**United States**
 **Securities and Exchange Commission**
 **Washington, D.C. 20549**
 
 **FORM 10-QSB**
 
 (Mark One)
 
 **x**
**Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934**
 
 For the quarterly period ended December 26, 2004
 
 or
 
 o
**Transition Report Under Section 13 or 15(d) of the Exchange Act**
 
 For the transition period from ________ to ________
 
 Commission file number 0-024828
 ________________________________
 
 **GRAND HAVANA ENTERPRISES, INC.**
 **(** **Exact name of small business issuer as specified in its charter** **)**
 
 **DELAWARE**

**95-4428370****(State or other jurisdiction of incorporation or organization)**

**(IRS Employer Identification No.)**
 
 **1990 Westwood Boulevard, 3** **rd** **Floor**
 **Los Angeles, CA 90025**
 **(Address of principal executive offices)**
 
 **(310) 475-5600**
 **(Issuer s telephone number)**
 
 **N/A**
 **(Former name, former address and former fiscal year, if changed since last report)**  ****
 ________________________________
 
 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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
 
 As of January 3, 2005, there were 14,599,306 shares of Common Stock outstanding.
 
 Transitional Small Business Disclosure Format Yes  ̈ No x
 
  INDEX
 
 PART I.
FINANCIAL INFORMATION (unaudited)Item 1.
Financial Statements: (unaudited)Condensed Consolidated Balance Sheets as of December 26, 2004 (unaudited)and September 26, 2004
1Condensed Consolidated Statements of Operations for the quarter ended December 26, 2004and December 28, 2003 (unaudited)
2Condensed Consolidated Statements of Cash Flows for the quarter ended December 26, 2004and December 28, 2003 (unaudited)
3Notes to the Condensed Consolidated Financial Statements (unaudited)
4Item 2.
Management's Discussion and Analysis or Plan of Operation
7Item 3.
Controls and Procedures
11PART II.
OTHER INFORMATIONItem 6.
Exhibits
12SIGNATURES
12
  
  **PART I - FINANCIAL INFORMATION**
 
 **ITEM 1. FINANCIAL STATEMENTS**
 
 **GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES**
 **CONDENSED CONSOLIDATED BALANCE SHEETS**
 
 December26, 2004


September26, 2004ASSETS


(unaudited)CURRENT ASSETSCash and cash equivalents

$
297,989

$
121,338Accounts receivable, net


142,776


195,343Inventories, net


310,275


257,872Prepaid expenses


75,153


96,231TOTAL CURRENT ASSETS


826,193


670,784PROPERTY AND EQUIPMENT, net of accumulated depreciation


1,931,999


2,009,099OTHER ASSETSRestricted cash


760,000


760,000Deposits and other assets


77,088


77,088TOTAL OTHER ASSETS


837,088


837,088TOTAL ASSETS

$
3,595,280

$
3,516,971LIABILITIES AND STOCKHOLDERS' DEFICIENCYCURRENT LIABILITIESCash overdraft

$
97,562

$
140,132Accounts payable and accrued liabilities


465,958


531,155Taxes payable


213,171


250,397Notes payable


185,000


185,000Deferred revenues


432,090


491,254Notes payable to related parties


120,000


120,000TOTAL CURRENT LIABILITIES


1,513,781


1,717,938LONG TERM LIABILITIESNotes payable to related parties


3,214,702


3,284,702Interest payable to related parties


40,331


--Deferred rent payable


475,419


480,927Sublease security deposit


48,308


48,308TOTAL LONG TERM LIABILITIES


3,778,760


3,813,937STOCKHOLDERS' DEFICIENCYPreferred stock, $.01 par value; authorized -3,000,000 shares; issued and outstanding - noneCommon stock, $.01 par value; authorized -50,000,000 shares; issued and outstanding -14,599,306 shares


145,994


145,994Additional paid-in capital


13,279,044


13,279,044Accumulated deficit


(15,122,299
)

(15,439,942
)TOTAL STOCKHOLDERS' DEFICIENCY


(1,697,261
)

(2,014,904
)TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY

$
3,595,280

$
3,516,971
 
 See accompanying Notes to Condensed Consolidated Financial Statements.
  1
  **GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES**
 **CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**
 **(Unaudited)**
 For the Quarter EndedDecember 26,2004


