**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 March 27, 2005





or





**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
April 25, 2005, there were 14,764,306 shares of Common Stock outstanding.





Transitional
Small Business Disclosure Format Yes  ̈ No x



















INDEX





PART
      I.
    FINANCIAL
      INFORMATIONItem
      1.
    Financial
      Statements: (unaudited)Condensed
      Consolidated Balance Sheets as of March 27, 2005 (unaudited)and
      September 26, 2004
    1Condensed
      Consolidated Statements of Operations for the three months and six months
      endedMarch
      27, 2005 and March 28, 2004 (unaudited)
    2Consolidated
      Statement of Stockholders’ Deficiency as of March 27, 2005
      (unaudited)
    3Condensed
      Consolidated Statements of Cash Flows for the six months ended March 27,
      2005and
      March 28, 2004 (unaudited)
    4Notes
      to the Condensed Consolidated Financial Statements
    (unaudited)
    5Item
      2.
    Management's
      Discussion and Analysis or Plan of Operations
    10Item
      3.
    Controls
      and Procedures
    15PART
      II.
    OTHER
      INFORMATIONItem
      6.
    Exhibits
      and Reports on Form 8-K
    16SIGNATURES
    17_














**PART
I - FINANCIAL INFORMATION**





**ITEM
1. FINANCIAL STATEMENTS**





**GRAND
HAVANA ENTERPRISES, INC. AND SUBSIDIARIES**


**CONDENSED
CONSOLIDATED BALANCE SHEETS**


March
      27,
    
    
    September
      26,2005
    
    
    2004ASSETS
    
    
    (unaudited)CURRENT
      ASSETSCash
      and cash equivalents
    
    $
    100,133
    
    $
    121,338Accounts
      receivable, net
    
    
    72,661
    
    
    195,343Inventories,
      net
    
    
    327,365
    
    
    257,872Prepaid
      expenses
    
    
    141,581
    
    
    96,231TOTAL
      CURRENT ASSETS
    
    
    641,740
    
    
    670,784PROPERTY
      AND EQUIPMENT, net of accumulated depreciation
    
    
    1,917,082
    
    
    2,009,099OTHER
      ASSETSRestricted
      cash
    
    
    760,000
    
    
    760,000Deposits
      and other assets
    
    
    45,088
    
    
    77,088TOTAL
      OTHER ASSETS
    
    
    805,088
    
    
    837,088TOTAL
      ASSETS
    
    $
    3,363,910
    
    $
    3,516,971LIABILITIES
      AND STOCKHOLDERS' DEFICIENCYCURRENT
      LIABILITIESCash
      overdraft
    
    $
    55,156
    
    $
    140,132Accounts
      payable and accrued liabilities
    
    
    434,213
    
    
    531,155Taxes
      payable
    
    
    103,690
    
    
    250,397Notes
      payable
    
    
    185,000
    
    
    185,000Deferred
      revenues
    
    
    387,004
    
    
    491,254Current
      portion of notes payable to related parties
    
    
    120,000
    
    
    120,000TOTAL
      CURRENT LIABILITIES
    
    
    1,285,063
    
    
    1,717,938LONG
      TERM LIABILITIESNotes
      payable to related parties, net of current portion
    
    
    3,135,702
    
    
    3,284,702Interest
      payable to related parties
    
    
    75,930
    
    
    --Deferred
      rent payable
    
    
    490,404
    
    
    480,927Sublease
      security deposit
    
    
    48,308
    
    
    48,308TOTAL
      LONG TERM LIABILITIES
    
    
    3,750,344
    
    
    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 -14,764,306
      shares at March 27, 2005 and14,599,306
      shares at September 26, 2004
    
    
    147,644
    
    
    145,944Additional
      paid-in capital
    
    
    13,280,044
    
    
    13,279,044Accumulated
      deficit
    
    
    (15,099,185
    )
    
    (15,439,942
    )TOTAL
      STOCKHOLDERS' DEFICIENCY
    
    
    (1,671,497
    )
    
    (2,014,904
    )TOTAL
      LIABILITIES AND STOCKHOLDERS' DEFICIENCY
    
    $
    3,363,910
    
    $
    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 three months ended
    For
      the six months endedMarch
      27,
    
