FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

(Mark One)

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

For the fiscal year ended December 31, 1997

                                       OR

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

For the transition period from ________ to ___________

Commission file number: SEC #: 0-22675


                               800-JR Cigar, Inc.
             (Exact name of Registrant as specified in its charter)

Delaware                                                     52-2022117
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                               Identification No.)

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

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


        Securities  registered  pursuant  to Section 12(b) of the Act:

Title of Securities                                Exchanges on which Registered

None



        Securities  registered  pursuant  to Section 12(g) of the Act:

Common Stock, $.01 par value



         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. o



                   (APPLICABLE ONLY TO CORPORATE REGISTRANTS)

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

         The  aggregate  market  value  of  Registrants'  Common  Stock  held by
non-affiliates as of March 27, 1998 was  $72,450,000.00  based on 3,450,000 such
shares outstanding on such date and the closing sales price for the Common Stock
on such date of $21.00 as reported by the Nasdaq National Market.

         The number of shares of Common Stock of the  registrant  outstanding at
March 30, 1998 was 12,750,000.



                       DOCUMENTS INCORPORATED BY REFERENCE

         List hereunder the following documents if incorporated by reference and
the Part of the Form 10-K (e.g.,  Part I, Part II, etc.) into which the document
is  incorporated:  (1) Any annual report to security  holders;  (2) Any proxy or
information  statement;  and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the  Securities Act of 1933.  The listed  documents  should be clearly
described for identification  purposes (e.g.,  annual report to security holders
for fiscal year ended December 24, 1980).

Notice and Proxy Statement for the 1998 Annual Meeting of Stockholders to be
held May 20, 1998

<PAGE>

                                      Index

Part I
Item 1.    Business............................................................4
Item 2.    Properties.......................................................  12
Item 3.    Legal Proceedings................................................  12
Item 4.    Submission of Matters to a Vote of Security Holders..............  12
Part II
Item 5.    Market for the Registrant's Common Equity and Related Security
               Holder Matters...............................................  13
Item 6.    Selected Financial Data..........................................  13
Item 7.    Management's Discussion and Analysis of Financial Condition and
               Results of Operations........................................  15
Item 8.    Financial Statements and Supplementary Data......................  19
Item 9.    Changed in and Disagreements with Accountants on Accounting and
               Financial Disclosure.........................................  20
Part III
Item 10.   Directors and Executive Officers of the Registrant...............  20
Item 11.   Executive Compensation...........................................  20
Item 12.   Security Ownership of Certain Beneficial Owners and Management...  20
Item 13.   Certain Relationships and Related Transactions...................  20
Part IV
Item 14.   Exhibits, Financial Statements, Schedules and Reports on Form 8-K. 21

<PAGE>
                                     Part I

Item 1.  Business

General

800-JR  Cigar is one of the largest  distributors  and  retailers  of brand name
premium cigars in the United States.  The Company's  primary products consist of
premium  cigars,  mass market cigars and  cigarettes,  which are  distributed to
retail  and  wholesale  customers.  The  Company's  highest  gross  margins  are
generated from the sale of premium cigars  (imported,  hand-made and hand-rolled
cigars made with long filler and all natural  tobacco leaf) and, as such, it has
targeted  premium cigars as its primary growth  vehicle.  The Company's  premium
cigars  consist  of  approximately  150  brands  of which  45 are the  Company's
proprietary  brands.  Among the company's  proprietary  products are  nationally
recognized brand names such as Belinda(R),  Casa Blanca(R), El Rey del Mundo(R),
5 Star Seconds(R),  Jose Marti(TM),  J.R Alternative(R),  J.R,  Ultimate(R),  La
Finca(R), Rosa Cuba(TM), and Santa Clara(R). The Company is the largest customer
for each of the world's leading cigar manufacturers, inducing Consolidated Cigar
Holdings, Inc.  ("Consolidated  Cigar"),  General Cigar Holdings, Inc. ("General
Cigar"), Swisher International, Inc. ("Swisher") and Villazon & Company, Inc.
("Villazon").

800-JR Cigar,  Inc. is a holding company owning 100% of the outstanding  capital
stock of each of J.R.  Tobacco of America,  Inc.,  Cigars by Santa Clara,  N.A.,
Inc.,  J.N.R.  Grocery  Corp.,  J.R.  Tobacco NC, Inc., J&R Tobacco (New Jersey)
Corp.,  J.R. Tobacco Company of Michigan,  Inc.,  J.R.-46th  Street,  Inc., J.R.
Tobacco Outlet, Inc., J.R. Statesville, Inc., J R Cigar (DC), Inc., J.R.
Tobacco of Burlington, Inc., and Casa Blanca Inc.

The  Company  is well  known for its  cigar  business,  principally  the sale of
premium  cigars,  at  discounted  prices.  Associated  sales of  other  discount
products,  including  cigarettes,  general  merchandise,  fragrances  and  other
tobacco related products, benefit from this recognition.

Marketing and Distribution

Retail  Operations.  The Company's retail  operations are comprised of a premium
cigar  direct mail  operation  through  which the  Company  markets a variety of
cigars and tobacco related  products,  six stand alone cigar stores (four in the
New  York  metropolitan  area,  one  outside  Detroit,   Michigan,  and  one  in
Washington, D.C., and two discount outlet stores in North Carolina.)

Direct Mail. The company markets a wide variety of premium cigars (including its
own brand names) and related tobacco  products on a retail basis  throughout the
United States by direct mail.  For over 25 years,  the Company has maintained an
extensive  proprietary  mail  order  list of regular  customers.  The  Company's
average order size is presently  over $110.  Management  utilizes its mail order
catalogs  as it primary  advertising  vehicle.  Each  glossy,  color  catalog is
replete with humorous asides and anecdotes written by Lew Rothman, the Company's
President and Chief Executive  Officer,  who views the retail catalog as a means
of personally  communicating with the Company's  established  customer base. The
Company  catalog  frequently  highlights  the Company's  proprietary  cigars and
changes its product offerings and featured specials with each issue. On average,
each catalog offers 20 different brands of cigars from six different  countries;
however,  by dialing  1-800-JR-CIGAR,  a customer can order any cigar or tobacco
accessory  currently carried by the Company.  In the event that the Company does
not have a particular product in stock, a customer may place an order to ship on
arrival,  or  knowledgeable  telemarketers  may direct the  customer  to similar
products by utilizing  the  Company's  sophisticated  database.  The Company has
increased the frequency and circulation of its mail order catalog and introduced
its own website in 1997 as an additional means of advertising. Retail mail order
sales  increased  49.0% to $52.9  million in 1997,  accounting  for 22.0% of net
sales, compared to $35.5 million in 1996, representing 18.5% of net sales.

Cigar Stores.  The Company currently  maintains six specialty cigar stores.  The
Company's  strategy  is to: (i) locate its stores in densely  populated,  highly
trafficked  areas  where  demand  for  premium  cigars  is high:  (ii)  maintain
exceptional  inventories of premium cigars and: (iii) maintain fully  humidified
and  climate-controlled  stores to ensure  freshness.  In July 1997, the Company
relocated its  Hasbrouck  Heights,  NJ store to Paramus,  NJ, an upscale area of
Bergen County.  In March 1998, the Company  relocated one of its New York stores
to Wall Street. Sales generated by the Company's cigar stores increased 42.0% to
$23.0 million in 1997  accounting for 9.6% of the Company's net sales,  compared
to $16.2 million in 1996, accounting for 8.4% of the net sales.

Discount Outlet Stores.  The Company  operates two large discount outlet stores.
The   Company's   strategy  for  discount   outlet  store  success  is  to:  (i)
strategically  locate its  stores on  interstate  highways;  (ii)  leverage  the
Company's  reputation for quality cigars and cigarettes at discount prices;  and
(iii) to offer a broad and changing product mix to encourage multiple purchases.
An  important  factor  contributing  to its  success is its status as a licensed
cigarette   distributor  in  North   Carolina  for  the  major  U.S.   cigarette
manufacturers.  Each discount outlet store maintains on the premises a wholesale
cigarette  cash-and-carry operation and a specialty cigar store. Sales generated
by the Company's discount outlet stores increased 6.5% to $63.6 million in 1997,
accounting  for  26.5%  of  net  sales,  compared  to  $59.7  million  in  1996,
representing 31.1% of net sales.

Cigar Bars. In January 1998, the Company purchased,  for a nominal amount,  Casa
Blanca Inc., an affiliated  entity,  which operates a discount  liquor store and
cigar bar at the Whippany  location.  In March 1998, the Company began operation
of a cigar bar at its Wall Street Court location.

Wholesale Operations

Wholesale  activities are a major component of the Company's  success,  enabling
the  Company to obtain  favorable  prices by giving it the  ability to  purchase
tobacco products,  particularly  cigars and cigarettes in large quantities,  and
the  flexibility  to  determine  the amount,  timing and manner by which it will
satisfy  demand in the  marketplace.  The  Company  attributes  its  competitive
advantage  over other  distributors  to:  (i) a large  quantity  and  variety of
products; (ii) a policy of no minimum order; (iii) convenience through "one stop
shopping;"  and  (iv)  competitive  prices.  Sales  generated  by the  Company's
wholesale  division  grew  25.1%  to  $100.8  million  in 1997,  accounting  for
approximately 41.9% of net sales,  compared to $80.6 million in 1996, accounting
for 42.0% of net sales.

Catalog.  The Company's  wholesale mail order business is focused on the sale of
premium  cigars.  The Company's  wholesale  catalog  consists of a comprehensive
price list of a wide  selection of Company  branded  products as well as premium
and mass market cigars  trademarked  by others.  The catalog is  distributed  to
approximately  5,000 smoke shops, fine restaurants,  taverns,  liquor stores and
other retail  outlets  throughout  the United  States.  Wholesale  catalog sales
increased  from  41.1% to $46.0  million  in 1997,  accounting  for 19.1% of net
sales, compared to $32.6 million in 1996, accounting for 17.0% of net sales.

Cash-and-Carry.  The Company's cash-and-carry wholesale operations are conducted
on a walk-in basis at its two North Carolina discount outlet stores. The Company
maintains a 3,000 square foot wholesale store within each of its discount outlet
stores which serve wholesale customers. The Company obtains substantially all of
its cash-and-carry wholesale revenues at these locations from the sale of a wide
variety  of premium  cigarettes,  generic  cigarettes  and deep  discount  label
cigarettes. The remainder of the Company's cash-and-carry wholesale revenues are
derived from mass market cigars,  smokeless  tobacco products and pipe tobaccos.
The  Company's  cash-and-carry  sales  grew  14.2%  to  $54.8  million  in 1997,
accounting for 22.8% of net sales, compared to $48.0 million in 1996, accounting
for 25.0% of net sales.

Products

Cigars and Other Tobacco Products

Sales of premium and mass market  cigars and other  tobacco  products  increased
44.3% to $135.2  million for the year ended  December 31, 1997,  accounting  for
56.3% of net sales,  compared to $93.7  million for the year ended  December 31,
1996, representing 48.8% of net sales.

Premium  Cigars.  Premium  cigars are  generally  imported,  100%  hand-made  or
hand-rolled  cigars  made with long filler and all natural  tobacco  leaf.  Unit
sales of  premium  cigars in the United  States  increased  by 30.5%,  66.3% and
75.89% in 1995, 1996 and 1997,  respectively.  The Dominican Republic,  Honduras
and Jamaica  collectively  accounted for  approximately  83.7% of premium cigars
imported into the United States in 1997. Approximately 90% of the cigars sold by
the Company are premium cigars.

The Company sells  approximately  150 brands of premium cigars,  of which 45 are
the Company's  proprietary  brands.  Sales of the Company's  proprietary  cigars
represent  approximately  45% of the Company's  total gross dollar premium cigar
sales.  The  Company  offers  most  of its  cigars  at  discounts  ranging  from
approximately 20% to 60% off of manufacturers' suggested retail prices.

The Company believes that its proprietary product offerings are unmatched in the
marketplace for superior  quality at affordable  prices.  The Company's  premium
cigars are handmade and are principally  produced in five  countries,  including
Honduras, the Dominican Republic,  Nicaragua,  Mexico and Jamaica. While premium
cigars  generally  sell at price  points  ranging up to $12.00  per  cigar,  the
Company's  branded  premium cigars are typically sold at prices ranging  between
$1.75 to $4.00 per cigar with J.R  Alternatives  selling at price points ranging
from $.75 to $1.50 per cigar. In addition,  the Company holds exclusive licenses
to distribute  additional  brands of premium cigars for certain periods of time.
The Company has the right to market the El Rey del Mundo(R) and Belinda(R) brand
names  exclusively  through the year 2012.  Among the Company's  premium brands,
several have received from Cigar  Aficionado  magazine among the highest ratings
of cigars sold,  including,  among others El Rey del Mundo,  La Finca,  Belinda,
Casa Blanca and Santa Clara.

The following premium cigars are either trademarks or pending  trademarks of the
Company or brands exclusively licensed to the Company:

         Honduras:   Belinda,   Chivis,   Consuegra,   Honduran  Specials,   J.R
         Alternatives,  J.R Ultimate, Jose Marti, La Finca, Lew's Smokers, Maria
         Mancini,  Mocha,  Mocha Supreme,  Rey del Mundo,  Tena Y Vega,  Vintage
         Hondurans.

         Dominican  Republic:  Casa  Blanca,  Casa  Blanca  Reserve,   Dominican
         Estates,  Five Star, Five Star Seconds,  J.R Alternatives,  J.R Special
         Caribbean,  J.R  Special  Corona,  J.R Special  Jamaicans,  Jose Marti,
         Matasa 2nds, Quorum, Royal Dominicana.

         Nicaragua:  Jose Marti, La Finca, Rosa Cuba, Villar y Villar, Remedios,
                     Flor de Farach.