December 28, 2003REVENUESFood and beverage

$
1,269,344

$
1,110,510Merchandise sales


134,893


129,871Membership (humidor rental) fees


647,033


674,382Club activities


245,240


286,341TOTAL REVENUES


2,296,510


2,201,104COSTS AND EXPENSESFood and beverage


452,212


433,269Merchandise


72,602


71,631Operating expensesDirect Labor


460,050


459,682Occupancy and other


652,104


624,317General and administrative


211,055


187,105Depreciation and amortization


83,051


81,761TOTAL COSTS AND EXPENSES


1,931,074


1,857,765INCOME BEFORE OTHER INCOME (EXPENSE)


365,436


343,339OTHER INCOME (EXPENSE)Interest income


1,894


784Interest expense


(49,687
)

(52,425
)TOTAL OTHER INCOME (EXPENSE)


(47,793
)

(51,641
)NET INCOME

$
317,643

$
291,698NET INCOME PER COMMON SHAREBASIC

$
0.02

$
0.02DILUTED

$
0.02

$
0.02WEIGHTED AVERAGE NUMBER OF COMMON SHARESBASIC


14,599,306


14,524,306DILUTED


14,824,306


14,624,306
 
 See accompanying Notes to Condensed Consolidated Financial Statements.
 
 2
  **GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES**
 **CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(Unaudited)**
 For the quarter endedDecember 26, 2004


December 28, 2003CASH FLOWS FROM OPERATING ACTIVITIESNet income (loss)

$
317,643

$
291,698Adjustments to reconcile net loss to net cash used inoperating activities:Depreciation and amortization


83,051


81,761Changes in operating assets and liabilities:Accounts receivable, net


52,567


(26,213
)Inventories, net


(52,403
)

(32,028
)Prepaid expenses


21,078


(31,586
)Due from related parties


-


(1,527
)Deposits and other assets


-


(11,371
)Accounts payable and accrued liabilities


(65,197
)

(38,300
)Taxes payable


(37,226
)

(6,735
)Interest payable to related party


40,331


--Deferred revenues


(59,164
)

(41,246
)Deferred rent payable


(5,508
)

(5,508
)NET CASH PROVIDED BY OPERATING ACTIVITIES


295,172


178,946CASH FLOWS FROM INVESTING ACTIVITIESPurchases of property and equipment


(5,951
)

(4,270
)CASH FLOWS FROM FINANCING ACTIVITIESCash overdraft


(42,570
)

(232,485
)Notes payable and due to related parties


(70,000
)

10,372NET CASH USED IN FINANCING ACTIVITIES


(112,570
)

(222,113
)NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS


176,651


(47,437
)CASH AND CASH EQUIVALENTS, beginning of period


121,338


368,206CASH AND CASH EQUIVALENTS, end of period

$
297,989

$
320,769Supplemental disclosures:Interest paid

$
1,869

$
7,662Income tax paid

$
705

$
705
 
 See accompanying Notes to Condensed Consolidated Financial Statements.
  3
  
 **GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES**
 **NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **QUARTERS ENDED DECEMBER 26, 2004 AND DECEMBER 28, 2003**
 **(Unaudited)**
 
 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
 
 The interim consolidated condensed financial statements presented have been prepared by Grand Havana Enterprises, Inc. (the Company ) without audit, and in the opinion of the management, reflect all adjustments of a normal recurring nature necessary for a fair presentation of statements of (a) the consolidated results of operations for the three months ended December 26, 2004 and December 28, 2003, (b) the consolidated financial position at December 26, 2004 and (c) the consolidated cash flows for the three months ended December 26, 2004 and December 28, 2003. Interim results are not necessarily indicative of the results for a full year. The consolidated balance sheet presented as of September 26, 2004 has been derived from the consolidated financial statements that have been audited by the Company's independent auditors. The consolidated financial statements and notes are condensed as permitted by Form 10-QSB and do not contain certain information included in the annual financial statements and notes of the Company. The consolidated financial statements and notes included herein should be read in conjunction with the financial statements and notes included in the Company s Annual Report on Form 10-KSB.
 
 Use of Estimates . The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
 
 Revenue Recognition and Measurement . The Company derives revenues from four principal sources: (1) membership (humidor rental) fees; (2) sales of cigars and related merchandise; (3) private events and club activities; and (4) food and beverage sales. Revenue from sales of cigars and related merchandise, private events and club activities, and food and beverage sales are recognized at the time of the sale. The Company recognizes two types of membership (humidor rental) fees, an initial fee, or set up fee, and a monthly rental fee. The initial fee is recognized at the time the member joins. The monthly rental fee is charged in advance for a three-month period, and recognized equally over the three-month period. Deferred revenue represents those humidor fees charged in advance and recognized equally over the three-month period.
 