    
    March
      28,
    
    
    March
      27,
    
    
    March
      28,2005
    
    
    2004
    
    
    2005
    
    
    2004REVENUESFood
      and beverage
    
    $
    1,013,245
    
    $
    979,960
    
    $
    2,282,589
    
    $
    2,090,470Humidor
      rental fee
    
    
    752,548
    
    
    699,208
    
    
    1,399,581
    
    
    1,373,590Merchandise
      sales
    
    
    106,958
    
    
    99,554
    
    
    241,851
    
    
    229,425Other
      revenue
    
    
    132,114
    
    
    144,385
    
    
    377,354
    
    
    430,726TOTAL
      REVENUES
    
    
    2,004,865
    
    
    1,923,107
    
    
    4,301,375
    
    
    4,124,211COSTS
      AND EXPENSESFood
      and beverage
    
    
    417,783
    
    
    404,767
    
    
    869,995
    
    
    838,036Merchandise
    
    
    54,725
    
    
    48,467
    
    
    127,327
    
    
    120,098Operating
      expensesDirect
      Labor
    
    
    445,012
    
    
    468,842
    
    
    905,062
    
    
    928,524Occupancy
      and other
    
    
    626,628
    
    
    582,559
    
    
    1,278,732
    
    
    1,206,876General
      and administrative
    
    
    305,637
    
    
    174,453
    
    
    516,692
    
    
    361,558Depreciation
      and amortization
    
    
    84,982
    
    
    83,310
    
    
    168,033
    
    
    165,071TOTAL
      COSTS AND EXPENSES
    
    
    1,934,767
    
    
    1,762,398
    
    
    3,865,841
    
    
    3,620,163INCOME
      BEFORE OTHER INCOME (EXPENSE)
    
    
    70,098
    
    
    160,709
    
    
    435,534
    
    
    504,048OTHER
      INCOME (EXPENSE)Interest
      income
    
    
    2,420
    
    
    59
    
    
    4,314
    
    
    843Interest
      expense
    
    
    (49,404
    )
    
    (52,372
    )
    
    (99,091
    )
    
    (104,797
    )Loss
      on disposal of asset
    
    
    -
    
    
    (791
    )
    
    -
    
    
    (791
    )TOTAL
      OTHER INCOME (EXPENSE)
    
    
    (46,984
    )
    
    (53,104
    )
    
    (94,777
    )
    
    (104,745
    )NET
      INCOME
    
    $
    23,114
    
    $
    107,605
    
    $
    340,757
    
    $
    399,303NET
      INCOME PER COMMON SHAREBASIC
    
    $
    0.00
    
    $
    0.01
    
    $
    0.02
    
    $
    0.03DILUTED
    
    $
    0.00
    
    $
    0.01
    
    $
    0.02
    
    $
    0.03WEIGHTED
      AVERAGE NUMBER OF COMMON SHARESBASIC
    
    
    14,675,973
    
    
    14,524,306
    
    
    14,637,639
    
    
    14,524,306DILUTED
    
    
    14,924,306
    
    
    14,620,973
    
    
    14,874,306
    
    
    14,624,306





See
accompanying Notes to Condensed Consolidated Financial Statements.





2











**GRAND
HAVANA ENTERPRISES, INC. AND SUBSIDIARIES**


**CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ DEFICIENCY**




**Common
      Stock**
    
    
    **AdditionalPaid
      in**
    
    
    **Accumulated******
    
    
    **Shares**
    
    
    **Amount**
    
    
    **Capital**
    
    
    **Deficit**
    
    
    **Total**Balance,
      September 27, 2004
    
    
    14,599,306
    
    
    145,994
    
    
    13,279,044
    
    
    (15,439,942
    )
    
    (2,014,904
    )Issuance
      of stock at $0.01 on February 8, 2005
    
    
    65,000
    
    
    650
    
    
    -
    
    
    -
    
    
    650Issuance
      of stock at $0.02 on March 8, 2005
    
    
    100,000
    
    
    1,000
    
    
    1,000
    
    
    -
    
    
    2,000Net
      income for six months ended March 27, 2005
    
    
    -
    
    
    -
    
    
    -
    
    
    340,757
    
    
    340,757Balance,
      March 27, 2005
    
    
    14,764,306
    
    
    147,644
    
    
    13,280,044
    
    
    (15,099,185
    )
    
    (1,671,497
    )





See
accompanying Notes to Condensed Consolidated Financial Statements.