         Mexico:  Mocambo, Santa Clara, Shane

         Jamaica: J.R Alternatives, Whitehall.

         Philippines:  Harrows.

         Spain: La Fama.

         Ireland:  Mocambo Cigarillos.

Mass Market  Cigars.  Mass market cigars  generally  are domestic,  machine-made
cigars  that  use  less  expensive  short  filler  tobacco  and  are  made  with
homogenized  tobacco  binders and either  homogenized  sheet wrappers or natural
leaf wrappers.  The Company sells  approximately 75 mass market large cigars, as
well as four proprietary brands of mass market cigars. The Company's proprietary
mass market cigars sell at prices as low as $.50 per cigar.  These  products are
manufactured  for the Company in the United  States and are sold under the brand
names Garcia Grande, Henry IV, J.R. Famous and Mr. B.

Smokeless  Tobacco  Products and Pipe  Tobacco.  The Company  sells moist snuff,
loose  leaf  chewing  tobacco,  and dry  snuff  in each  of its  retail  stores,
including  its two discount  outlet stores in North  Carolina.  The Company also
plans to sell smokeless  tobacco  products in the stores it opens in the future.
Smokeless  tobacco  products are made from  tobacco  that has been cured,  aged,
fermented  and then dried and  flavored.  In  addition  to cigars and  smokeless
tobacco  products,  the Company  sells pipe tobaccos of various  types,  grades,
countries or origin and crop years.

Tobacco  Accessories.   The  Company  also  sells  a  wide  variety  of  tobacco
accessories, including, among other things, humidors, cutters, pipes, disposable
lighters, cigar cases and ashtrays.  Although sales of such products represent a
small component of the Company's  overall  business,  the Company  believes that
their  inclusion  among  the  Company's  product  mix  enhances  the look of the
Company's  retail  catalog and rounds out the range of  products  offered by the
Company.

New  Product  Development.  The Company is  continually  engaging in new product
development, and expects to launch two new premium cigar brands during the first
half of 1998: Remedios which will be produced in Nicaragua,  and Trinidad y Cia,
which will be produced in the  Dominican  Republic.  In the second half of 1998,
the  Company  will launch Casa  Blanca  Reserve a Dominican  Republic  cigar and
Perfecto  Garcia from  Nicaragua.  In addition,  the Company  expects to receive
exclusive distribution rights to two existing famous cigar brands this year.

Cigarettes

The Company purchases its cigarettes from major  manufacturers for resale in its
discount outlet stores and from  distributors for resale in certain of its cigar
stores,  including  brands such as Marlboro and Winston and discount labels such
as Basic and GPC. The availability of discount cigarettes generates  substantial
customer  traffic at the  Company's two discount  outlet  stores.  In 1997,  the
Company  grossed  approximately  $20.5 million and $30.5 million,  respectively,
from  cigarette  sales in the  Selma,  North  Carolina  and  Statesville,  North
Carolina  discount  outlet stores alone.  Overall  cigarette  sales grew 6.3% to
$83.3  million in 1997,  accounting  for 34.6% of net sales,  compared  to $78.4
million in 1996, accounting for 40.8% of net sales.

Fragrances and Other Merchandise.

The  Company  believes  that  diversification  in  its  product  mix  encourages
increased  retail  sales.  The  Company  purchases  a wide  variety of  designer
fragrances and specialty goods from  distributors for resale  exclusively in its
discount  outlet stores and, to a lesser  extent,  other Company  retail stores.
Such specialty  goods include,  among other things,  books,  collectibles,  gift
items,  toys,  household  items,  jewelry,  jeans and other clothing items.  The
Company  offers  all  such  products  at  significantly   reduced  prices,  with
fragrances  frequently  sold at prices ranging from 20% to 75% off the suggested
retail  price.  The Company  believes  that  diversification  in its product mix
encourages  customers to purchase more than one type of item and  contributes to
increased  sales.  Although  the  majority  of such  products  are sold from the
Company's two discount  outlet stores,  the Company is able to ship inventory to
its other retail stores at targeted times, such as the Christmas holiday season,
to maximize  sales at these stores.  Sales of fragrances  and other  merchandise
grew 9.5 % to $21.8 million in 1997,  accounting for 9.1% of net sales, compared
to $19.9 million in 1996, accounting for 10.4% of net sales.

Sources of Supply; Production

Cigar  manufacturers  have  recently  experienced   shortages  in  raw  material
(principally properly aged tobacco) due to unanticipated increases in demand for
tobacco  for  premium  cigars.  The  Company,  therefore,  has also  experienced
shortages  in supply and  increasing  prices.  To address this issue the Company
believes that major  manufacturers  have strengthened  their  relationships with
tobacco  growers around the world and have increased  production in an effort to
meet demand.  The Company believes that the quality and strength of its business
relationships with such  manufacturers,  developed over a 25 years period,  have
positioned it to obtain a significant portion of such increased production.

In  addition,  to enhance  the supply of the  Company's  own brand name  premium
cigars, the Company has entered into five-year supply agreements with Nicaraguan
American  Tobacco,  S.A.  ("NATSA") and  Tabacalera  Nacional  Dominicana,  S.A.
("TANDSA"),  affiliated entities which own and operate manufacturing  facilities
in  Nicaragua  and  the  Dominican  Republic,  respectively.  Pursuant  to  such
agreements, NATSA produces products exclusively for the Company and one-third of
TANDSA's  production,  which commenced in May 1997, is allocated to the Company.
Each of NATSA and TANDSA  produces  50,000 and  10,000  premium  cigars per day,
respectively,  and  together  currently  represents  approximately  30%  of  the
Company's  supply of premium cigars.  The Company,  however has not entered into
formal  contracts  with any other  manufacturer.  In January 1998,  the Board of
Directors  approved the Company's  purchase of Nicaragua  American  Tobacco Co.,
Inc., ("NATCO"),  the exclusive importer of all NATSA products for a multiple of
NATCO's earnings.

An important  factor in the success of the Company's  discount outlet stores has
been its  status  as a  licensed  cigarette  distributor  in the  State of North
Carolina for  virtually  every major U.S.  cigarette  manufacturer.  As a direct
buying account of every major cigarette manufacturer, the Company is eligible to
participate  in  various  goal  oriented   promotions  and  to  receive  display
allowances,  which enables it to pass  substantial  savings onto its  customers.
Another  important  factor in the Company's  discount  store growth has been the
Company's   experience  in   purchasing   general   merchandise   directly  from
manufacturers  and other vendors at prices  substantially  below those generally
paid by conventional  vendors.  The Company regularly  purchases  overstocked or
overproduced   items  from   manufacturers   and  other   retailers,   including
end-of-season,  out-of-season  and  end-of-run  merchandise  and  manufacturers'
slight irregulars.  As a result of the Company's  relationships,  experience and
reputation  for  prompt   payment,   many  suppliers   offer  special   purchase
opportunities  to the  Company  prior to  attempting  to dispose of  merchandise
through other channels.

Sales and Advertising

The Company has relied successfully upon the strength of its reputation and word
of mouth to achieve  steadily  increasing sales during years of industry decline
as well as industry  prosperity,  and believes that 25% of the nation's  premium
cigar smoking public represents its customer base. The Company's Chief Executive
Officer,  Lew  Rothman,  is a  well-known  figure in the world of cigars and the
Company's  products  are  widely  reputed to be of high  quality  at  affordable
prices. As such, the Company is frequently  featured in articles printed by such
publications  as  Cigar  Aficionado,  Smoke  and the  Tobacconist  and  numerous
newspapers.  Consequently, the Company has not been required to maintain a sales
force or to expend  substantial  amounts  of money to  promote  its image or its
products.   The  Company  believes  that  the  lack  of  significant   marketing
expenditures   enables  it  to  fulfill  its  mission  to  provide  quality  and
affordability.

The Company does,  however,  conduct a limited  amount of  advertising  in local
newspapers   catering  to  the  Company's  retail  communities  and  on  highway
billboards located within a 20 to 90 mile radius surrounding the Company's North
Carolina discount outlet stores. The Company anticipates spending  approximately
1% of its net sales  annually in  advertising.  In 1997 the Company  issued five
catalogs and plans to distribute seven during 1998.

Information Systems

Over the past several  years,  the Company has made a substantial  investment in
its  information  systems,  which has  enabled  it to manage its  inventory  and
monitor sales on a real time basis.  During 1997, the Company  engaged  Computer
Generated  Solutions  Inc.  and RMP  Computer  Science to review its  management
information systems and to recommend  improvements to such systems. In addition,
the Company introduced its own website during 1997 as a new cost-effective means
of direct marketing.

Approximately  85% of the  Company's  purchased  inventory  is  bar-coded by the
manufacturer,  and the  Company  uses  alpha  numeric  coding  to  identify  its
remaining  inventory,  consisting  principally of premium cigars.  The Company's
headquarters and warehouse are electronically linked to each discount outlet and
cigar store location,  enabling the Company's senior management to monitor daily
sales and  inventory  levels at each  location  by SKU.  As a  consequence,  the
Company is able to identify the best selling items,  to forecast  product demand
by SKU. In  addition,  the  Company's  software  is able to  identify  low stock
situations and to communicate  product re-orders  directly to its North Carolina
warehouse  instantaneously.  The Company  believes that this capability  greatly
reduces out-of-stock situations in its retail outlets.

MC Management, the Company's telemarketing provider, has access to the Company's
information  systems,  and is able to obtain in-stock  product  information on a
real time basis, as well as access a variety of information  regarding any cigar
in which a customer may be  interested,  including  the cigar's  strength,  ring
size,  length,  country of origin,  wrapper color and price as well as a list of
comparable  cigars to be recommended  it the desired cigar is out of stock.  The
Company  believes  that these  capabilities  have  enabled it to increase  sales
despite  periods of industry  shortages.  In  addition,  because  the  Company's
systems are on-line with all major credit  cards,  the Company is able to obtain
instant  credit  checks prior to the release of an order,  thereby  reducing the
Company's bad debt experience.

Competition

The Company operates in a large and highly fragmented industry  characterized by
multiple  and  relatively  undeveloped  channels  of  distribution.  The Company
believes that no single  corporation  competes against the Company in all of the
Company's  lines of business,  although  several  companies  compete against the
Company  in one or  more  of its  market  segments.  The  Company  faces  retail
competition  from numerous small smoke shops.  Likewise,  the Company's cash and
carry wholesale  stores face price  competition  from Sam's Clubs, a division of
Wal-mart  Stores,  Inc.,  in its local  markets.  Sam's Clubs has  substantially
greater resources than the Company and is better able to sustain prolonged price
competition.

Intellectual Property

The  Company  markets  a number  of  cigar  brand  names  which  are  registered
trademarks  of the  Company:  Quorum(R),  5 Star  Seconds(R),  J.R  Ultimate(R),
Mocambo(R), Maria Mancini(R),  Consuegra(R), La Finca(R), Whitehall(R), Perfecto
Garcia(R),  Perfecto Garcia Crown Royals(R), Garcia y Garcia(R), Rey del Rey(R),
Mocha(R),   Farach(R),  Casa  Blanca(R),  Santa  Clara(R),  Robustos  de  Manuel
Zavalla(R),  Jose Marti(R), Villar y Villlar(R) and El Secreto del Rio Jagua(R).
The Company has also  registered the J.R(R) mark,  which precedes  Company brand
names  such  as J.R  Special  Jamaica,  J.R  Special  Corona,  and  J.R  Special
Caribbean.  The J.R  Alternative(R)  brand name,  which is used to market cigars
that are manufactured for the Company in Jamaica,  the Dominican  Republic,  and
Honduras, is also a registered trademark of the Company.  Trademark applications
are  pending  for  LaguitoTM,  and La MecaTM  brand  names.  In  addition to the
foregoing,  the Company holds  trademarks  for the following  ring size names of
cigars: Remedios(R), Principales(R),  Clemenceau(R), Reynitas(R) and Jeroboam(R)
and trademark  applications are pending for the  RectangulareTM and ValentinasTM
cigar sizes. Each of the aforementioned  trademarks are valid for ten years from
the date of  registration  with the U.S.  Patent  and  Trademark  Office and are
subject to renewals.  With regard to its non-tobacco products,  the Company also
holds a registered trademark for CigarwareTM,  which it intends to use to market
a line of clothing.  The Company has also filed a trademark  application for its
direct mail telephone number 1-800-JR-CIGARTM.

Employees

As of December 31, 1997, the Company had 690 employees, of whom 319 were engaged
in sales,  eight in finance and  administration,  147 in  operations  and 216 in
various part-time and temporary capacities. The Company will be required to hire
additional  employees on a periodic basis in connection  with future  facilities
and expanded direct mail  operations.  The Company  considers its relations with
its employees to be good.

As of December 31, 1997,  various  administrative  and other  services have been
performed for the Company by MC Management who had 118 employees,  including 102
telemarketers  involved  in retail and  wholesale  direct mail  operations.  The
Company will be required to hire  additional  employees on a periodic  basis, in
connection with the construction, and subsequent operation, of future facilities
and expanded direct mail operations.

Tobacco Industry Litigation

Regulation.  The tobacco  industry is subject to regulation in the United States
at federal, state and local levels. Federal law has recently required states, in
order to receive  full  funding for federal  substance  abuse block  grants,  to
establish  a minimum age of 18 years for the sale of tobacco  products  together
with an appropriate  enforcement  program. The recent trend is toward increasing
the scope and quantity  regulation of the tobacco industry,  and the increase in
popularity  of cigars  could lead to an  increase  in  regulation  of cigars.  A
variety of bills relating to tobacco issues have been introduced in the Congress
of the United States,  including bills that would,  if passed,  (i) prohibit the
advertising  and promotion of all tobacco  products and/or restrict or eliminate
the  deductibility  of  such  advertising   expenses;   (ii)  increase  labeling
requirements  on tobacco  products to include,  among  other  things,  addiction
warnings and lists of additives and toxins;  (iii) modify federal  preemption of
state laws to allow state  courts to hold  tobacco  manufacturers  liable  under
common law or state statutes;  (iv) shift regulatory control of tobacco products
and advertisements  from the United States Federal Trade Commission,  ("FTC") to
the United States Food and Drug Commission, ("FDA"); (v) increase tobacco excise
taxes;  and require  tobacco  companies to pay for health care costs incurred by
the federal  government in connection  with tobacco related  diseases.  Hearings
have been held on certain of these  proposals;  however,  to date,  none of such
proposals have been passed by Congress.