 Income (Loss) Per Share . Basic income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted income per share is calculated assuming the issuance of common shares, if dilutive, resulting from the exercise of stock options and warrants.
 
 Principles of Consolidation . The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.
 
 Fair Value of Financial Instruments . The Company s financial instruments consist of cash and cash equivalents, trade accounts receivable, trade accounts payable, accrued expenses, deferred liabilities and term loans. The fair value of the Company s financial instruments approximates the carrying value of the instruments.
 
 Recent Accounting Pronouncements . In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 150, entitled Accounting for Certain Financial Instruments and Characteristics of Both Liabilities and Equity ( SFAS 150 ). SFAS 150 changes the accounting for certain financial instruments with characteristics of both liabilities and equity that, under previous pronouncements, issuers could account for as equity. The new accounting guidance contained in SFAS 150 requires that those instruments be classified as liabilities on the balance sheet.
 
 4
 
 SFAS 150 affects the issuer's accounting for three types of freestanding financial instruments. One type is mandatory redeemable shares, which the issuing company is obligated to buy back in exchange for cash or other assets. A second type includes put options and forward purchase contracts, which involve instruments that require the issuer to buy back some of its shares in exchange for cash or other assets. The third type of instruments that are liabilities under SFAS 150 are obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such as a market index, or that vary inversely with the value of the issuer's shares. SFAS 150 does not apply to features embedded in a financial instrument that are not derivative in their entirety.
 
 Most of the provisions of SFAS 150 are consistent with the existing definition of liabilities in FASB Concepts Statement No. 6, entitled "Elements of Financial Statements". The remaining provisions of SFAS 150 are consistent with FASB's proposal to revise the definition to encompass certain obligations that a reporting entity can settle by issuing its own shares. SFAS 150 is effective for the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of a non-public entity, where the effective date is the fiscal period beginning after December 15, 2004.
 In December 2004, FASB issued SFAS No. 123 (R), "Share-Based Payment" ("SFAS 123 (R)"). SFAS 123 (R) revises SFAS No. 123, "Accounting for Stock-Based Compensation" and supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123 (R) focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123 (R) requires companies to recognize in the statement of operations the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). SFAS 123 (R) is effective as of the first interim or annual reporting period that begins after June 15, 2005 for non-small business issuers, and after December 15, 2005 for small business issuers. Accordingly, the Company will adopt SFAS 123 (R) in its quarter ending March 31, 2006. The Company is currently evaluating the provisions of SFAS 123 (R), and has not yet determined the impact, if any, that SFAS 123 (R) will have on its financial statement presentation or disclosures.
  In November 2004, FASB issued SFAS No. 151, "Inventory Costs - An Amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends the guidance given in ARB No. 43, Chapter 4, "Inventory Pricing" ("ARB 43"), to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that "under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges . . . ." SFAS 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal". In addition, SFAS 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management does not believe that the adoption of this statement will have any immediate material impact on the Company.
  In December 2004, FASB issued SFAS No. 152 , "Accounting for Real Estate Time-sharing Transactions," which amends FASB statement No. 66, Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position SOP 04-2, Accounting for Real Estate Time-Sharing Transactions. This statement also amends FASB Statement No. 67, "Accounting for Costs and Initial Rental Operations of Real Estate Projects," to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2. This statement is effective for financial statements for fiscal years beginning after June 15, 2005. Management believes the adoption of this statement will have no impact on the financial statements of the Company.
  In December 2004, FASB issued SFAS No. 153, "Exchange of Nonmonetary Assets." This statement addresses the measurement of exchanges of nonmonetary assets. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that opinion, however, included certain exceptions to that principle. This statement amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetrary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This statement is effective for financial statements for fiscal years beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges incurred during fiscal years beginning after the date this statement is issued. Management believes the adoption of this statement will have no impact on the financial statements of the Company.
  The implementation of the provisions of these pronouncements are not expected to have a significant effect on the Company's consolidated financial statement presentation.
 2. SEGMENT INFORMATION
 
 The following segment information for the three months ended December 26, 2004 and December 28, 2003 is broken down into geographic areas as follows:
 