3





**GRAND
HAVANA ENTERPRISES, INC. AND SUBSIDIARIES**


**CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(Unaudited)**


For
      the six months endedMarch
      27, 2005
    
    
    March
      28, 2004CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
    
    $
    340,757
    
    $
    399,303Adjustments
      to reconcile net income to net cash providedby
      operating activities:Depreciation
      and amortization
    
    
    168,033
    
    
    165,071Changes
      in operating assets and liabilities:Accounts
      receivable, net
    
    
    122,682
    
    
    (3,053
    )Inventories,
      net
    
    
    (69,493
    )
    
    (43,238
    )Prepaid
      expenses
    
    
    (45,350
    )
    
    (44,440
    )Due
      from related parties
    
    
    -
    
    
    19,879
    )Deposits
      and other assets
    
    
    -
      -
    
    
    (10,870
    )Accounts
      payable and accrued liabilities
    
    
    (96,942
    )
    
    (119,899
    )Taxes
      payable
    
    
    (146,707
    )
    
    (157,207
    )Interest
      payable to related party
    
    
    75,930
    
    
    --Deferred
      revenues
    
    
    (104,250
    )
    
    (45,160
    )Deferred
      rent payable
    
    
    9,477
    
    
    (11,016
    )NET
      CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    254,137
    
    
    149,370CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of property and equipment
    
    
    (44,015
    )
    
    (52,623
    )CASH
      FLOWS FROM FINANCING ACTIVITIESCash
      overdraft
    
    
    (84,977
    
    
    (230,075
    )Notes
      payable and due to related parties
    
    
    (149,000
    )
    
    (61,864
    )Proceeds
      from the issuance of common stock
    
    
    2,650
    
    
    -NET
      CASH USED IN FINANCING ACTIVITIES
    
    
    (231,327
    )
    
    (291,939)
    )NET
      DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (21,205
    )
    
    (195,192
    )CASH
      AND CASH EQUIVALENTS, beginning of period
    
    
    121,338
    
    
    368,206CASH
      AND CASH EQUIVALENTS, end of period
    
    $
    100,133
    
    $
    173,014Supplemental
      disclosures:Interest
      paid
    
    $
    64,387
    
    $
    12,719Income
      tax paid
    
    $
    4,705
    
    $
    4,705





See
accompanying Notes to Condensed Consolidated Financial Statements.






4





**GRAND
HAVANA ENTERPRISES, INC. AND SUBSIDIARIES**


**NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
THE THREE AND SIX MONTHS ENDED MARCH 27, 2005 AND MARCH 28,
2004**


**(Unaudited)**





1.  BASIS OF
PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICES





The
interim condensed consolidated 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 and six months ended March 27, 2005 and March
28, 2004, (b) the consolidated financial position at March 27, 2005 and (c) the
consolidated cash flows for the six months ended March 27, 2005 and March 28,
2004. 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. Inter-company accounts and transactions have been
eliminated in consolidation.





Fair
Value of Financial Instruments . The
Company’s financial instruments consist of cash and cash equivalents, trade
accounts receivable, cash overdraft, 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
December 2004, Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Acounting Standards (“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 26, 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.





5





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 cost, 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 cost 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 impact on
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
Company maintains two locations, New York, New York and Beverly Hills,
California. Information concerning principal geographic areas is set forth
below:





Revenues
    
    
    Three
      monthsended
      March
      27,2005
    
    
    Three
      months
      Ended
      March
      28,2004New
      York, New York
    
    $
    1,355,636
    
    $
    1,234,185Beverly
      Hills, California
    
    
    649,229
    
    
    688,922Total
    
    $
    2,004,865
    
    $
    1,923,107
   6




Gross
      Profit
    
    
    Three
      months ended
      March
      27,2005
    
    
    Three
      months ended
      March
      28, 2004New
      York, New York
    
    $
    794,319
    
    $
    700,041Beverly
      Hills, California
    
    
    293,026
    
    
    300,990Total
    
    $
    1,087,345
    
    $
    1,001,031Net
      Income/(Loss)New
      York, New York
    
    $
    281,623
    
    $
    221,404Beverly
      Hills, California
    
    
    100,667
    
    
    99,986Los
      Angeles, California (corporate)
    