In August, 1996, the FDA published a final rule in the Federal Register in which
it announced that nicotine is a drug and that it therefore has jurisdiction over
nicotine-delivery products, including cigarettes and smokeless tobacco products,
as medical  devices.  Specifically,  the rule  prohibits a variety of activities
relating  to the  sale  of  cigarettes  and  smokeless  tobacco.  The  provision
prohibiting  retailers from selling  cigarettes,  cigarette tobacco or smokeless
tobacco to persons  under the age of 18, and  requiring  retailers  to check the
photographic identification of every person under the age of 27 became effective
on February 28, 1997.  Other measures were scheduled to go into effect on August
28, 1997 and August 28, 1998.  The FDA has also  announced  that, at some future
point,  it  intends  to apply  additional  requirements,  potentially  including
registration,  listing, premarket notification and approval,  record-keeping and
reporting  requirements,   and  good  manufacturing   practices.  All  of  these
requirements  would  represent  substantial  additional  costs to the  Company's
operations.  A number of tobacco  companies and other  entities have filed legal
proceedings  challenging the FDA's assertion of jurisdiction to regulate tobacco
products.  On April 25, 1997, the Federal District Court for the Middle District
of North  Carolina  upheld the FDA's  jurisdiction  to regulate  cigarettes  and
smokeless  tobacco as medical devices and to improve  restrictions on their sale
and  distribution  to  minors,   but  rejected  the  agency's   restrictions  on
advertising  and  promotion.   Pending  appeal,   the  court  ordered  that  all
restrictions  which had gone into  effect on February  28, 1997 would  remain in
full  force but held that the  agency may not  implement  any of the  additional
regulations that were scheduled to take effect on August 28, 1997 or thereafter.
This  decision has been  appealed and no judgement  has yet been  rendered.  The
Company is unable to predict the outcome of the appeal or its ultimate effect on
the consumption of tobacco or on the Company's business and  profitability.  One
company has proposed, as an alternative to FDA regulation of tobacco products, a
more limited set of restrictions  on cigarette  sales and  advertising  aimed at
curbing  youth  smoking.  The  Company  is unable to  predict  the effect on its
business and  profitability of the FDA rules but, if upheld in court, such rules
could have a material adverse effect on the operations of the Company.  Although
these  regulations  are not currently  applicable to cigars and cigar  products,
there can be no assurance that  additional  regulations  will not be proposed in
the future cigars and cigar products.

In  addition,  the  majority of states  restrict or prohibit  smoking in certain
public  places and  restrict  the sale of  tobacco  products  to  minors.  Local
legislative  and  regulatory  bodies  have also  increasingly  moved to  curtail
smoking by  prohibiting  smoking in certain  buildings  or areas or by requiring
designated  "smoking" areas. Further restrictions of a similar nature could have
an adverse effect on the sales or operations of the Company.  Numerous proposals
also have been  considered at the state and local level  restricting  smoking in
certain public areas.

Federal  law has  required  health  warnings  on  cigarettes  since  1965 and on
smokeless  tobacco  since  1986.  Although  there is no  federal  law  currently
requiring  that  cigars or pipe  tobacco  carry such  warnings,  California  has
enacted legislation  requiring that "clear and reasonable"  warnings be given to
consumers  who are exposed to  chemicals  known to the state to cause  cancer or
reproductive  toxicity,  including  tobacco smoke and several of its constituent
chemicals.  Violations  of this law,  known as  Proposition  65, can result in a
civil penalty not to exceed $2,500 per day for each violation.  Although similar
legislation has been introduced in other states, no action has been taken. There
can be no assurance that such legislation introduced in other states will not be
passed in the future or that other  states will not enact  similar  legislation.
Consideration  at both the  federal  and  state  level  also  has been  given to
consequences  of tobacco  smoke on others  that are not  presently  smoking  (so
called "second-hand" smoke). There can be no assurance that regulations relating
to  second-hand  smoke will not be adopted or that such  regulations  or related
litigation would not have a material adverse effect on the Company's  results of
operations or financial condition.

The United States Environmental Protection Agency (the "EPA") published a report
in  January  1993 with  respect  to the  respiratory  health  effects of passive
smoking  (second-hand  smoke),  which  concluded  that  widespread  exposure  to
environmental  tobacco smoke  presents a serious and  substantial  public health
concern.  Issuance of the report, which is based primarily on studies of passive
cigarette  smokers,   may  lead  to  further  legislation  designed  to  protect
non-smokers.  Also, a study recently  published in the journal Science  reported
that a chemical found in cigarette  smoke has been found to cause genetic damage
in lung cells that is identical to damage  observed in many malignant  tumors of
the lung and, thereby,  directly links lung cancer to smoking.  This study could
affect pending and future tobacco regulation and litigation.

Increased  cigar  consumption  and the publicity that such increase has received
may increase the risk of additional regulation.  There can be no assurance as to
the ultimate content,  timing, or effect of any additional regulation of tobacco
products by any federal,  state,  local or regulatory  body, and there can be no
assurance  that any such  legislation  or  regulation  would not have a material
adverse effect on the Company's business.

Litigation. Historically, the cigar industry has experienced less health-related
litigation than the cigarette and smokeless tobacco industries have experienced.
Litigation  against the  cigarette  industry  has  historically  been brought by
individual  cigarette  smokers.  In 1992,  the United  States  Supreme  Court in
Cippollone v. Liggett  Group,  Inc. ruled that federal  legislation  relating to
cigarette labeling requirements exempt claims based on failure to warn consumers
about the health hazards of cigarette smoking,  but does not exempt claims based
on  express  warranty,   misrepresentation,   fraud,  or  conspiracy.  To  date,
individual  cigarette  smokers' claims against the cigarette  industry have been
generally unsuccessful.  A jury in Florida,  however, recently determined that a
cigarette  manufacturer  was  negligent  in  the  production  and  sale  of  its
cigarettes  and sold a product that was  unreasonably  dangerous and  defective,
awarding the plaintiffs a total of $750,000 in compensatory damages.

Current tobacco litigation generally falls within one of three categories: class
actions,  individual  actions  (which  have  been  filed  mainly in the State of
Florida) or actions brought by individual  states  generally to recover Medicaid
costs allegedly attributable to tobacco-related  illnesses.  The pending actions
allege a broad range of injuries  resulting from the use of tobacco  products or
exposure to tobacco smoke and seek various remedies, including compensatory and,
in some cases,  punitive damages together with certain types of equitable relief
such as the establishment of medical monitoring funds and restitution. The major
tobacco companies are vigorously defending these actions.

In May 1996, the Fifth Circuit Court of Appeals in Castano v. American  Tobacco,
et al. reversed a Louisiana district court's certification of a nationwide class
consisting essentially of nicotine dependent cigarette smokers.  Notwithstanding
the dismissal,  new class actions  asserting  claims similar to those in Castano
have recently been filed in certain  states.  To date, two pending class actions
against major cigarette  manufacturers  have been  certified.  The first case is
limited to Florida citizens  allegedly injured by their addiction to cigarettes;
the other is limited to flight attendants  allegedly injured through exposure to
secondhand smoke.

There can be no assurance  that there will not be an increase in  health-related
litigation involving tobacco and health issues against the cigarette industry or
similar  litigation in the future against the cigar  industry.  The costs to the
Company of defending  prolonged  litigation  and any  settlement  or  successful
prosecution of any material health-related litigation against sellers of cigars,
cigarettes or smokeless  tobacco or suppliers to the tobacco industry could have
a material adverse effect on the Company's business.



Item 2.  Properties

The Company's executive and administrative  offices are located in Whippany, New
Jersey in a 33,000 square foot building owned by the Company,  which includes an
8,200 square foot upscale  cigar store of which 1,200 square feet are  allocated
to the El Rey del Mundo Cigar Bar  acquired by the Company in 1998.  The Company
owns a  50,000  square  foot  discount  outlet  store  and a 6,000  square  foot
specialty  cigar  store  located  on nine  acres in Selma,  North  Carolina.  In
December of 1997,  the  Company  purchased  a 100,000  square  foot  facility in
Burlington,  North  Carolina,  which is expected to be used as a discount outlet
store, warehouse and new corporate  headquarters.  This building is located on I
40/85,  which is a major  east/west  interstate in North Carolina on 14 acres of
land.  During,  March 1998 the Company  relocated its 219 Broadway  store in New
York City to One Wall Street Court,  an upscale store including a bar and lounge
located in the heart of the  financial  district.  The  Company  also leases the
following retail properties:

Location                  Square Footage                  Lease Expiration Date
--------                  --------------                  ---------------------
17 E. 45th St., New York, NY         3,000                    December 31, 1999
1 Wall Street Court, New York, NY     8,000                    June 22, 2007
Rt. 17N, Paramus, NJ                  7,545                    July 31, 2004
Newtowne Plaza, Statesville, NC     53,800                    December 31, 2004
Northwestern Highway, Southfield, MI  3,000                    Month to Month
1667 K. St., Washington, D.C.           850                    March 31, 1999



Item 3.  Legal Proceedings

         The Company is not presently  involved in any legal proceedings  which,
if determined adversely to the Company,  would have a material adverse effect on
the Company.



Item 4.  Submission of Matters to a Vote of Security Holders

No matters were  submitted  during the fourth quarter of the fiscal year covered
by this  report to a vote of  security  holders,  through  the  solicitation  of
proxies or otherwise.



                                     Part II


Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

Since June 26, 1997,  the  Company's  Common Stock has been quoted on the Nasdaq
National Market under the symbol "JRJR." The following table sets forth the high
and low sales price of the Common  Stock on the Nasdaq  National  Market for the
period  commencing  with the listing of the Common Stock on the Nasdaq  National
Market through December 31, 1997.

                  Quarter                 High               Low
                  Third                  $37.00            $17.00
                  Fourth                 $38.75            $21.00

The Company's policy is to retain all available earnings for the development and
growth of its business;  accordingly,  it has not declared or paid any dividends
on its Common Stock since the completion of its initial public  offering in June
1997 and does not intend to pay any cash  dividends.  See "Item 7.  Management's
Discussion  and  Analysis  of  Financial  Condition  and  Results of  Operations
--Liquidity and Capital Resources." Declaration or payment of dividends, if any,
in the future,  will be at the  discretion  of the Board of  Directors  and will
depend  upon  the  Company's  then  current  financial  condition,   results  of
operations, capital requirements and other factors deemed relevant by the Board.

  The  approximate  number of record holders of the Common Stock as of March 27,
1998 was 2221.



Item 6.  Selected Financial Data

The  following  selected  financial  data  set  forth  below  should  be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations  and the  accompanying  Financial  Statements  and related
notes thereto.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                    Year Ended December 31,
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
                                      1993           1994           1995          1996           1997
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
                                      (dollars in thousands, except per share amounts)
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------

Statement of Income Data:
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
<S>                                    <C>           <C>            <C>           <C>            <C>      
Net sales                              $ 74,581      $ 109,297      $ 152,695     $ 191,982      $ 240,348
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Cost of goods sold                       62,660         91,588        130,645       158,007        190,886
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Gross profit                             11,921         17,709         22,050        33,975         49,462
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Selling, general, and administrative expen9,714         14,450         18,768        20,954         24,715
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Income from operations                    1,846          2,812          2,789        12,347         23,842
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Interest expense, (income) net              481            647            627           582            (14)
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Other Expenses                                -            151              -            (8)            58
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative 1,769t of chang2,556accounting2,312od      12,325         24,116
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Provision (benefit) for income taxes        160            257            (74)          144          4,781
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Income before cumulative effect of change 1,609counting m2,299          2,386        12,181         19,335
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting for58ncome taxes   -              -             -              -
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Net income                              $ 1,667        $ 2,299        $ 2,386      $ 12,181       $ 19,335
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Pro forma earnings per share - basic (1)                                                $ 0.73      $ 1.30
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Pro forma earnings per share - diluted (1)                                              $ 0.73      $ 1.29
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Pro forma common shares outstanding - basic (1)                                       9,812         11,281
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Pro forma common shares outstanding - diluted (1)                                     9,812         11,374
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Balance Sheet Data:
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Working capital                         $ 9,014       $ 10,845        $ 8,914      $ 18,522       $ 55,213
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Total assets                             22,692         29,951         32,670        42,682         91,262
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Total long-term debt, including current po6,153          8,955          7,129         8,279         20,833
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
Total Stockholders' equity                7,405          9,704         12,090        23,476         61,176
-----------------------------------------------------------------------------------------------------------
(1)  See Note 1 to Notes to Financial Statements-Pro Forma Earnings per share.
</TABLE>



Item 7.  Management's Discussion and Analysis of Financial Condition and Results
     of Operation

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


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

General.

         The Company is one of the largest distributors and retailers of tobacco
and tobacco related  products in North America.  The Company operates in a large
and  highly  fragmented  industry   characterized  by  multiple  and  relatively
undeveloped  channels of  distribution.  With its  27-year  history in the cigar
industry,  the Company has established itself as an important participant in the
movement of tobacco products from manufacturers to the customers. Manufacturers 
value the Companys ability to perform distribution, credit, customer support and
marketing  functions,  which  would  otherwise  be  the  responsibility  of  the
manufacturer.  Customers  value  the  Company's  extensive  variety  of  tobacco
products  and rapid order  fulfillment  and benefit  from  advantageous  pricing
derived   through  the  Company's   volume  buying  as  a  direct  importer  and
distributor.  The Company's net sales have grown from $152.7 million in the year
ended December 31, 1995 to $192.0 million and $240.3 million, in the years ended
December 31, 1996 and December 31, 1997, respectively.