 Revenues


December 26, 2004


December 28, 2003New York, New York

$
1,671,121

$
1,518,637Beverly Hills, California


625,389


682,467Total

$
2,296,510

$
2,201,104Gross ProfitNew York, New York

$
1,032,745

$
919,142Beverly Hills, California


278,901


317,380Total

$
1,311,646

$
1,236,522Net Income/(Loss)New York, New York

$
494,768

$
403,427Beverly Hills, California


89,551


116,864Los Angeles, California (corporate)


(266,676
)

(228,593
)Total

$
317,643

$
291,698
    5
   Total AssetsNew York, New York

$
2,317,715

$
2,304,817Beverly Hills, California


1,100,348


1,104,310Los Angeles, California (corporate)


177,217


255,617Total

$
3,595,280

$
3,664,744
 
 3. RELATED PARTY TRANSACTIONS
 
 Notes Payable to Related Parties . Notes payable to related parties at December 26, 2004 and September 26, 2004 consisted of principal amounts due to the following:
 
 December 26, 2004


September 26, 2004(A) Promissory notes, former chief executive officer

$
2,375,050

$
2,435,050(B) Affiliated company


798,786


798,786(C) Former landlord


160,866


170,866$
3,334,702

$
3,404,702
 
 (A) At March 1, 2004, the Company was indebted to its former chief executive officer in the total amount of $2,500,901 as a result of monies owed pursuant to notes issued to the former CEO in 1998 and 2001, and as a result of accrued liabilities to advances made by the former CEO. On March 1, 2004, the Company and its former chief executive officer agreed to cancel and terminate the obligations owed by the Company as of such date, and, in lieu thereof, issued a new promissory note to the former CEO in the amount of $2,500,901 (the "March 2004 Note"). On September 26, 2004, the Company canceled the March 2004 Note and issued a new, unsecured promissory note for principle and unpaid interest of $2,435,050 (the "September 2004 Note"). The September 2004 Note bears interest at 5% per annum. The Company has the right to prepay the September 2004 Note in whole or in part at any time. In addition, the Company has agreed to pay its former chief executive officer successive monthly payments of at least $10,000, commencing on October 1, 2004 and continuing on the first day of each month until the loan matures. The September 2004 Note is due and payable upon the earlier of (1) September 30, 2007, (2) the sale of all or substantially all of the assets of the Company, or (3) a change in control of the Company. During the quarter ended December 26, 2004, the Company paid its former chief executive officer $60,000.
 
 (B) At March 1, 2004, the Company was indebted to an affiliated company in the amount $782,917 as a result of monies due under a promissory note issued in May 1997 (the "1997 Promissory Note"). On March 1, 2004, the Company and the affiliated company agreed to cancel and terminate the obligations due under the 1997 Promissory Note, and, in lieu thereof, the Company issued a promissory note in the amount of $782,917 (the "March 2004 United Film Note"). On September 26, 2004, the Company canceled the March 2004 United Film Note and issued a new, unsecured promissory note for principle and unpaid interest of $798,786 (the "September 2004 United Film Note"). The September 2004 United Film Note bears interest at 5% per annum. The Company has the right to prepay the September 2004 United Film Note in whole or in part at any time. The September 2004 United Film Note is due and payable upon the earlier of (1) September 30, 2007, (2) the sale of all or substantially all of the assets of the Company, or (3) a change in control of the Company.
 6
 
 (C) At March 1, 2004, the Company was indebted to its former landlord for its corporate office in the amount of $181,720 for outstanding rent due under its lease agreement. On March 1, 2004, the Company and the Company's former landlord entered into a letter agreement, whereby the Company issued a promissory note to the former landlord in the amount of $181,720 (the "March 2004 Westwood Note"). On September 26, 2004, the Company canceled the March 2004 Westwood Note and issued a new, unsecured promissory note for principle and unpaid interest of $170,886 (the September 2004 Westwood Note ). The September 2004 Westwood Note bears interest at 5% per annum. The Company has the right to prepay the September 2004 Westwood Note in whole or in part at any time. The September 2004 Westwood Note is due and payable upon the earlier of (1) September 30, 2007, (2) the sale of all or substantially all of the assets of the Company, or (3) a change in control of the Company. During the fiscal quarter ended December 26, 2004, the Company paid the former landlord $10,000.
 