    
    (359,176
    )
    
    (213,785
    )Total
    
    $
    23,114
    
    $
    107,605
   Revenues
    
    
    Six
      months ended
      March
      27, 2005
    
    
    Six
      months ended
      March
      28, 2004New
      York, New York
    
    $
    3,026,757
    
    $
    2,752,822Beverly
      Hills, California
    
    
    1,274,618
    
    
    1,371,389Total
    
    $
    4,301,375
    
    $
    4,124,211Gross
      ProfitNew
      York, New York
    
    $
    1,827,065
    
    $
    1,619,183Beverly
      Hills, California
    
    
    571,926
    
    
    618,370Total
    
    $
    2,398,991
    
    $
    2,237,553Net
      Income (Loss)New
      York, New York
    
    $
    776,391
    
    $
    624,831Beverly
      Hills, California
    
    
    190,218
    
    
    216,850Los
      Angeles, California (corporate)
    
    
    (625,852
    )
    
    (442,378
    )Total
    
    $
    340,757
    
    $
    399,303
   March 27,
    
    
    March
      28,Total
      Assets
    
    
    2005
    
    
    2004New
      York, New York
    
    $
    2
      ,282,415
    
    $
    2,248,530Beverly
      Hills, California
    
    
    1,037,545
    
    
    1,071,974Los
      Angeles, California (corporate)
    
    
    43,950
    
    
    140,526Total
    
    $
    3,363,910
    
    $
    3,461,030
 
  7




3. RELATED
PARTY TRANSACTIONS





Notes
Payable to Related Parties . Notes
payable to related parties at March 27, 2005 and September 26, 2004 consisted of
principal amounts due to the following:





March
      27, 2005
    
    
    September
      26, 2004(A)
      Promissory notes, former chief executive officer
    
    $
    2,345,050
    
    $
    2,435,050(B)
      Affiliated company
    
    
    798,786
    
    
    798,786(C)
      Former landlord
    
    
    111,866
    
    
    170,8663,255,702
    
    
    3,404,702Less current portion
    
    
    (120,000
    )
    
    (120,000
    )$
    3,135,702
    
    $
    3,284,702





(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 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
six months ended March 27, 2005, the Company paid its former chief executive
officer $90,000.





(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, 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 on 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.





(C) At
March 1, 2004, the Company was indebted to its former landlord, a related
party, 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 its 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 for principal
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 on 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 six months
ended March 27, 2005, the Company paid its former landlord $59,000.





8




Interest
Payable to related parties .
Interest payable to related parties at March 27, 2005 and September 26, 2004
consisted of the following:








March
      27
      2005
    
    
    September
      26,
      2004Interest
      payable, former chief executive officer
    
    $
    57,440
    
    $
    -Interest
      payable, affiliated company
    
    
    14,802
    
    
    -Interest
      payable, former landlord
    
    
    3,688
    
    
    -$
    75,930
    
    $
    -


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 March 27, 2005, the Company owed the New York State
Department of Taxation $79,015 in back sales tax, interest and penalties, and
$24,675 in current sales tax.





5. NOTE
PAYABLE





The
Company has an $185,000 loan with Bank Leumi. The note is dated February 28,
2005 and matures on September 12, 2006. 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.





9





**ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS**





FORWARD-LOOKING
STATEMENTS





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 Acts (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.





OVERVIEW





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 LEI in May 1993. In December 1996, due to less than anticipated
operating results , the Company adopted a plan of discontinuance with respect to
the Love’s restaurant 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’s primary business focus is operating its
existing cigar clubs and retail store.





For the
six months ended March 27, 2005, the Company had net income of $340,757,
compared to net income of $399,303 for the six months ended March 28, 2004. This
is primarily due to the increase in general and administrative expense
pertaining to the filing of quarterly and annual reports to bring the
Company current.





RESULTS
OF OPERATIONS





THREE
MONTHS ENDED MARCH 27, 2005 COMPARED TO THREE MONTHS ENDED MARCH 28,
2004.





