  by the  Company;  and (v) the
declaration and payment of dividends.  Prospective  investors are cautioned that
any such forward-looking statements are not guarantees of future performance and
involve risks and  uncertainties  and that actual results may differ  materially
from those  projected in the  forward-looking  statements as a result of various
factors.

General.

         The Company is one of the largest distributors and retailers of tobacco
and tobacco related  products in North America.  The Company operates in a large
and  highly  fragmented  industry   characterized  by  multiple  and  relatively
undeveloped  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 the 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  derived  through the Company's  volume buying as a direct  importer and
distributor.

Three-month Period Ended March 31, 1998 Compared to Three-Month Period Ended 
March 31, 1997

         Net sales were $62.2 million and $49.7  million for the first  quarters
of 1998 and 1997,  respectively,  an increase of $12.5 million or 25.2%.  Retail
sales  increased 12.0% to $32.3 million for the first quarter of 1998 from $28.8
million for the first  quarter of 1997.  The  increase  in retail  sales was due
primarily  to a $3.2  million,  or 32.7%  increase in direct  mail cigar  sales.
Wholesale  sales  increased 43.5% to $29.8 million for the first quarter of 1998
from $20.8  million  over the same  period in the prior  year.  The  increase in
wholesale  sales was due to a $3.9  million,  or 41.1%  increase  in direct mail
cigar sales and to a $5.2 million, or 45.4% 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 $12.6 million and $9.1 million for the first  quarters
of 1998 and 1997,  respectively,  an  increase  of $3.5  million  or 38.8%.  The
increase in gross  profit was due to the increase in sales.  As a percentage  of
net sales,  gross profit  increased to 20.2% for the first  quarter of 1998 from
18.2% for the first quarter of 1997, primarily due to an increase in unit volume
of higher margin,  proprietary cigars and strategic  purchases of products based
upon the Companies volume buying opportunities.

                                                                        Page 11.

<PAGE>

         Selling,  general and  administrative  ("S, G & A") expenses  were $6.3
million and $4.8 million for the first quarters of 1998 and 1997,  respectively,
an increase of $1.5  million or 31.2%.  As a percentage  of net sales,  S, G & A
expenses  increased  to 10.1%  for the first  quarter  of 1998 from 9.6% for the
first  quarter  of 1997  primarily  due to  increased  payrolls  for  new  store
openings,  higher telephone  expense and postage expense related to the mailings
of additional catalogues.

         Income from  operations was $5.9 million and $4.1 million for the first
quarters of 1998 and 1997,  respectively,  an increase of $1.8 million or 45.0%.
As a percentage of net sales,  income from operations  increased to 9.5% for the
first quarter of 1998 from 8.2% for the first quarter of 1997,  primarily due to
an increase in sales of higher margin, proprietary cigars.

         Interest  expense  was $0.4  million  and $0.2  million  for the  first
quarters of 1998 and 1997, respectively,  an increase of $0.2 million due to the
issuance of the Distribution Notes. Other income,  primarily interest and rental
income,  was $0.5  million and $0.1  million for the first  quarters of 1998 and
1997, respectively.

         Income  before  income taxes was $6.0  million and $4.0  million for 
the first  quarters of 1998 and 1997, respectively, an increase of $2.0 million 
or 50.0%.

         The  provision  for income  taxes of $2.4  million for the  three-month
period ended March 31, 1998,  represents federal and state income taxes provided
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 March 31, 1997 represents taxes
payable  by the  predecessor  companies  to state and local  governments  at "S"
corporation rates.

         As a result  of the  foregoing,  the  Company  had net  income  of $3.5
million in the first  quarter of 1998,  compared to pro forma net income of $2.2
million for the first quarter of 1997, an increase of $1.3 million or 59.1%.

Liquidity and Capital Resources

         The Company  prior to its Initial  Public  Offering  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 $4.7
million  for the  three-month  period  ended  March 31,  1998.  Net cash used in
investing  activities  during such period was $5.5  million and net cash used in
financing activities was $2.0 million.

         As of March 31, 1998, the Company had working  capital of $55.1 million
compared to $55.2 million at December 31, 1997.  Working capital as of March 31,
1998 is  comprised  primarily  of cash and cash  equivalents  of $13.8  million,
short-term  investments of $18.8 million,  accounts  receivable of $4.3 million,
$38.7  million of  inventory  offset by $15.8  million of  accounts  payable and
accrued  expenses  and $7.9 million of the current  portion of the  distribution
notes.

                                                                        Page 12.

<PAGE>

         At March 31, 1998, 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 with interest at either the bank's
base rate minus 50 basis points or an  increment  over LIBOR,  at the  Company's
option. The Company intends to renew such line of credit upon its expiration.

         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 7.0% 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.  In addition,  on
June 6, 1997,  the  Predecessor  Companies also issued  additional  Distribution
Notes to  shareholders of the  Predecessor  Companies for a nominal  amount.  On
December 31, 1997, the initial  principal  amount was increased to $1.0 million,
the maximum allowable.  The additional Distribution Notes mature on June 1, 2000
and bear  interest at the rate of 7.0% per annum.  The holders of the notes have
agreed to  subordinate  payment of principal  and interest to senior  lenders if
required by credit  agreements.  The existing credit  agreement does not require
subordination  in the event of a default  under the terms and  conditions of the
agreement.

         During  1995,   the  Company   purchased   versions  of  its  principal
information technology software packages, which have been certified as Year 2000
compliant by the respective  software vendors.  The Company has developed a plan
to modify  non-critical  data  processing  systems to prepare for Year 2000. The
Company  expects  that  by  early  1999  it  will  complete   modifications   of
non-critical  data  processing  systems  and does not  expect  the  total  costs
associated with these products will be significant.



Part II.  Other Information

Item 2.  Change 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 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 March 31, 1998, of the net proceeds of $53,270
which were received  following the Company's initial public offering on June 26,
1997:

                                                                        Page 13.

<PAGE>

         New warehouse and discount outlet store                          $4,100
         Relocation and design of specialty stores                         4,900
         Upgrade of information systems and graphics                       1,800
         Reduction of bank debt and mortgages                              7,300
         Payment of Distribution Notes and interest                        7,100
         Payment of employment bonuses`                                    1,500
         Working capital and general corporate use                        14,900

         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 to shareholders of
Predecessor  Companies  referred to in the table above, 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  and  bonuses,   fringe  benefits,  and  expenses
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.

         As of March 31, 1998, the status of proceeds pending final  application
are as follows:

         Temporary investment of proceeds in marketable securities        11,670

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 March 31, 1998.

                                                                        Page 14.

<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:  May 13, 1998                  By:  /s/ Lewis I. Rothman
                                          --------------------
                                           Chairman and President



Date:  May 13, 1998                  By:  /s/ Michael E. Colleton
                                          -----------------------
                                           Chief Financial Officer