         The Company  markets it  products  through  two  principal  channels of
distribution:  retail,  consisting  of the  Company's  premium cigar direct mail
business,  six specialty cigar stores, and two large discount outlet stores, and
wholesale  consisting of the wholesale  cigar mail order  business and wholesale
cash and carry  cigarette  store located  within the Company's  discount  outlet
stores.  The following  table sets forth the  Company's  sales at the retail and
wholesale level by dollar amount and as a percentage of net sales.
<TABLE>
<CAPTION>
                                                 Year Ended December 31,

                                       1995                    1996                    1997
                                    $           %           $          %            $          %
                                                       ($ in millions)
Retail operations:
<S>                              <C>         <C>         <C>         <C>         <C>         <C>  
     Direct mail cigars.......   $26.4       17.3%       $35.5       18.5%       $52.9       22.0%
     Cigar stores.............    10.5        6.9         16.2        8.4         23.0        9.6
     Discount outlet stores...    52.1       34.1         59.7       31.1         63.6       26.5
       Total retail sales.....    89.0       58.3         111.4      58.0         139.5      58.1

Wholesale operations:
     Direct mail cigars.......    25.2       16.5         32.6       17.0         46.0       19.1
     Cash-and-carry cigarettes*   38.5       25.2         48.0       25.0         54.8       22.8
       Total wholesale sales..    63.7       41.7         80.6       42.0         100.8      41.9
Total net sales...............   $152.7     100.0%       $192.0     100.0%       $240.3     100.0%
--------------------
*Also includes tobacco and other tobacco related products
</TABLE>

         The Company has built its  reputation  with consumers as a retailer and
wholesaler of a wide selection of premium cigars.  To leverage its premium cigar
business,  the Company offers a variety of other tobacco  products to the buying
public,   including   mass-market   cigars,   smokeless  and  pipe  tobacco  and
tobacco-related  accessories.  The  Company  is  also a  major  distributor  and
retailer of cigarettes.  In addition,  the Company sells  fragrances and general
merchandise  primarily  through its North Carolina  discount outlet stores.  The
following  table sets forth the Company's  sales per product  category by dollar
amount and as a percentage of net sales.
<TABLE>
<CAPTION>
                                                  Year Ended December 31,

                                        1995                    1996                    1997
                                    $          $             %         %            $          %
                                                       ($ in millions)
<S>                               <C>        <C>          <C>        <C>         <C>         <C>  
Cigars/Tobacco*...............    $65.5      42.9%        $93.7      48.8%       $135.2      56.3%
Cigarettes....................    67.1       43.9         78.4       40.8         83.3       34.6
Fragrances....................     8.1        5.3          7.2        3.8          7.5        3.1
Other merchandise.............    12.0        7.9         12.7        6.6         14.3        6.0
     Total net sales..........   $152.7     100.0%       $192.0     100.0%       $240.3     100.0%
--------------------
* Excludes Cigarettes
</TABLE>

Results of Operations

         The  following  discussion  should  be read  in  conjunction  with  the
Financial  Statements and related notes thereto appearing  elsewhere herein. The
following table sets forth,  as a percentage of net sales,  certain items in the
Consolidated Statements of Income for the periods presented.

                                                    Year Ended December 31,
                                                 1995       1996          1997
Revenues:
     Retail sales...........................     58.3%      58.0%         58.1%
     Wholesale sales........................     41.7       42.0          41.9
     Net Sales..............................     100.0      100.0         100.0
Cost of goods sold..........................     85.6       82.3          79.0
Gross profit................................     14.4       17.7          20.6
Selling, general and administrative expenses     12.3       10.9          10.3
Depreciation and amortization...............      0.3        0.4           0.4
Income from operations......................      1.8        6.4           9.9
Other income(expense):
     Interest (expense).....................     (0.5)      (0.4)         (0.5)
     Other..................................      0.2        0.4           0.6
Income before income taxes..................      1.5        6.4          10.0
Provision (credit) for income taxes.........     (0.1)       0.1           2.0
Net income..................................      1.6%       6.3%          8.0%


Year Ended December 31, 1997 compared to Year Ended December 31, 1996

         Net sales were  $240.3  million  and $192.0  million for 1997 and 1996,
respectively,  an increase of $48.3  million or 25.2%.  Retail  sales  increased
25.2% to $139.5  million for 1997 from $111.4 for 1996.  The  increase in retail
sales was due  primarily to a $17.4  million,  or 49.0%  increase in direct mail
cigar stores; a $6.8 million, or 42.0% increase in cigar store sales; and a $3.9
million or 6.5%  increase  in  discount  outlet  store  sales.  Wholesale  sales
increased  25.0% to $100.8  million  for 1997 from $80.6  million  over the same
period in the prior year. The increase in wholesale sales was due primarily to a
$13.4  million,  or 41.1%  increase in direct mail sales and a $6.8 million,  or
14.2% increase in  cash-and-carry  cigarette  sales. The overall increase in net
sales was  primarily  attributable  to  increases  in the  Company's  retail and
wholesale  products  sales,  and in  particular  the sale of premium  cigars and
related products.

         Gross  profit was $49.5  million  and $34.0  million for 1997 and 1996,
respectively,  an  increase  of $15.5  million or 45.6%.  The  increase in gross
profit was due to the increase in cigar sales,  which have higher profit margins
relative to other products. As a percentage of net sales, gross profit increased
to 20.6% for 1997 from  17.7% for 1996,  primarily  due to an  increase  in unit
volume and prices of higher margin, premium cigars.

         Selling,  general  and  administrative  ("SG&A")  expenses  were  $24.7
million and $21.0 million for 1997 and 1996,  respectively,  an increase of $3.7
million or 17.6%,  primarily  due to increased  staffing,  costs  related to the
relocation  of the  Company's  Bergen  County,  New Jersey model store,  and the
payment of  one-time  signing  bonuses of $1.5  million in  connection  with the
execution of long term service  agreements.  As a percentage of net sales,  SG&A
expenses  decreased to 10.3% for 1997 from 10.9% for 1996,  due primarily to net
sales increasing at a greater rate than SG&A expenses.

         Income from  operations was $23.8 million and $12.3 million for 1997and
1996, respectively,  an increase of $11.5 million. As a percentage of net sales,
income from operations  increased to 9.9% for 1997 from 6.4% for 1996, primarily
due to increased sales of higher margin, premium cigars.

         Interest  expense  increased to $1.3 million for 1997, from $.8 million
in 1996. The increase is attributable to the  distribution  notes (which amounts
represent  cumulative  undistributed S Corporation  earnings of its subsidiaries
through  June 30, 1997 on which  income  taxes had  previously  been paid by the
existing  stockholders)  issued  to  the  former  principals  of  the  Company's
subsidiaries  prior to their  acquisition  by the  Company  in a  reorganization
transaction  in June 1997.  Other  income was $1.5  million and $0.8 million for
1997  and  1996,  respectively.  The  increase  in  1997  was  primarily  due to
additional interest income from investing activities.

         As a result  of the  foregoing,  the  Company  had net  income of $19.3
million in 1997, compared to $12.2 million in 1996, an increase of 58.7% or $7.1
million.

Year Ended December 31, 1996 compared to Year Ended December 31, 1995

         Net sales were  $192.0  million  and  $152.7  million in 1996 and 1995,
respectively,  an increase of $39.3  million or 25.7%.  Retail  sales  increased
25.2% to $111.4  million in 1996 from $89.0 million in 1995. The increase in net
sales was due primarily to a $9.1 million or 34.5% increase in direct mail cigar
sales;  a $5.7  million  or 54.3%  increase  in cigar  store  sales;  and a $7.6
million,  or 14.6%  increase in discount  outlet  store sales.  Wholesale  sales
increased  26.5% to $80.6  million from $63.7  million in 1995.  The increase in
wholesale sales was due primarily to a $7.4 million, or 29.4% increase in direct
mail sales and a $9.5 million,  or 24.7%  increase in  cash-and-carry  cigarette
sales.  The  overall  increase in net sales was a result of  increased  sales of
premium cigars and related products,  higher levels of cigarette sales and, to a
lesser extent, general merchandise.

         Gross  profit  was $34.0  million  and $22.1  million in 1996 and 1995,
respectively,  an  increase  of $11.9  million or 54.1%.  The  increase in gross
profit for 1996 was due in large part to sales  increases in premium  cigars and
cigarettes  and,  to  a  lesser  extent,  sales  of  general  merchandise.  As a
percentage of net sales,  gross profit  increased to 17.7% in 1996 from 14.4% in
1995,  primarily  due to the impact of greater sales of  lower-margin  wholesale
cigarettes.

         SG&A  expenses  were $21.0  million and $18.8 million in 1996 and 1995,
respectively,  an  increase  of $2.2  million or 11.6%,  primarily  due to costs
related to the  improvement  of and  relocation to the Company's  Whippany,  New
Jersey specialty cigar store and administrative offices. SG&A expenses decreased
as a  percentage  of net  sales to 10.9% in 1996  from  12.3% in 1995,  however,
primarily  due to net sales  increasing  at a greater  rate than SG&A  expenses.
Included  in SG&A  expenses  for 1995 are  legal  fees and  settlement  costs in
connection with certain  litigation with a former licensee in the amount of $1.0
million.

         Income from  operations  increased  to $12.3  million in 1996 from $2.8
million in 1995. As a percentage of net sales, income from operations  increased
to 6.4% in 1996 from 1.8% in 1995,  primarily  due to  higher  sales of  premium
cigars.

         Interest  expense  remained  unchanged at $0.8  million in 1996.  Other
income was $0.8  million and $0.3  million in 1996 and 1995.  The  increase  was
primarily due to an insurance settlement.

         As a result  of the  foregoing,  the  Company  had net  income of $12.2
million in 1996, compared to $2.4 million in 1995.

Seasonality

         The Company  historically  has  experienced  and expects to continue to
experience  certain  seasonal  fluctuations  in its  sales and net  income.  The
Company  generally has experienced  relatively lower sales for the first half of
the calendar year,  and a substantial  increase in sales and net income from the
summer vacation season through the Christmas holiday season. The Company expects
this trend to continue  for the  foreseeable  future.  The  Company's  quarterly
results of  operations  may also  fluctuate as a result of a variety of factors,
including  the timing of store  renovations  and net store  openings and the net
sales contributed by such stores.

Liquidity and Capital Resources

         The Company  historically has financed its business through  internally
generated funds, bank debt and loans from certain of its principal stockholders.
The  Company's  net cash  provided by operating  activities  was $.3 million for
1997.  Net cash  used in  investing  activities  during  such  period  was $23.5
million,  of which $15.0 million was invested in short term investments and $8.5
million  was used for  capital  expenditures.  Net cash  provided  by  financing
activities was $33.7 million for 1997, representing cash from the initial public
offering of approximately  $53.3 million offset by distributions to stockholders
and funds used to repay long term debt and a portion of the Distribution Notes.

         As of December 31, 1997 net proceeds of approximately $53.3 million the
Company's initial public offering were used for the following  purposes:  (i) to
repay  outstanding  indebtedness  of $7.3  million,  (ii) $3.3  million  for the
relocation and design of specialty  stores,  (iii) $4.0 million for the purchase
of land and building for a new discount outlet store and warehouse  distribution
center,  (iv) the  quarterly  principal  payment of  distribution  notes of $4.0
million,  (v) $1.5 million for the payment of signing  bonuses to an officer and
to MC Management in connection  with  long-term  service  agreements,  (vi) $1.6
million for the upgrade of the Company's  information  systems,  (vii)  interest
payments of $.8 million on the  Distribution  Notes and (viii) $14.9 million for
working capital and general corporate purposes.  The remaining proceeds of $15.9
million are expected to be used for the following purposes: (I) $6.0 million for
a new discount outlet store and warehouse distribution center, (ii) $5.0 million
for the expansion of retail  selling space at existing  discount  outlet stores,
(iii) $4.0 million for the payment of Distribution  Notes,  (iv) $.6 million for
the interest payments on Distribution  Notes and (v) $.3 million for the upgrade
of information technology systems.

         The Company's net cash flow provided by operating  activities  was $9.2
million for 1996. Net cash used in investing  activities was $4.1 million during
such  period,  relating  to  capital  expenditures  at  the  Company's  Whippany
location.  Net cash  used in  financing  activities  was $2.2  million  in 1996,
primarily for repayment of debt.

         At December 31, 1997, the Company had working  capital of $55.2 million
compared to $18.5  million at December  31, 1996.  The amount for 1997  includes
cash,  cash  equivalents and short-term  investments of $31.6 million,  accounts
receivable  of $2.3  million,  $34.8  million of  inventory  and $9.3 million of
accounts payable and accrued expenses.

         As of December 31, 1997, the Company also had available  under a credit
agreement a $15.0 million line of credit,  with borrowings  thereunder  accruing
interest at the bank's base rate less 0.5% or the London Interbank  Offered Rate
("LIBOR") plus 1.5%. At December 31, 1997,  the Company had no borrowings  under
this line of credit, which expires on May 31, 1998.

         At December 31, 1997 the Company had outstanding  Distribution Notes in
the  amount  of  $19.8  million  which  were  issued  to  the  former  principal
stockholders  of the Company's  subsidiaries  prior to their  acquisition by the
Company  on  June 6,  1997.  These  notes  represented  estimated  undistributed
accumulative  S  Corporation  earnings  through June 26,  1997,  the date of the
initial public offering. These notes bear interest at the rate of 7.0% per annum
and are  payable on a  quarterly  basis  until June 1, 2000.  In  addition,  the
Company  has  outstanding  Distribution  Notes  totaling  $1.0  million  bearing
interest at the rate of 7.0% per annum payable on June 1, 2000.