 
 Interest Payable to related parties . Interest payable to related parties at December 26, 2004 and September 26, 2004 consisted of the following:
 
 December 26,2004


September 26,2004Interest payable, former chief executive officer

$
28,996

$
-Interest payable, affiliated company


9,340


-Interest payable, former landlord


1,995


-$
40,331

$
-
 
 4. TAXES PAYABLE
 
 In May 2003, the Company began negotiations with the State of New York Department of Taxation with regards to the Company's sales tax in arrears. The Company paid $100,000 as a down payment and entered into a tentative agreement to pay $25,000 a month until the total balance was paid-in-full. In July 2003, the Company began making monthly payments. On January 24, 2004, the State of New York formally approved the $25,000 per month payment agreement, which is scheduled to end in July 2005. As of December 26 2004, the Company owed the New York State Department of Taxation $172,626 in back sales tax, interest and penalties.
 
 5. NOTE PAYABLE
 
 The Company has a $185,000 loan with Bank Leumi. The note is dated March 1, 2004 and matures on February 28, 2005. The interest rate is LIBOR plus 2%. The Company's chief executive officer is a guarantor of the Company's credit line, and has pledged certain personal assets to secure the obligation.
 
 7
 
 **ITEM 2. MANAGEMENT S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS**
 
 OVERVIEW
 
 The following discussion should be read in conjunction with the Company's consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-QSB. Certain statements contained herein that are not related to historical results, including, without limitation, statements regarding the Company's business strategy and objectives, future financial position and estimated cost savings, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and involve risks and uncertainties. Although the Company believes that the assumptions on which these forward-looking statements are based are reasonable, there can be no assurance that such assumptions will prove to be accurate and actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, risks and uncertainties associated with the ability to obtain adequate working capital on terms favorable to the Company, compliance with regulatory requirements, the Company's ability to sell more memberships, a decline in public consumption of cigars and other tobacco products, significant increases in excise taxes which could substantially increase the price of cigars and general economic factors. All forward-looking statements contained in the Quarterly Report on Form 10-QSB are qualified in their entirety by this statement.
 
 The Company is engaged in the business of the ownership and operation of private membership cigar clubs known as "Grand Havana Rooms", and in the ownership and operation of retail cigar stores known as "Grand Havana House of Cigars". Unless the context otherwise indicates, the "Company" means Grand Havana Enterprises, Inc. and its consolidated subsidiaries.
 
 The Company was incorporated under the laws of the State of Delaware on April 13, 1993 under the name "United Restaurants, Inc."  The Company was originally formed in order to acquire all of capital stock of Love's Enterprises, Inc. ("LEI"), which was the franchiser, owner and operator of the Love's restaurant chain. The Company acquired the stock of LEI in May 1993. In December 1996, due to less than anticipated operating results from the Love's restaurant chain, the Company adopted a plan of discontinuance with respect to the chain, which was completed in July 1998.
 
 The Company currently owns and operates two Grand Havana Rooms, one in Beverly Hills, California, which opened in June 1995, and one in New York, New York, which opened in May 1997. In addition, the Company currently owns and operates one Grand Havana House of Cigars location, in Beverly Hills, California, which opened in December 1997. The Company previously operated a Grand Havana House of Cigars in Las Vegas, Nevada, which opened in November 1997. The Company closed the Las Vegas Grand Havana House of Cigars on January 1, 2002. The Company's primary business focus is operating its existing cigar clubs and retail store.
 
 For the quarter ended December 26, 2004, the Company had net income of $317,643, compared to net income of $291,698 for the fiscal quarter ended December 28, 2003. This is primarily due to increased membership and club usage at the Grand Havana Room in New York City.
 
 RESULTS OF OPERATIONS
 
 THREE MONTHS ENDED DECEMBER 26, 2004 COMPARED TO THREE MONTHS ENDED DECEMBER 28, 2003.
 
 REVENUES
 
 The Company derives revenues from continuing operations from four principal sources: (1) membership (humidor rental) fees; (2) sales of cigars and related merchandise; (3) club activities; and (4) food and beverage sales. During the fiscal quarter ended December 26, 2004, the Company had revenues of $2,296,510, compared to revenues of $2,201,104 for fiscal quarter ended December 28, 2003, an increase of $ 95,406 , or approximately 4 . 3 %.
 
 8
 
 Membership (Humidor Rental) Fees . Revenue from humidor rental fees decreased from $674,382 in the fiscal quarter ended December 28, 2003 to $647,033 in the fiscal quarter ended December 26, 2004, a decrease of $27,349, or approximately 4.1%. This was primarily due to a decrease in new membership at the New York Grand Havana Room. The New York Grand Havana Room is now maintaining a waiting list for membership.
 