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 March 27, 2005, the Company had revenues of $2,004,865,
compared to revenues of $1,923,107 for fiscal quarter ended March 28, 2004, an
increase of $81 ,758 , or
approximately 4 . 3 %.





Membership
(Humidor Rental) Fees . Revenue
from humidor rental fees increased from $699,208 in the fiscal quarter ended
March 28, 2004 to $752,548 in the fiscal quarter ended March 27, 2005, an
increase of $53,340, or approximately 7.6%. This was primarily due to a rental
increase of $25 per month per member at the New York Grand Havana Room which
took effect on January 1, 2005. The New York Grand Havana Room is now
maintaining a waiting list for membership.





10





Merchandise
Sales . Revenue
from merchandise sales increased from $99,554 in the fiscal quarter ended March
28, 2004 to $106,958 in the fiscal quarter ended March 27, 2005, an increase of
$7,404, or approximately 7.4%. 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 $144,385 in the fiscal
quarter ended March 28, 2004 to $132,114 in the fiscal quarter ended March 27,
2005, a decrease of $12,271, or approximately 8.5%, due to a decrease in private
events.





Food
and Beverage . Revenue
from food and beverage increased from $979,960 in the fiscal quarter ended March
28, 2004 to $1,013,245 in the fiscal quarter ended March 27, 2005, an increase
of $33,285, or approximately 3.4%. 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 March 27, 2005, the Company incurred total costs and
expenses of $1,934,767, compared to $1,762,398 for the fiscal quarter ended
March 28, 2004, an increase of $172,369, or approximately 9.8%.





Food
and Beverage . During
the quarter ended March 27, 2005, food and beverage expenses were $417,783, an
increase of $13,016, or 3.2%, over food and beverage expenses for the quarter
ended March 28, 2004. This increase was attributable to a 3.4% increase in food
and beverage income.




Merchandise . During
the quarter ended March 27, 2005, merchandise expenses were $54,725, an increase
of $6,258, or 12.9%, over merchandise expenses for the quarter ended March 28,
2004. This increase was due to a 7.4% increase in merchandise sales.





Direct
Labor and Occupancy and other Expenses . During
the quarter ended March 27, 2005, direct labor and occupancy and
other expenses were $1,071,640, an increase of $20,239, or 1.9%,
from direct labor and occupancy and other expenses for the quarter
ended March 28, 2004. This was attributable to increased activity at the New
York Grand Havana Room.





Depreciation
and Amortization .
Depreciation and amortization expenses increased by approximately 2.0%, from
$83,310 in the fiscal quarter ended March 28, 2004, to $84,982 in the fiscal
quarter ended March 27, 2005. This was primarily due to additional depreciation
related to the acquisition of $64,000 in operating equipment.





General
and Administrative . General
and administrative expenses increased by approximately 75.2%, from $174,453 in
the fiscal quarter ended March 28, 2004, to $305,637 in the fiscal quarter ended
March 27, 2005. This was due to an increase in legal and auditing fees due to
the Company’s resumption of filing quarterly and annual reports.





NET
INCOME





The
Company had net income of $23,114, or $0.00 per share, for the fiscal
quarter ended March 27, 2005, compared to a net income of $107,605, or $0.01 per
share, for fiscal quarter ended March 28, 2004, a decrease in net income of
$84,491, or approximately 78.5%.




11





SIX
MONTHS ENDED MARCH 27, 2005 COMPARED TO SIX MONTHS ENDED MARCH 28,
2004.





REVENUES





During
the six months ended March 27, 2005, the Company had revenues of $4,301,375,
compared to revenues of $4,124,211 for the six months ended March 28, 2004, an
increase of $177,164, or approximately 4.3%. This increase in revenues is
primarily due to an increase in humidor rental fees and food and beverage
revenue from the New York Grand Havana Room.





Humidor
Rental Fees. Revenue
from humidor rental fees increased from $1,373,590 in the sixth months ended
March 28, 2004 to $1,399,581 in the six months ended March 27, 2005, an increase
of $25,991, or approximately 1.9%. This was due to a $25 per month per member
increase in rental fees at the Grand Havana Room in New York.





Merchandise
Sales. Revenue
from merchandise sales increased from $229,425 in the six months March 28, 2004
to $241,851 in the six months ended March 27, 2005, an increase of $12,426, or
approximately 5.4%. This was due to increased traffic in the Grand Havana Room
in New York.