         Capital  expenditures,   primarily  for  computers,  office  furniture,
leasehold  improvements  and the  purchases of the  Burlington,  North  Carolina
property were $8.5 million and $2.9 million in 1997 and 1996, respectively.

         The  Company  anticipates  that it will be able to satisfy  its ongoing
cash  requirements  for the  foreseeable  future,  primarily with cash flow from
operations,  and cash  and  short-term  investments  on  hand,  supplemented  by
borrowings under its current credit agreement.

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

Impact of Recently Issued Accounting Standards

In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income.
The   Statement   established   standards  for  the  reporting  and  display  of
comprehensive  income  and  its  components  in a full  set of  general  purpose
financial  statements.  This Statement requires that all items that are required
to be recognized  under  accounting  standards as  components  of  comprehensive
income be reported  in a financial  statement  that is  displayed  with the same
prominence as other financial statements. This Statement is effective for fiscal
years  beginning  after  December  15,  1997.  The Company does not expect to be
significantly impacted by the adoption of this Statement.

In June 1997, the FASB issued  Statement of Financial  Accounting  Standards No.
131,  Disclosures  about  Segments  of an  Enterprise  and  Related  Information
("Statement  No.  131").  Statement 131  establishes  standards for the way that
public business  enterprises  report  information  about  operating  segments in
annual financial  statements and requires that those enterprises report selected
information  about  operating  segments in interim  financial  reports.  It also
establishes  standards  for related  disclosures  about  products and  services,
geographic areas, and major customers.  Statement 131 is effective for financial
statements for fiscal years  beginning  after December 15, 1997 and,  therefore,
the Company will adopt the new requirements  retroactively  in 1998.  Management
has not completed its review of Statement 131, but anticipates that the adoption
of this Statement will increase the number of reported segments.



Item 8.  Financial Statements and Supplementary Data

See  pages  F-1  through  F-26  annexed  hereto.  The  schedule  required  under
Regulation S-X is included herein on page S-1



Item 9.  Changes in and Disagreements With Accountants on Accounting and
     Financial Disclosure

Effective as of October 5, 1996, the Company's Board dismissed J.H. Cohn LLP and
appointed Ernst & Young LLP as the Company's independent public accountants. The
report of J.H. Cohn LLP on the  Company's  combined  financial  statements as of
December  31,  1994 and 1995 and for the years  then  ended did not  contain  an
adverse opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principles. In connection with the audits
for the years ended  December  31,  1993,  1994 and 1995 and through  October 5,
1996, there were no disagreements with J.H. Cohn LLP on any matter of accounting
principles or practices,  financial  statements  disclosure or auditing scope or
procedure at the time of the change of  independent  public  accountants or with
respect to the Company's financial statements.  Prior to retaining Ernst & young
LLP,  the  company  had not  consulted  with  Ernst & Young  LLP  regarding  the
application of accounting  principles or the type of audit opinion that might be
rendered on the Company's financial statements.




                                            Part III


Item 10.  Directors and Executive Officers of the Registrant

Information  with respect to the  Directors and Officers of the Company which is
called for by this Item 10 is  incorporated  by reference to the information set
forth under the heading "Election of Directors" in the Company's Proxy Statement
relating  to its 1997 Annual  Meeting of  Stockholders  to be filed  pursuant to
Regulation 14A (the "Company's 1997 Proxy Statement").



Item 11.  Executive Compensation

Information  called  for by this Item 11 is  incorporated  by  reference  to the
information  set  forth  under  the  heading  "Executive  Compensation"  in  the
Company's 1997 Proxy Statement.



Item 12.  Security Ownership of Certain Beneficial Owners and Management

Information  called  for by this Item 12 is  incorporated  by  reference  to the
information  set  forth  under  the  headings  "Security  Ownership  of  Certain
Beneficial Owners" and "Security  Ownership of Management" in the Company's 1997
Proxy Statement.



Item 13.  Certain Relationships and Related Transactions

Information  called  for by this Item 13 is  incorporated  by  reference  to the
information  set forth under the headings  "Election of Directors,"  "Employment
Arrangements,"  and  "Certain  Relationships  and Related  Transactions"  in the
Company's 1997 Proxy Statement.




                                      Part IV


Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) The following documents are filed as part of this report:

1.  Financial Statements: - See "Index to Financial Statements"
2.  Financial Statement Schedule: - See "Index to Financial Statements"
3.    Exhibits: - See "Exhibit Index"

(b) Reports on Form 8-K - None.
                                                        21
<PAGE>
                                                800-JR CIGAR, Inc.

                                           Index to Financial Statements
                                         and Financial Statement Schedule



Reports of Independent Auditors..............................................F-2

Financial Statements

Consolidated Balance Sheets as of December 31, 1996 and 1997.................F-4
Consolidated Statements of Income for the Years Ended
   December 31, 1995, 1996 and 1997..........................................F-5
Consolidated Statements of Stockholders' Equity for the Years Ended
   December 31, 1995, 1996 and 1997..........................................F-6
Consolidated Statements of Cash Flows for the Years Ended
   December 31, 1995, 1996 and 1997..........................................F-7
Notes to Consolidated Financial Statements...................................F-8

Financial Statement Schedule

Schedule II--Valuation and Qualifying Accounts...............................S-1


All other  schedules for which  provision is made in the  applicable  accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.

<PAGE>
                                          Report of Independent Auditors


To the Board of Directors 800-JR CIGAR, Inc.

We have audited the  accompanying  consolidated  balance  sheet of 800-JR CIGAR,
Inc. as of December 31, 1997 and the related consolidated  statements of income,
stockholders'  equity  and cash  flows  for the year  then  ended.  We have also
audited the combined balance sheet of 800-JR CIGAR, Inc. as of December 31, 1996
and the related  combined  statements of income,  stockholders'  equity and cash
flows for the year then ended. Our audits also included the financial  statement
schedule  listed in the index at Item  14(a).  These  financial  statements  and
schedule are the responsibility of the Company's management.  Our responsibility
is to express an opinion on these financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the consolidated financial position of 800-JR CIGAR, Inc.
as of December 31, 1997, and the  consolidated  results of their  operations and
their cash flows for the year then ended, and the combined financial position of
800-JR CIGAR,  Inc. as of December 31, 1996,  and the combined  results of their
operations  and their  cash  flows for the year then  ended in  conformity  with
generally  accepted  accounting  principles.  Also, in our opinion,  the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole,  presents  fairly,  in all material  respects,  the
information set forth therein.

                                          /S/  ERNST & YOUNG LLP
MetroPark, New Jersey
February 27, 1998
<PAGE>
                                     Report of Independent Public Accountants


To the Board of Directors 800-JR CIGAR, Inc.

We have audited the accompanying consolidated statement of income, stockholders'
equity and cash flows of 800-JR CIGAR,  INC. AND SUBSIDIARIES for the year ended
December 31, 1995.  These  financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audit.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the combined financial statements.  An audit also
includes assessing the accounting principles used and significant estimates made
by  management,   as  well  as  evaluating  the  overall   financial   statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the results of operations and cash flows of
800-JR CIGAR,  INC. AND  SUBSIDIARIES  for the year ended  December 31, 1995, in
conformity with generally accepted accounting principles.

Our audit  referred to above  included  Schedule II as of and for the year ended
December  31, 1995 which  presents  fairly,  when read in  conjunction  with the
consolidated  financial  statements,  the  information  required to be set forth
therein.

                                           /S/  J.H. COHN LLP

Roseland, New Jersey
May 21, 1996
<PAGE>
                                                                F-2
                                                  Consolidated Balance Sheets
                                                       (Dollars in thousands)
                                                           December 31
                                                       1996           1997
                                                 -------------------------------

Assets
Current assets:

   Cash and cash equivalents                        $  6,056        $16,572
   Short-term investments                                  -         14,981
   Accounts receivable, net of allowance for 
    doubtful accounts of $118 and $78 at 
    December 31, 1996 and 1997, respectively           1,703          2,313
   Merchandise inventory                              19,616         34,779
   Prepaid expenses and other current assets             700          2,155
   Loans receivable - affiliates and other 
    associated entities                                1,070            603
   Loans receivable - stockholders                     2,471              -
   Deferred tax assets - current                           -            996
                                                 -------------------------------
Total current assets                                  31,616         72,399

Property, equipment and improvements, at cost, net
    of accumulated depreciation and amortization      10,876         18,518
Other assets                                             165            243
Deferred tax assets                                       25            102
                                                 ===============================
Total assets                                         $42,682        $91,262
                                                 ===============================

Liabilities and stockholders' equity Current liabilities:
   Current portion of long-term debt                 $ 2,167     $        -
   Current portion of distribution notes payable
    to stockholders                                        -          7,933
   Current portion of capital lease obligations           89              -
   Accounts payable                                    8,947          7,157
   Accrued expenses                                    1,891          2,096
                                                 -------------------------------
Total current liabilities                             13,094         17,186

Long-term debt, less current portion                   6,112              -
Distribution notes payable to stockholders, 
    less current portion                                   -         12,900
                                                 -------------------------------
Total liabilities                                     19,206         30,086

Commitments and contingencies

Stockholders' equity:
   Common stock of predecessor                            21              -
   Preferred stock, $.01 par value, 5,000,000 
    shares authorized, no shares issued and outstanding
   Common stock, $.01 par value, 40,000,000 shares
    authorized, 12,750,000 issued and outstanding          -            128
   Additional paid-in capital                             28         52,716
   Retained earnings                                  23,845          8,332
                                                 -------------------------------
                                                      23,894         61,176
   Less treasury stock, at cost                         (418)             -
                                                 -------------------------------
Total stockholders' equity                            23,476         61,176
                                                 ===============================
Total liabilities and stockholders' equity           $42,682        $91,262
                                                 ===============================
<PAGE>

                                       800-JR CIGAR, Inc. and Subsidiaries

                                        Consolidated Statements of Income
                                (Dollars in thousands, except per share amounts)


                                                  Year ended December 31
                                            1995           1996           1997
                                   ---------------------------------------------
Net sales                                 $152,695       $191,982       $240,348
Cost of goods sold                         130,645        158,007        190,886
                                   ---------------------------------------------
Gross profit                                22,050         33,975         49,462

Operating expenses:
   Selling                                   3,977          3,946          5,192
   General and administrative               14,791         17,008         19,523
   Depreciation and amortization               493            674            905
                                   ---------------------------------------------
Income from operations                       2,789         12,347         23,842

Other income (expense):
   Interest expense                          (785)          (789)        (1,269)
   Interest income                             158            207          1,283
   Rental income                               150            195            202
   Insurance settlement                          -            373              -
   Other, net                                   -             (8)            58
                                   ---------------------------------------------
Income before income taxes                   2,312         12,325         24,116

Provision (credit) for income taxes           (74)           144          4,781
                                   =============================================
Net income                               $   2,386    $    12,181     $   19,335
                                   =============================================

Pro forma - unaudited
Historical income before provision for income taxes   $    12,325     $   24,116
Pro forma adjustments other than income taxes                 580            977
                                                 -------------------------------
Pro forma income before income taxes                       12,905         25,093

Pro forma provision for income taxes                        5,262         10,255
                                                                 ---------------
                                                 ===============================
Pro forma net income                                  $     7,643     $   14,838
                                                 ===============================

Pro forma earnings per share - basic                 $         .73    $     1.30
                                                 ===============================
Pro forma earnings per share - diluted               $         .73    $     1.29
                                                 ===============================
Pro forma common shares outstanding - basic                 9,812         11,281
                                                 ===============================
Pro forma common shares outstanding - diluted               9,812         11,374
                                                 ===============================

See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>                                   800-JR CIGAR, Inc. and Subsidiaries
                                Consolidated Statements of Stockholders' Equity
                                            (Dollars in thousands)

                                       Common
                                      Stock of                               Additional
                                    Predecessor       Common Stock            Paid-in         Retained       Treasury
                                               ----------------------------
                                      Entities      Shares       Amount        Capital         Earnings         Stock        Total
                                  -------------------------------------------------------------------------------------------------

<S>                <C>                   <C>            <C>          <C>         <C>            <C>             <C>        <C>      
Balance at January 1, 1995               $21                 -         -       $   28         $10,073         $(418)     $   9,704
   Net income                                                                                   2,386                        2,386
                                  -------------------------------------------------------------------------------------------------
Balance at December 31, 1995              21                 -         -           28          12,459          (418)        12,090
   Distribution to stockholders                                                                  (795)                        (795)
   Net income                                                                                  12,181                       12,181
                                  -------------------------------------------------------------------------------------------------
Balance at December 31, 1996              21                 -         -           28          23,845          (418)        23,476
   Net income                                                                                  19,335                       19,335
   Reorganization                        (21)        9,300,000     $  93         (547)             57           418              -
   Issuance of common stock                          3,450,000        35       53,235                                       53,270
   Issuance of distribution notes                                                             (23,800)                     (23,800)
   Issuance of additional
    distribution notes                                                                         (1,000)                      (1,000)
   Distribution to stockholders                                                               (10,105)                     (10,105)
                                  -------------------------------------------------------------------------------------------------
Balance at December 31, 1997          $    -        12,750,000      $128      $52,716       $   8,332       $     -       $ 61,176
                                  =================================================================================================
See accompanying notes.
</TABLE>
<PAGE>
                                                      Year ended December 31
                                                    1995       1996       1997
                                              ----------------------------------