 Merchandise Sales . Revenue from merchandise sales increased from $129,871 in the fiscal quarter ended December 28, 2003 to $134,893 in the fiscal quarter ended December 26, 2004, an increase of $5,022, or approximately 3.9%. This increase is principally due to an increase in membership in the New York Grand Havana Room.
 
 Club Activities . Revenue from club activities or private events decreased from $286,341 in the fiscal quarter ended December 28, 2003 to $245,240 in the fiscal quarter ended December 26, 2004, a decrease of $41,101, or approximately 14.4%.
 
 Food and Beverage . Revenue from food and beverage increased from $1,110,510 in the fiscal quarter ended December 28, 2003 to $1,269,344 in the fiscal quarter ended December 26, 2004, an increase of $158,834, or approximately 14.3%. This increase is primarily due to a greater number of members associated with the New York Grand Havana Room.
 
 COSTS AND EXPENSES
 
 During the fiscal quarter ended December 26, 2004, the Company incurred total costs and expenses of $1,931,074, compared to $1,857,765 for the fiscal quarter ended December 28, 2003, an increase of $73,309, or approximately 3.9%.
 
 Food and Beverage . During the quarter ended December 26, 2004, food and beverage expenses were $452,212, an increase of $18,943, or 4.4%, over food and beverage expenses for the quarter ended December 28, 2003. This increase was attributable to a 14% increase in food and beverage income. The Company also closed its kitchen in Beverly Hills at the end of January 2001, and entered into a contract with Mistral's Brasserie L.L.C. ("Mistral's") to provide food for the club. In June 2002, Mistral's was replaced by 301 N. Canon Dr. L.L.C. ("301 Canon"). In August 2003, 301 Canon was replaced by Luce of Beverly Hills ("Luce"). The Company's contract with Luce calls for food costs to be 78% of Luce's sales.
 
 Merchandise . During the quarter ended December 26, 2004, merchandise expenses were $72,602, an increase of $971, or 1.4%, over merchandise expenses for the quarter ended December 28, 2003. This increase was due to a 3.9% increase in merchandise sales.
 
 Operating Expenses . During the quarter ended December 26, 2004, operating expenses were $1,112,154, an increase of $28,155, or 2.6%, from operating expenses for the quarter ended December 28, 2003. This was attributable to increased activity at the New York Grand Havana Room.
 
 Depreciation and Amortization . Depreciation and amortization expenses increased by approximately 1.6%, from $81,761 in the fiscal quarter ended December 28, 2003, to $83,051 in the fiscal quarter ended December 26, 2004.
 
 General and Administrative . General and administrative expenses increased by approximately 12.8%, from $187,105 in the fiscal quarter ended December 28, 2003, to $211,055 in the fiscal quarter ended December 26, 2004.
 
 9
 
 NET INCOME
 
 The Company experienced net income of $317,643, or $0.02 per share, for the fiscal quarter ended December 26, 2004, compared to a net income of $291,698, or $0.02 per share, for fiscal quarter ended December 28, 2003, an increase in net income of $25,945, or approximately 8.9%.
 
 LIQUIDITY AND CAPITAL RESOURCES
 
 At December 26, 2004, the Company had cash or cash equivalents of $297,989 .
 
 At March 1, 2004, the Company was indebted to Harry Shuster, the former chief executive officer, in the total amount of $2,500,901 as a result of monies owed pursuant to notes issued to the former CEO in 1998 and 2001, and as a result of accrued liabilities to advances made by the former CEO. On March 1, 2004, the Company and Mr. Shuster agreed to cancel and terminate the obligations owed by the Company as of such date, and, in lieu thereof, the Company issued a new promissory note to the former CEO in the amount of $2,500,901. The March 2004 Note provided for interest at the rate of 5% per annum.
 
 On September 26, 2004, the Company cancelled the March 2004 Note. In consideration for cancellation and termination of the note, the Company issued its former chief executive officer a new, unsecured promissory note in the amount of $2,435,050. The September 2004 Note bears interest at a rate of 5% per annum. The Company has the right to prepay the September 2004 Note in whole or in part at any time. In addition, the Company has agreed to pay its former CEO successive monthly installments of at least $10,000, commencing on October 1, 2004 and continuing on the first day of each month until the loan matures. The September 2004 Note is due and payable upon the earlier of (1) September 30, 2007, (2) the sale of all or substantially all of the assets of the Company, or (3) a change in control of the Company.
 