Club
Activities. Revenue
from club events decreased from $430,726 in the six months ended March 28, 2004
to $377,354 in the six months ended March 27, 2005, a decrease of $53,372, or
approximately 12.4%. This was due to a decrease in private events held at the
Grand Havana Room in New York.





Food
and Beverage. Revenue
from food and beverage increased from $2,090,470 in the six months ended March
28, 2004 to $2,282,589 in the six months ended March 27, 2005, an increase of
$192,119, or approximately 9.2%. This is primarily due to an increase in members
utilizing the New York Grand Havana Room.





COST AND
EXPENSES





During
the six months ended March 27, 2005 the Company incurred total costs and
expenses of $3,865,841, compared to $3,620,163 for the six months ended March
28, 2004, an increase of $245,678, or approximately 6.8%. This was primarily due
to an increase in general and administrative expenses.





Food
and Beverage. During
the six months ended March 27, 2005, food and beverage expenses were $869,995,
an increase of $31,959, or 3.8%, over food and beverage expenses for six months
ended March 28, 2004. This is primarily due to the increase in food and beverage
revenue.





Merchandise. During
the six months ended March 27, 2005, merchandise expenses were $127,327, an
increase of $7,229, or 6.0% over merchandise expenses for the six months ended
March 28, 2004. This was primarily due to the purchases of higher end tobacco
and other merchandise.





Direct
Labor and Occupancy and other Expenses. During
the six months ended March 27, 2005, direct labor and occupancy and other
expenses were $2,183,794, an increase of $48,394, or 2.3% over direct labor and
occupancy and other expenses for the six months ended March 28, 2004.  This was
due to slight decrease in direct labor, with an offsetting increase in occupancy
and other.





Depreciation
and Amortization. Depreciation and amortization expenses increased by approximately 1.8%, from
$165,071 in the six months ended March 28, 2004, to $168,033 in the six months
ended March 27, 2005. This is due to the additional depreciation related to the
purchase of new operating equipment.





General
and Administrative. General
and administrative expenses increased by approximately 42.9%, from $361,558 in
the six months ended March 28, 2004, to $516,692 in the six months ended March
27, 2005. This is due to the increased legal and professional expenses
associated with the filings of quarterly and annual reports.





NET
INCOME





The
Company had a net income of $340,757, or $.02 per share, for the six months
ended March 27, 2005, compared to a net income of $399,303, or $.03 per share,
for the six months ended March 28, 2004, a decrease in net income of $58,546, or
14.7%.





12





LIQUIDITY
AND CAPITAL RESOURCES





At March
27, 2005, the Company had cash or cash equivalents of $100,133 .
Operating activities for the six months ended March 27, 2005 provided $254,137
compared to $149,370 for the six months ended March 28, 2004. Investing
activities used $44,015 for purchasing operating equipment. Financing activities
used $231,327, mainly by reducing the Company’s cash overdraft, and payments for
notes payable to related parties. Also included in this balance was $2,650 which
the Company received from three employees exercising their stock options. Two
employees exercised their options for 65,000 shares of common stock at a price
of $.01 per share. One employee exercised his options for 100,000 shares of
common stock at $.02 per share.





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 and 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, 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 chief
executive officer 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. 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
principal 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.





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. 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, that it will be available 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.





13





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
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.





14





The
implementation of the provisions of these pronouncements are not expected to
have a significant effect on the Company’s consolidated financial statement
presentation.





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.





OFF-BALANCE
SHEET ARRANGEMENTS





The
Company does not have any off-balance sheet arrangements.


**ITEM
3. CONTROLS AND PROCEDURES**





(a)Evaluation
      of Disclosure Controls and Procedures.





Stanley
Shuster, the Company’s chief executive and 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.







15





**PART
II - OTHER INFORMATION**





**ITEM
      6.**
    **EXHIBITS
      AND REPORTS ON FORM 8-K**Exhibits31.1
    Certification
      of Chief Executive and Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
    Certification
      of Chief Executive and Financial Officer under Section 906 of the
      Sarbanes-Oxley Act of 2002Reports
      on Form 8-KNone





**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: May 11, 2005/s/ Stanley
      ShusterChief
      Executive and Financial Officer







16