Cash flows from operating activities
Net income                                         $ 2,386    $12,181    $19,335
Adjustments to reconcile net income to net cash 
  provided by operating activities:
    Depreciation and amortization                      493        674        905
    Provision for uncollectible accounts                33        191         55
    Deferred income taxes                              57         (5)    (1,073)
    Other                                              (17)        (8)         -
    (Gain) loss on sale of assets                       (8)        28          -
    Changes in operating assets and liabilities:
     Accounts receivable                              501       (549)      (665)
     Merchandise inventory                             56     (2,894)   (15,163)
     Prepaid expenses and other current assets         (3)      (460)    (1,455)
     Other assets                                       2        (36)       (78)
     Accounts payable and accrued expenses          1,053         68     (1,585)
                                              ----------------------------------
Net cash provided by operating activities            4,553      9,190        276

Cash flows from investing activities
Purchase of short-term investments                      -          -    (14,981)
Purchase of property and equipment                 (3,176)    (2,929)    (8,547)
Loans repaid by (extended to) affiliates and other 
   associated entities                                 113       (240)       467
Proceeds from sale of assets                            75          -          -
Loans extended to stockholders                          -       (938)      (445)
                                              ----------------------------------
Net cash used in investing activities              (2,988)    (4,107)   (23,506)

Cash flows from financing activities
(Repayments) proceeds of borrowings under revolving 
   line of credit                                      950        500          -
Proceeds from Common Stock offering                      -          -     54,545
Expenses paid in connection with Common Stock offering  -          -     (1,275)
Payments of distribution notes                          -          -     (3,967)
Payments of long-term debt                         (1,575)    (1,850)    (8,279)
Payments of capital lease obligations                 (78)       (84)       (89)
Payments of loans payable - stockholders           (1,164)         -          -
Distribution to stockholders                            -       (795)    (7,189)
                                              ----------------------------------
Net cash (used in) provided by financing activities (1,867)    (2,229)    33,746
                                              ----------------------------------

Net (decrease) increase in cash and cash equivalents  (302)     2,854     10,516
Cash and cash equivalents, beginning of period       3,504      3,202      6,056
                                                                    ------------
                                                         =======================
Cash and cash equivalents, end of period           $ 3,202    $ 6,056   $ 16,572
                                              ==================================

Supplemental disclosure of cash flow data
Income taxes paid                                  $   325    $    37  $   6,053
                                                         =======================
                                              ==================================
Interest paid                                      $   874    $   775  $     397
                                              ==================================

Supplemental disclosure of noncash investing and financing activities
Line of credit refinanced with note payable        $     -     $3,000  $      -
Non-cash distribution to stockholders                    -          -      2,916
Distribution notes issued to stockholders                -          -     24,800

See accompanying notes.
<PAGE>

1.  Basis of Presentation and Significant Accounting Policies

Business

800-JR  CIGAR,  Inc.  and  subsidiaries  ("800-JR  CIGAR" or the  "Company")  is
primarily  engaged in the  retail/wholesale  distribution of tobacco and tobacco
related products throughout the United States.

The  Company's  business is impacted  by the  general  seasonal  trends that are
characteristic  of the retail industry,  and it generally  experiences lower net
revenues  and net income in the first half of each fiscal  year  compared to the
second half of the fiscal year.

Initial Public Offering

Effective June 26, 1997,  the Company sold 3,450,000  shares of its common stock
at a price of $17 per share in an initial public offering (the "Offering").  Net
proceeds  of  the  Offering,   after   deducting   underwriting   discounts  and
commissions,  and professional fees aggregated  $53,270. As of December 31, 1997
proceeds of the  Offering  were used for the  following  purposes:  (i) to repay
outstanding indebtedness of $7,300, (ii) $3,300 for the relocation and design of
specialty  stores,  (iii) $4,000 for the purchase of land and building for a new
discount  outlet store and  warehouse  distribution  center,  (iv) the quarterly
principal  payment  of  distribution  notes of  $4,000,  (v)  payment of signing
bonuses to an officer and to MC Management in connection with long-term  service
agreements,  (vi) $1,600 for the upgrade of the Company's  information  systems,
(vii) interest payments of $800 on the Distribution Notes and (viii) $14,900 for
working  capital and  general  corporate  purposes.  The  remaining  proceeds of
$15,870 are expected to be used for the following purposes: (i) $6,000 for a new
discount  outlet store and warehouse  distribution  center,  (ii) $5,000 for the
expansion of retail  selling space at existing  discount  outlet  stores,  (iii)
$4,000  for the  payment  of  distribution  notes,  (iv)  $600 for the  interest
payments  on  distribution  notes and (v) $270 for the  upgrade  of  information
technology systems.

Basis of Presentation

800-JR CIGAR was  incorporated  in Delaware in March 1997.  Concurrent  with the
completion of 800-JR CIGAR's Offering,  the former principals of the predecessor
group of companies  contributed to 800-JR CIGAR all of the outstanding  stock in
the entities listed below that comprise the predecessor  group of companies,  in
exchange   for   9,300,000   shares  of  common   stock  of  800-JR  CIGAR  (the
"Reorganization").
<PAGE>

1.  Basis of Presentation and Significant Accounting Policies (continued)

The accompanying financial statements include the results of operations for  
1995, 1996 and the period from January 1, 1997 to June 26, 1997 of J.R. Tobacco 
of America, Inc., J.N.R. Grocery Corp., J&R Tobacco (New Jersey) Corp., J.R. 
Tobacco Company of Michigan, Inc., cigars by Santa Clara, N.A., Inc., J.R. 
Tobacco Outlet, Inc., J.R.-46th Street, Inc., J.R. Tobacco NC, Inc., and J.R. 
Statesville, Inc. (together, the "Company" or the "Predecessor Entities").  
The Predecessor Entities are corporations that had elected to be taxed as S 
Corporations pursuant to the Internal Revenue Code and certain state and local 
tax regulations through June 26, 1997.

After the Reorganization, the Predecessor Entities became subsidiaries of 800-JR
CIGAR.  Because 800-JR CIGAR and the  Predecessor  Entities were commonly owned,
the  Reorganization  has been  accounted for in a manner similar to a pooling of
interests and,  accordingly,  the historical  carrying  values of the assets and
liabilities of the Predecessor Entities were not affected by the Reorganization.
800-JR CIGAR conducted no business prior to the Reorganization and, accordingly,
it was not included in the results of operations of the Predecessor Entities.

For the period from June 27, 1997 through  December 31, 1997,  the  accompanying
consolidated  financial  statements  include the results of operations of 800-JR
CIGAR, as well as all companies that were included in the Predecessor Entities.

All significant intercompany balances and transactions have been eliminated.

The principal  stockholders of the  Predecessor  Entities were Lewis Rothman and
LaVonda Rothman, each of whom owned 50% of the Predecessor Entities,  except for
J.R.  Statesville,  Inc.,  which was owned 26% by Lewis Rothman,  26% by LaVonda
Rothman and 12% by each of the Shane Rothman Trust,  the Luke Rothman Trust, the
Marni Rothman Trust and the Samantha  Rothman Trust.  As  consideration  for the
contribution  of their  interests  in the  Predecessor  Entities,  each of Lewis
Rothman,  LaVonda Rothman,  the Shane Rothman Trust, the Luke Rothman Trust, the
Marni  Rothman  Trust and the Samantha  Rothman  Trust will  receive  4,387,920,
4,387,920,  131,040,  131,040,  131,040  and  131,040  shares of  common  stock,
respectively, of 800-JR CIGAR, Inc., for an aggregate 9,300,000 shares.

Amounts included for common stock on the accompanying consolidated balance sheet
and statements of stockholders'  equity prior to the  Reorganization,  represent
the combined par or stated value of the outstanding  shares of the  corporations
included in the Predecessor Entities.
<PAGE>

1.  Basis of Presentation and Significant Accounting Policies (continued)

Statement of Income Presentation

The  statement  of income of the  Company for the year ended  December  31, 1997
reflects the results of  operations of the  Predecessor  Entities for the period
January 1, 1997  through  June 26, 1997 and the results of the Company from June
27, 1997 (the date of the  consummation  of the Offering)  through  December 31,
1997.

Selected  statement  of income data for the year ended  December 31, 1997 are as
follows:
                                     January 1       June 27 to       Year ended
                                      to June         December         December
                                     26, 1997         31, 1997         31, 1997
                            ----------------------------------------------------
                                 (Predecessor)     (Company)      (Consolidated)

Net revenues                           $107,782         $132,566        $240,348
                            ====================================================

Gross profit                          $  20,975        $  28,487       $  49,462
                            ====================================================

Operating income                      $  10,481        $  13,361       $  23,842
Other (expense) income                     (118)             392             274
                            ----------------------------------------------------
Income before provision for income taxes 10,363           13,753          24,116

Provision for income taxes                  361            4,420           4,781
                            ====================================================
Net income                            $  10,002       $    9,333       $  19,335
                            ====================================================

Pro Forma Adjustments (Unaudited)

The  unaudited  pro forma net income for the years ended  December  31, 1996 and
1997 reflects the Reorganization,  the Offering and the following adjustments as
if they had  occurred on January 1 of each  period:  a) a decrease in  aggregate
compensation from $1,818 to $400 for 1996 and from $253 to $200 for 1997 for two
of the Company's executives pursuant to their new employment  agreements;  b) an
increase in interest  expense of $1,458 for 1996 and $798 for 1997  assuming the
issuance of the  Distribution  Notes; c) a reduction in interest expense of $789
for 1996  and  $328 for 1997  assuming  the  application  of  proceeds  from the
Offering to repay all of the  Company's  indebtedness  other than capital  lease
obligations;  d) a reduction  in  interest  income of $169 for 1996 and $106 for
1997   assuming  the  repayment  to  the  Company  of  loans   receivable   from
stockholders; e) an increase of $1,500 for 1997, related to signing bonuses paid
to an  officer  of the  Company  and to MC  Management  in  connection  with the
execution of long-term service agreements, and f) an increase of $5,118 for 1996
and $5,474 for 1997
<PAGE>

1.  Basis of Presentation and Significant Accounting Policies (continued)

for income taxes based upon pro forma pre-tax  income as if the Company had been
subject to federal and additional state income taxes.

On  June 6,  1997,  the  Company  issued  Distribution  Notes  to the  principal
stockholders of the Predecessor Entities in the amount of $23,800,  representing
estimated  undistributed  cumulative S Corporation  earnings through the date of
the Offering which were taxable to those  stockholders.  The Distribution  Notes
are net of  loans  receivable  from  the  stockholders  of  $2,916,  which  were
outstanding prior to the Offering,  and additional  distributions of $7,189 made
prior to the  consummation  of the  Offering to enable the  stockholders  to pay
income taxes on their  allocable  portions of the 1996 and 1997  undistributed S
Corporation  estimated  earnings  through the date of the Offering.  These notes
bear  interest  at the rate of 7.0% per annum,  and are  payable on a  quarterly
basis over the three-year period following the Offering.

On June 6, 1997, the Predecessor  Entities also issued  additional  distribution
notes (the "Additional Notes") to the principal  stockholders of the Predecessor
Entities,  for a nominal  amount.  At December 31, 1997,  the initial  principal
amount  of the  additional  notes  was  increased  to $1  million,  the  maximum
allowable.  Such increase represents the amount by which the final S Corporation
earnings  of the  Predecessor  Entities  exceeded  the  principal  amount of the
Distribution  Notes (as discussed above). The Additional Notes mature on June 1,
2000 and bear interest at the rate of 7% per annum.

Pro Forma Earnings Per Share (Unaudited)

Pro forma basic and diluted  earnings per share for the year ended  December 31,
1996 is based on  9,300,000  shares of  common  stock  outstanding  prior to the
Offering,  increased by the sale of 511,658 shares of common stock at an initial
public offering price of $17.00 per share ($15.44, net of underwriting discounts
and commissions and estimated offering expenses), the proceeds of which would be
necessary to pay approximately  $7,900,  the current portion of the Distribution
Notes.  The net income used in the  calculation  of pro forma earnings per share
for the year ended December 31, 1996  represents pro forma net income  decreased
by the interest expense on debt of $789 ($467 on an after-tax basis).

The 11,280,829 pro forma common shares  outstanding  used in the  calculation of
basic pro forma  earnings per share is based on a weighted  average  calculation
derived by using 12,750,000 common shares outstanding subsequent to the offering
and 9,811,658, the pro forma common shares outstanding prior to the Offering.
<PAGE>

1.  Basis of Presentation and Significant Accounting Policies (continued)

The 11,373,900 pro forma common shares  outstanding,  used in the calculation of
diluted pro forma  earnings per share,  for the year ended  December 31, 1997 is
based  on a  weighted  average  calculation  derived  by using  12,936,143,  the
weighted  average  common  shares  outstanding  subsequent  to the  Offering and
9,811,658,  the pro forma common shares  outstanding  prior to the Offering,  as
calculated  above. The net income used in the calculation of pro forma per share
information  for the year ended  December  31,  1997  consists  of the pro forma
income of  $14,838  reduced  by  interest  expense  on debt of $328  ($194 on an
after-tax basis).

Supplementary  pro forma basic and diluted earnings per share for the year ended
December 31, 1996, is $.74 based on 9,300,000 shares of common stock outstanding
prior to the  Offering,  increased  by (a) the sale of 511,658  shares of common
stock at an initial public  offering  price of $17.00 per share ($15.44,  net of
underwriting  discounts and commissions and estimated  offering  expenses),  the
proceeds of which would be necessary to pay  approximately  $7,900,  the current
portion of the  Distribution  Notes and (b) the sale of 467,896 shares of common
stock at an initial public  offering  price of $17.00 per share ($15.44,  net of
underwriting  discounts and commissions and estimated  offering  expenses),  the
proceeds of which would be necessary to repay  approximately  $7,229, the amount
of  outstanding  debt at the date of the  offering.  The net income  used in the
calculation of  supplementary  pro forma earnings per share is the pro forma net
income of $7,643 for the year ended December 31, 1996.