 As of December 28, 2003, an aggregate of $801,495 remained outstanding under a note issued to United Film Distributors, Inc. ("United Films"), an affiliate of the Company, in May 1997. The president of United Films is Brian Shuster, the son of Harry Shuster and the brother of Stanley Shuster, the current chief executive officer and principal stockholder of the Company. On March 1, 2004, the Company and United Films agreed to cancel and terminate the obligations due under the 1997 Promissory Note, and, in lieu thereof, the Company issued a new promissory note to United Films in the amount of $782,917. The March 2004 United Films Note provided for interest at the rate of 5% per annum.
 
 On September 26, 2004, the Company cancelled the March 2004 United Films Note. In consideration for cancellation and termination of the note, the Company issued United Films a new, unsecured promissory note in the amount of $798,786 for principle and unpaid interest owed as of September 26, 2004. The September 2004 United Films Note bears interest at a rate of 5% per annum. The Company has the right to prepay the note in whole or in part at any time. The September 2004 United Films Note is due and payable upon the earlier of (1) September 30, 2007, (2) the sale of all or substantially all of the assets of the Company, or (3) a change in control of the Company.
 
 As of December 28, 2003, the Company was indebted to its former landlord, 1990 Westwood Boulevard, Inc. ("1990 Westwood"), in the amount of $181,720 for outstanding rent due under its lease for its corporate headquarters. On March 1, 2004, the Company and 1990 Westwood entered into a letter agreement, whereby the Company issued a promissory note to 1990 Westwood in the amount of $181,720. The promissory note provided for interest at the rate of 5% per annum.
 
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 On September 26, 2004, the Company canceled the note issued to 1990 Westwood on March 1, 2004. In consideration for cancellation and termination of the note, the Company issued 1990 Westwood, a new, unsecured promissory note in the amount of $170,866 for principle and unpaid interest owed as of September 26, 2004. The new note bears interest at a rate of 5% per annum. The Company has the right to prepay the note in whole or in part at any time. The promissory note is due and payable upon the earlier of (1) September 30, 2007, (2) the sale of all or substantially all of the assets of the Company, or (3) a change in control of the Company.
 
 The Company believes that it will meet its working capital needs in the current fiscal year from the operations of its Grand Havana Rooms and Grand Havana House of Cigars locations. Due to the fact that the trading price of the Company's common stock has remained low in the last twelve months and because it currently is not trading on a nationally recognized exchange, the Company does not anticipate that it will be able to sell its securities in private placements on terms that are acceptable to the Company for the foreseeable future. If the Company is unable to raise additional funds through private placement of its securities, it may seek financing from affiliated or unaffiliated third parties. There can be no assurance, however, that such financing would be available to the Company when and if it is needed, or that if available,  it will be on terms acceptable to the Company. If the Company is unable to obtain financing to meet its working capital needs and to repay indebtedness as it becomes due, the Company may have to consider such options as selling or pledging portions of its assets in order to meet such obligations.
 
 CRITICAL ACCOUNTING POLICIES
 
 Revenue Recognition and Measurement . The Company derives revenues from four principal sources: (1) membership (humidor rental) fees; (2) sales of cigars and related merchandise; (3) private events and club activities; and (4) food and beverage sales. Revenue from sales of cigars and related merchandise, private events and club activities, and food and beverage sales are recognized at the time of the sale. The Company recognizes two types of membership (humidor rental) fees, an initial fee, or set up fee, and a monthly rental fee. The initial fee is recognized at the time the member joins. The monthly rental fee is charged in advance for a three-month period, and recognized equally over the three-month period. Deferred revenue represents those humidor fees charged in advance and recognized equally over the three-month period.
 
 Recent Accounting Pronouncements . In May 2003, FASB issued SFAS 150 which changes the accounting for certain financial instruments with characteristics of both liabilities and equity that, under previous pronouncements, issuers could account for as equity. The new accounting guidance contained in SFAS 150 requires that those instruments be classified as liabilities on the balance sheet.
 
 SFAS 150 affects the issuer's accounting for three types of freestanding financial instruments. One type is mandatory redeemable shares, which the issuing company is obligated to buy back in exchange for cash or other assets. A second type includes put options and forward purchase contracts, which involves instruments that require the issuer to buy back some of its shares in exchange for cash or other assets. The third type of instruments that are liabilities under SFAS 150 are obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such as a market index, or that vary inversely with the value of the issuer's shares. SFAS 150 does not apply to features embedded in a financial instrument that are not derivative in their entirety.
 