Supplementary pro forma basic earnings per share for the year ended December 31,
1997  is  $.78.  The  common  shares  outstanding  used  in the  calculation  of
supplementary  basic pro forma earnings per share is based on a weighted average
calculation derived by using 12,750,000 common shares outstanding  subsequent to
the  offering  and  10,279,554,   the  supplementary  pro  forma  common  shares
outstanding, prior to the offering.

Supplementary  pro forma diluted  earnings per share for the year ended December
31, 1997 is $1.28 based on a weighted average of the 10,279,554 shares of common
stock  outstanding  for the  six-month  period  ended June 30 1997 (prior to the
Offering) and  12,936,143  shares  outstanding  for the  six-month  period ended
December 31, 1997 (subsequent to the Offering).

The net income  used in the  calculation  of  supplementary  pro forma basic and
diluted earnings per share is the pro forma net income of $14,838.
<PAGE>

2.  Summary of Significant Accounting Policies

Cash and Cash Equivalents

Cash  and  cash  equivalents   include  all  cash  balances  and  highly  liquid
investments with a maturity of three months or less when acquired.  The carrying
amount reported for cash equivalents approximates fair value.

Short-Term Investments

Short-term investments consist of U.S. Treasury obligations and commercial paper
which mature within one year. Such  short-term  investments are carried at cost,
which approximates fair value, due to the short period of time to maturity.

Concentrations of Credit Risk

Certain financial instruments  potentially subject the Company to concentrations
of credit risk. These financial  instruments  consist primarily of cash and cash
equivalents,  short-term investments, and trade accounts receivable. The Company
places its temporary cash  investments and short-term  investments in government
obligations  and commercial  paper of high credit quality  corporations to limit
its  credit  exposure.  Concentrations  of  credit  risk with  respect  to trade
receivables  are limited due to the large  number of  customers  comprising  the
Company's customer base, their dispersion across different  geographic areas and
generally short payment terms.

Merchandise Inventory

Merchandise  inventory  is  stated  at the  lower  of  cost  (determined  by the
first-in,   first-out  method)  or  market;   market  represents  the  lower  of
replacement  cost or  estimated  net  realizable  value.  Merchandise  inventory
consists of goods held for re-sale.

Property, Equipment and Improvements

Property,  equipment  and  improvements  are  stated at cost.  Depreciation  and
amortization  of assets,  including those under capital lease, is computed using
the  straight-line  and  accelerated  methods  over the lesser of the  estimated
useful lives of the related  assets or the lease term.  These lives range from 3
to 31 years.

Advertising

The  Company  expenses  the cost of  advertising  and  promotions  as  incurred.
Advertising  and promotion  costs amounted to $1,892,  $1,129 and $1,605 for the
years ended December 31, 1995, 1996 and 1997, respectively.
<PAGE>

2.  Summary of Significant Accounting Policies (continued)

Income Taxes

Income  taxes are  accounted  for by the  liability  method in  accordance  with
Statement of Financial  Accounting  Standards ("SFAS") No. 109,  "Accounting for
Income Taxes".

Revenue Recognition

Sales are  recognized  upon  shipment  of  products  or, in the case of sales by
Company owned stores, when payment is received.

Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect certain  reported  amounts and  disclosures.  Actual results could differ
from those estimates.

Stock Options

The Company has elected to follow  Accounting  Principles  Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related  Interpretations
in accounting for its employee stock option plans because,  the alternative fair
value  accounting  provided for under FASB  Statement No. 123,  "Accounting  for
Stock-Based  Compensation"  (FASB 123),  requires use of option valuation models
that were not developed for use in valuing employee stock options. Under APB 25,
because the exercise  price of the Company's  employee  stock options equals the
fair market value of the  underlying  common stock on the date of the grant,  no
compensation expense is recognized.

Earnings per Share

In 1997, the Financial  Accounting Standards Board ("FASB") issued Statement No.
128,  Earnings per Share.  Statement 128 replaced the calculation of primary and
fully  diluted  earnings  per share with basic and diluted  earnings  per share.
Unlike  primary  earnings  per share,  basic  earnings  per share  excludes  any
dilutive  effects of  options,  warrants  and  convertible  securities.  Diluted
earnings per share is calculated  similar to fully  diluted  earnings per share.
Pro forma  earnings per share amounts for all periods have been  presented,  and
where appropriate, restated to conform to the Statement 128 requirements.
<PAGE>

2.  Summary of Significant Accounting Policies (continued)

Comprehensive Income

In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income.
The   Statement   established   standards  for  the  reporting  and  display  of
comprehensive  income  and  its  components  in a full  set of  general  purpose
financial  statements.  This Statement requires that all items that are required
to be recognized  under  accounting  standards as  components  of  comprehensive
income be reported  in a financial  statement  that is  displayed  with the same
prominence as other financial statements. This Statement is effective for fiscal
years  beginning  after  December  15,  1997.  The Company does not expect to be
significantly impacted by the adoption of this Statement.

Disclosures About Segments of an Enterprise and Related Information

In June 1997, the FASB issued  Statement of Financial  Accounting  Standards No.
131,  Disclosures  about  Segments  of an  Enterprise  and  Related  Information
("Statement  No.  131").  Statement 131  establishes  standards for the way that
public business  enterprises  report  information  about  operating  segments in
annual financial  statements and requires that those enterprises report selected
information  about  operating  segments in interim  financial  reports.  It also
establishes  standards  for related  disclosures  about  products and  services,
geographic areas, and major customers.  Statement 131 is effective for financial
statements for fiscal years  beginning  after December 15, 1997 and,  therefore,
the Company will adopt the new requirements  retroactively  in 1998.  Management
has not completed its review of Statement 131, but anticipates that the adoption
of this Statement will increase the number of reported segments.

3.  Property, Equipment and Improvements

Property, equipment and improvements consist of the following:

                                                             December 31
                                                          1996         1997
                                                      --------------------------
Land                                                    $   1,593    $   1,593
Building and improvements                                   5,860       11,003
Machinery and equipment                                     1,453        2,979
Furniture and fixtures                                      1,769        1,754
Leasehold improvements                                      3,480        5,283
Automobiles                                                   135          174
                                                      --------------------------
                                                           14,290       22,786
Less accumulated depreciation and amortization              3,414        4,268
                                                      ==========================
                                                          $10,876      $18,518
                                                      ==========================
<PAGE>

4.  Long-Term Debt and Line of Credit

Long-term debt is comprised as follows:
                                                                December 31
                                                             1996        1997
                                                        ------------------------
Distribution Notes payable to stockholders, due in 
  quarterly installments, with interest at 7.0% through 
  June 1, 2000                                                           $19,833
Additional Distribution Notes payable to stockholders, due
  June 1, 2000, with interest at 7.0%                                      1,000
Mortgage payable - seller, due in monthly installments of 
  interest only at 8.25% through October 1, 2001, at which 
  time all unpaid principal and interest shall be due 
  (secured by certain  property,  equipment and improvements
  with a net book value of approximately $7,384 at December 
  31, 1996)                                                   $2,000
Mortgage payable - bank, due in monthly installments with
  interest at the prime rate (8.25% at December 31, 1996) 
  through  December 31, 1998 (secured by certain property, 
  equipment and improvements with a net book value of 
  approximately $2,664 at December 31, 1996)                     475
Note payable - bank, due in monthly installments with
  interest at 6.6% through August 25, 1998                     1,680
Note payable - bank, due in monthly installments with
  interest at 8.25% through September 18, 1999                 1,255
Note payable - bank, due in monthly installments with
  interest at 7.5% through May 23, 2003                        2,750
Notes payable - former stockholder, due in monthly 
  installments of $7,500 plus interest at 12% through
  April 30, 1998                                                 119
                                                        ------------------------
                                                               8,279      20,833
Less current portion                                           2,167       7,933
                                                        ========================
Long-term debt                                                $6,112     $12,900
                                                        ========================

The Company used a portion of the  proceeds  from the Offering to repay all debt
which was outstanding as of the date of the Offering,  with the exception of the
Distribution Notes.

During 1997, the Company  entered into a new $15,000 line of credit with a bank,
which expires on May 31, 1998.  Borrowings under this facility are unsecured and
bear  interest  at the  bank's  prime  rate less 0.5% or the  London  Inter-Bank
Offering Rate ("LIBOR") plus 1.5%.

The fair value of the Company's  long-term debt  approximates its carrying value
as the interest rates are substantially  the same as are currently  available to
the Company for similar debt instruments.
<PAGE>

4.  Long-Term Debt and Line of Credit (continued)

The Distribution  Notes and Additional Notes payable to stockholders will mature
as follows:

1998                                                                   $7,933
1999                                                                    7,933
2000                                                                    4,967
                                                                  ============
                                                                      $20,833
                                                                  ============

5.  Employee Benefit Plans and Stock Option Plans

401(k) Plan

During 1997, the Company  adopted a defined  contribution  plan (401(k)) for all
eligible  employees.  The plan provides for  discretionary  contributions by the
Company  based  on  the  performance  of  the  Company.   The  Company  made  no
contributions to the plan in 1997.

1997 Employee Stock Purchase Plan

During  1997,  the Company  adopted,  and the  stockholders  approved,  the 1997
Employee  Stock  Purchase  Plan,  effective  on July 1, 1997.  This plan permits
eligible employees of the Company and its subsidiaries  (generally all full-time
employees who have  completed one year of service) to purchase  shares of Common
Stock at a  discount.  Employees  who elect to  participate  will  have  amounts
withheld through payroll deduction during six-month purchase periods. At the end
of each purchase period, accumulated payroll deductions will be used to purchase
stock at a price equal to 85% of the market price at the beginning of the period
or the end of the period,  whichever is lower.  Stock  purchased  under the plan
will be subject to a six-month holding period.  The Company has reserved 300,000
shares of Common Stock for issuance under this plan.

1997 Long-Term Incentive Plan

Prior to the  Offering,  the  Board of  Directors  ("Board")  and the  Company's
stockholders   approved  the  Company's  1997  Long-Term   Incentive  Plan  (the
"Incentive  Plan").  The purpose of the Incentive  Plan is to provide  executive
officers,  key employees,  and others with additional  incentives  enabling such
persons to increase their ownership interests in the Company. The maximum number
of shares of Common Stock that may be subject to
<PAGE>

5.  Employee Benefit Plans and Stock Option Plans (continued)

outstanding awards may not be greater than 800,000 shares. Awards may be settled
in cash, shares, other awards or other property, as determined by the Committee.

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

1997 Non-Employee Directors' Stock Plan

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

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

The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."

FASB 123 requires pro forma  information  regarding  net income and earnings per
share as if the Company has  accounted for its employee  stock  options  granted
under the fair value method of FASB 123.  The fair value of these equity  awards
was estimated at the date of
<PAGE>

5.  Employee Benefit Plans and Stock Option Plans (continued)

grant using a  Black-Scholes  option  pricing model with the following  weighted
average  assumptions used for grants in 1997:  risk-free interest rates of 5.73%
in 1997;  expected  volatility of 73%;  expected  option life of 10 years and an
expected  dividend yield of 0%. The weighted average grant fair value of options
granted  during  1997 was $14.02 per share.  The total  compensation  related to
stock-based  compensation awards, net of related income tax benefits, under FASB
123 for 1997 would have been approximately $613.

For purposes of pro forma  disclosures,  the estimated  fair value of the equity
awards is amortized to expense over the options'  vesting period.  The Company's
pro forma information, for the year ended December 31, 1997, is as follows:

Pro forma net income                                                    $14,225
Pro forma diluted net income per share of common stock                    $1.23

A summary of stock option  activity  relating to the Company's stock options are
as follows:

                                 Long-Term                   Non-Employee
                                Incentive Plan               Directors Plan
                      ----------------------------------------------------------
                             Weighted                     Weighted
                             Average        Number        Average        Number
                          Exercise Price      of       Exercise Price      of
                                            Shares                       Shares
                        --------------------------------------------------------

Outstanding at January 1, 1997                    -                            -

   Granted                    17.00         450,000        17.00          20,000
   Exercised                                      -                            -
   Canceled                   17.00         (35,000)       25.38          10,000
                      ==========================================================
Outstanding at December 
   31, 1997                   17.00         415,000        19.79          30,000
                      ==========================================================

The weighted average fair value of options issued at fair market value in 1997 
was $14.02 per share.  There were no options exercisable at December 31, 1997.
<PAGE>

5.  Employee Benefit Plans and Stock Option Plans (continued)

Stock options outstanding at December 31, 1997 are summarized as follows:

                                                         Weighted Average
                                          Outstanding        Remaining
                                          Options at     Contractual Life
                                           December
        Range of Exercise Price            31, 1997
----------------------------------------------------------------------------

$17.00 per share                               435,000        10 years
$25.38 per share                                10,000        10 years
                                       ==================
$17.00 to $25.38 per share                     445,000
                                       ==================

6.  Related Party Transactions

From  time to  time,  the  Company  made or  received  cash  advances  from  the
stockholders.  Such  advances  bore  interest at 9% and had no  established  due
dates. Net interest (expense) income amounted to $78, $169 and $44 in 1995, 1996
and 1997, respectively.

During 1997, the Company purchased cigars from an affiliated company aggregating
approximately   $7.6  million.   The  affiliated  entity  is  owned  50%  by  an
officer/director and 50% by another director of the Company.

7.  Commitments and Contingencies

Employment Agreements

Effective upon consummation of the Offering, the Company entered into three year
employment  agreements  with three  executives  of the Company.  The  agreements
provide for aggregate annual base salaries of $505, plus employment benefits and
bonuses,  which shall be determined at the discretion of the Board of Directors.
In connection with entering into an employment agreement,  one of the executives
received a signing bonus of $500.