 Most of the provisions of SFAS 150 are consistent with the existing definition of liabilities in FASB Concepts Statement No. 6, entitled "Elements of Financial Statements." The remaining provisions of SFAS 150 are consistent with FASB's proposal to revise the definition to encompass certain obligations that a reporting entity can settle by issuing its own shares. SFAS 150 is effective for the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of a non-public entity, where the effective date is the fiscal period beginning after December 15, 2004.
 In December 2004, FASB issued SFAS 123 (R). SFAS 123 (R) revises SFAS No. 123, "Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123 (R) focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123 (R) requires companies to recognize in the statement of operations the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions). SFAS 123 (R) is effective as of the first interim or annual reporting period that begins after June 15, 2005 for non-small business issuers, and after December 15, 2005 for small business issuers. Accordingly, the Company will adopt SFAS 123 (R) in its quarter ending March 31, 2006. The Company is currently evaluating the provisions of SFAS 123 (R), and has not yet determined the impact, if any, that SFAS 123 (R) will have on its financial statement presentation or disclosures.
  In November 2004, FASB issued SFAS 151. SFAS 151 amends the guidance given in ARB 43, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that "under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges . . . ." SFAS 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." In addition, SFAS 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management does not believe that the adoption of this statement will have any immediate material impact on the Company.
  In December 2004, FASB issued SFAS No. 152 , "Accounting for Real Estate Time-sharing Transactions," which amends FASB statement No. 66, "Accounting for Sales of Real Estate," to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position SOP 04-2, "Accounting for Real Estate Time-Sharing Transactions." This statement also amends FASB Statement No. 67, "Accounting for Costs and Initial Rental Operations of Real Estate Projects," to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2. This statement is effective for financial statements for fiscal years beginning after June 15, 2005. Management believes the adoption of this statement will have no impact on the financial statements of the Company.
  In December 2004, FASB issued SFAS No. 153, "Exchange of Nonmonetary Assets." This statement addresses the measurement of exchanges of nonmonetary assets. The guidance in APB Opinion No. 29, "Accounting for Nonmonetary Transactions," is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that opinion, however, included certain exceptions to that principle. This statement amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetrary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This statement is effective for financial statements for fiscal years beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges incurred during fiscal years beginning after the date this statement is issued. Management believes the adoption of this statement will have no impact on the financial statements of the Company.
  The implementation of the provisions of these pronouncements are not expected to have a significant effect on the Company's consolidated financial statement presentation.
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 TRENDS AND UNCERTAINTIES
 
 The Department of Health and Mental Hygiene ("DOHMH") of the City of New York passed the Smoke-Free Act ("SFA"), which prohibited smoking in restaurants and bars after September 26, 2003. Local Law 47 of 2002 amended the SFA, providing that an establishment considered a "Tobacco Bar" could allow smoking indoors past the September 26, 2003 deadline. On March 26, 2003, DOHMH passed an amendment to Local Law 47 of 2002, which stated that "Tobacco Bars" must prohibit smoking indoors as of July 25, 2003, unless they register with DOHMH. DOHMH defines a "Tobacco Bar" as an entity that generates less than 40% of total revenue from food, and more than 10% of revenue from the sale of tobacco products and accessories, including humidor rentals. The entity must also not have expanded or changed its size or location as of December 31, 2001. The Company feels that it conforms to all aspects of this exemption. On June 25, 2003, the Company submitted its application to DOHMH. On July 22, 2003, DOHMH approved the Company's application. The exemption is valid until July 25, 2005. There can be no assurances that the Company will be able to maintain its Tobacco Bar status. Failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations.
 
 **ITEM 3. CONTROLS AND PROCEDURES**
 
 (a)Evaluation of Disclosure Controls and Procedures.
 
 Stanley Shuster, the Company's chief executive officer and chief financial officer, after evaluating the Company's disclosure controls and procedures (as defined in the rules and regulations of the Securities and Exchange Commission under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-QSB), concluded that as of such date, the Company's disclosure controls and procedures were effective to ensure that information the Company is required to disclose in reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
 
 (b) Changes in Internal Controls .
 
 During the period covered by the Quarterly Report on Form 10-QSB, there were no significant changes in the Company's internal controls over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.
 
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 **PART II - OTHER INFORMATION**
 
 **ITEM 6.**
**EXHIBITS**Exhibits31.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1 Certification of Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002
 
 **SIGNATURES**
 
 In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 GRAND HAVANA ENTERPRISES, INC.Dated: February 14, 2005/s/ Stanley ShusterChief Executive Officer and Chief Financial Officer
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