Leases

The Company is obligated under various  noncancelable  lease  agreements for the
rental of premises classified as operating leases. Several of the leases contain
escalation clauses which provide for scheduled increases.
<PAGE>

7.  Commitments and Contingencies (continued)

Future minimum lease  payments for operating  leases as of December 31, 1997 are
as follows:
                                               Operating
                                                 Leases
                                            -----------------

1998                                             $   795
1999                                                 801
2000                                                 599
2001                                                 620
2002                                                 620
Thereafter                                         1,662
                                            -----------------
                                            =================
Total minimum lease payments                      $5,097
                                            =================

Rental expense under  operating  leases amounted to $774, $817 and $922 in 1995,
1996 and 1997, respectively.

The  obligations  relating to the leasing of computer  equipment,  which  expire
during 1997, are classified as capital  leases.  Equipment  under capital leases
totaled approximately $79 and $-0-, net of accumulated depreciation, at December
31, 1996 and 1997, respectively.

Management Agreement

The Company has a management  agreement with a management company which provides
certain administrative services to the Company.  Management fee expense in 1995,
1996 and 1997 amounted to $2,792, $3,071 and $4,132, respectively.  In addition,
the management  company paid rent to the Company in the amount of $120, $146 and
$146 in 1995, 1996 and 1997, respectively.  In consideration for entering into a
long-term  agreement  with the  management  company,  the Company paid a signing
bonus of $1 million to the management company subsequent to the Offering.

Litigation

Included in general and  administrative  expense for the year ended December 31,
1995 are legal fees and settlement  costs in connection with certain  litigation
with a former licensee in the amount of $1,000.

The Company,  from time to time,  may be a defendant  in actions  arising in the
ordinary course of business. In the opinion of management,  such litigation will
not have a material  effect on the  Company's  combined  financial  condition or
results of operations.
<PAGE>

7.  Commitments and Contingencies (continued)

Self-Insurance

Effective April 25, 1994, the Company  established  the Pyramid  Insurance Trust
Fund (the "Trust") to provide health and welfare benefits to eligible employees.
Contributions to the Trust by the Company shall be in amounts  sufficient to pay
all costs and expenses of the Trust, including,  but not limited to, the cost of
self-insured  benefit claim payments,  a reserve for self-insured benefit claims
and premiums for any fully insured benefit coverage. Contributions to the Trust,
all of which were  charged to  operations,  amounted  to $517,  $619 and $642 in
1995, 1996 and 1997, respectively.

8.  Income Taxes

The  Predecessor  Entities  were  corporations  that  elected  to be  taxed as S
Corporations  pursuant to the Internal  Revenue Code and certain state and local
tax regulations.  Therefore,  for the years ended December 31, 1995 and 1996 and
for the  period  January  1,  1997 to June 26,  1997  (the  period  prior to the
Offering),  no provision has been made in the accompanying  financial statements
for federal and certain state and local income  taxes,  since such taxes are the
liability of the principals. In connection with the Offering, the Company became
subject to federal and additional state income taxes.

The Company has adopted the  provisions  of SFAS No. 109.  SFAS No. 109 requires
the asset and liability  method of accounting for income taxes.  Under the asset
and  liability  method,  deferred  income  taxes  are  recognized  for  the  tax
consequences of "temporary  differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial carrying amounts
and the tax bases of existing assets and liabilities.

Concurrent with becoming  subject to federal and additional  state income taxes,
the Company recorded a deferred tax asset and a corresponding tax benefit in the
statement  of income in  accordance  with the  provisions  of SFAS No. 109.  The
deferred tax asset recorded on the date of the offering was $1,209.
<PAGE>

8.  Income Taxes (continued)

The provision (credit) for income taxes consists of the following:

                                                         Year ended
                                                         December 31
                                               1995       1996        1997
                                            -----------------------------------

Current income taxes:
   Federal taxes                              $     -     $    -     $ 4,186
   State and local taxes                         (129)       149       1,668
Deferred income taxes                              55         (5)     (1,073)
                                            -----------------------------------
                                               $   74       $144     $ 4,781
                                            ===================================

The income tax credit in 1995 is due to  reversals  of income  taxes  accrued in
prior years which,  through a later tax election,  became the  responsibility of
the principal stockholders.

Deferred  income  taxes  reflect  the net tax effects of  temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
and the amounts  used for income tax  purposes.  Significant  components  of the
Company's deferred tax asset as of December 31, 1996 and 1997 are as follows:

                                                       Year ended December 31
                                                          1996       1997
                                                       -----------------------
Book over tax depreciation                                  $23     $   102
Allowance for doubtful accounts                               2          32
Inventory capitalization and reserves                                   485
Other book accruals                                                     479
                                                       -----------------------
                                                       =======================
                                                            $25      $1,098
                                                       =======================

The pro forma  provision for income taxes  represents  the income tax provisions
that  would have been  reported  had the  Company  been  subject to federal  and
additional state income taxes during the years ended December 31, 1996 and 1997.
The pro forma income tax provision has been prepared according to SFAS No. 109.
<PAGE>

8.  Income Taxes (continued)

The pro forma income tax provision consists of the following (in thousands):

                                                   Year ended December 31
                                                         1996 1997
                                            ------------------------------------
Current income taxes:
   Federal taxes                                  $4,234          $  8,624
   State and local taxes                           1,356             2,658
                                            ------------------------------------
                                                   5,590            11,282
Deferred income tax benefit                         (328)           (1,027)
                                                             -------------------
                                            ====================================
                                                  $5,262           $10,255
                                            ====================================

A reconciliation  setting forth the differences  between the pro forma effective
tax rate of the Company and the U.S. federal statutory tax rate is as follows:

                                                          1996         1997
                                                      --------------------------
Federal statutory rate                                    34.3%        34.4%
State and local taxes, net of federal tax benefits         6.5          6.5
                                                      ==========================
Effective tax rate                                        40.8%        40.9%
                                                      ==========================
<PAGE>

9.  Quarterly Results of Operations (Unaudited)

The following is a summary of the unaudited  quarterly results of operations for
1997 and 1996 (dollars in thousands, except per share amounts):

                                                         Quarter Ended
                             ---------------------------------------------------
                               March 31   June 30   September 30  December 31
                             ---------------------------------------------------
 1997
 Net sales                           $49,683   $60,435     $62,002       $68,228
 Gross profit                          9,052    12,378      12,871        15,161
 Net income                            3,884  6,614(1)    4,084(1)      4,753(1)
 Pro forma or net income per share data:
    Earnings per share - basic           .40       .67         .32           .37
    Earnings per share - diluted         .40       .67         .32           .37
 Weighted-average number of
   common shares outstanding - basic  12,750    12,750      12,750        12,750
 Weighted-average or pro forma
    weighted-average number of common
    shares outstanding - diluted       9,812     9,812      12,942        12,934

 1996
 Net sales                           $39,896   $46,530     $50,856       $54,700
 Gross profit                          7,009     8,150       8,890         9,926
 Net income                            2,721     2,845       2,839         3,776

(1)   Net income  reflects an income tax  provision  for federal and  additional
      state income taxes  subsequent  to the  Offering,  and the recording of an
      additional deferred tax benefit at the time of the Offering.  Prior to the
      Offering,  the  entities in the  combined  group  elected to be taxed as S
      Corporations  pursuant to the Internal  Revenue Code and certain state and
      local tax regulations.

10.  Subsequent Events

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

10.  Subsequent Events (continued)

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

                                                                S-1
<TABLE>
<CAPTION>
                                       800-JR CIGAR, Inc. and Subsidiaries

                                  Schedule II--Valuation and Qualifying Accounts
                                                  (In thousands)


                                          Charged     Charged
                             Beginning  to Cost and   to Other                Ending 
          Description          Balance    Expense     Accounts  Deductions    Balance
------------------------------------------------------------------------------------------------------

Year ended December 31, 1997
<S>                               <C>       <C>     <C>          <C>        <C>  
Allowance for doubtful accounts   $118      $55     $   -        $  95      $  78
                           =========================================================================

Year ended December 31, 1996
Allowance for doubtful accounts  $  83     $191     $   -         $156       $118
                           =========================================================================

Year ended December 31, 1995
Allowance for doubtful accounts  $  50     $ 33     $   -            $       $ 83
                           =========================================================================
</TABLE>
<PAGE>

                                               EXHIBIT LIST

Exhibit No.       Description of Document
     3.1          Certificate  of  Incorporation  of the  Company.  Filed as 
                  Exhibit 3.1 to the Company's Registration Statement on Form 
                  S-1 (Registration No. 333-23401)and hereby incorporated by 
                  reference.

     3.2          By-Laws of the Company.  Filed as Exhibit 3.2 to the Company's
                  Registration   Statement   on  Form  S-1   (Registration   No.
                  333-23401) and hereby incorporated by reference.

     4.1          Form of Certificate for Common Stock of the Company.  Filed as
                  Exhibit 4.1 to the Company's  Registration Statement on Form 
                  S-1 (Registration No. 333-23401) and hereby incorporated by 
                  reference.

     10.1         The Company's 1997 Long-Term  Incentive Plan. Filed as Exhibit
                  10.1 to the  Company's  Registration  Statement  on  Form  S-1
                  (Registration  No.  333-23401)  and  hereby   incorporated  by
                  reference.

     10.2         The Company's 1997  Non-Employee  Directors' Stock Plan. Filed
                  as Exhibit  10.2 to the  Company's  Registration  Statement on
                  Form S-1 (Registration No. 333-23401) and hereby  incorporated
                  by reference.

     10.3         The Company's Employee Stock Purchase Plan.  Filed as Exhibit
                  10.3 to the Company's Registration Statement on Form S-1  
                  (Registration No. 333-23401) and hereby incorporated by 
                  reference.

     10.4         1997 Employee Bonus Pool Plan.  Filed as Exhibit 10.4 to the 
                  Company's Registration Statement on Form S-1 (Registration 
                  No. 333-23401) and hereby incorporated by reference.

     10.5         Employment Agreement, dated March 13, 1997 between the Company
                  and Lewis I.  Rothman.  Filed as Exhibit 10.5 to the Company's
                  Registration   Statement   on  Form  S-1   (Registration   No.
                  333-23401) and hereby incorporated by reference.

     10.6         Employment Agreement, dated March 13, 1997 between the Company
                  and LaVonda M. Rothman. Filed as Exhibit 10.6 to the Company's
                  Registration   Statement   on  Form  S-1   (Registration   No.
                  333-23401) and hereby incorporated by reference.

     10.7         Employment Agreement, dated March 13, 1997 between the Company
                  and  Jane  Vargas.  Filed  as  Exhibit  10.7 to the  Company's
                  Registration   Statement   on  Form  S-1   (Registration   No.
                  333-23401) and hereby incorporated by reference.

     10.8         Management  Agreement,  dated March 13, 1997 by and between MC
                  Management  and the  Company.  Filed  as  Exhibit  10.8 to the
                  Company's Registration Statement on Form S-1 (Registration No.
                  333-23401) and hereby incorporated by reference.

     10.9         Form of Indemnification Agreement.  Filed as Exhibit 10.9 to 
                  the Company's Registration Statement on Form S-1 (Registration
                  No. 333-23401) and hereby incorporated by reference.

     10.10        Agreement  dated March 13, 1997 by and between Cigars by Santa
                  Clara, N.A.,  Nicaraguan American Tobacco Company,  ("Natco").
                  Filed as Exhibit 10.12 to the Company's Registration Statement
                  on  Form  S-1   (Registration   No.   333-23401)   and  hereby
                  incorporated by reference.

     10.11        Agreement  dated  March  13,  1997 by and  between  Natco  and
                  Nicaraguan-American  Tobacco Sociedad  Anomima,  S.A. Filed as
                  Exhibit 10.13 to the Company's  Registration Statement on Form
                  S-1 (Registration No. 333-23401) and hereby incorporated by
                  reference.

     10.12        Agreement  dated March 13, 1997 by and between Cigars by Santa
                  Clara, N.A., and Tabacalera Nacional Dominicana, S.A. Filed as
                  Exhibit 10.14 to the Company's  Registration Statement on Form
                  S-1 (Registration  No.  333-23401) and hereby  incorporated by
                  reference.

     10.13        Lease Agreement dated July 19, 1993 by and between J.R. 
                  Tobacco of American, Inc., and Interstate Development Co., 
                  Inc. as amended by First Amendment to Lease, dated November 2,
                  1993, by and between J.R. Tobacco of America, Inc. and 
                  Interstate Development Company.  Filed as Exhibit 10.15 to the
                  Company's Registration Statement on Form S-1 (Registration No.
                  333-23401) and hereby incorporated by reference.

     10.14        Lease Agreement, dated March 1, 1996 by and between J.R. 
                  Outlet, Inc. and Casa Blanca, Inc. Filed as Exhibit 10.16 to 
                  the Company's Registration Statement on Form S-1 (Registration
                  No. 333-23401) and hereby incorporated by reference.

     16.1         Letter  regarding  change in certifying  accountant.  Filed as
                  Exhibit 16.1 to the Company's  Registration  Statement on Form
                  S-1 (Registration  No.  333-23401) and hereby  incorporated by
                  reference.

     21.1         List of Subsidiaries of the Company.  Filed as Exhibit 21.1 to
                  the Company's Registration Statement on Form S-1 (Registration
                  No. 333-23401) and hereby incorporated by reference.

     27.1         Financial Data Schedule.  Filed as Exhibit 27.1 to the 
                  Company's Registration Statement on Form S-1 (Registration No.
                  333-23401) and hereby incorporated by reference.

     99.1         Consent of Cigar Aficionado.  Filed as Exhibit 99.1 to the 
                  Company's Registration Statement on Form S-1 (Registration No.
                  333-23401) and hereby incorporated by reference.
<PAGE>

                                                SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
                                            800-JR Cigar, Inc.

March 27, 1998                  By:___________/s/  Lew Rothman__________________
                  Lew Rothman, Chairman of the Board, President, Chief Executive
                     Officer, "Principal Executive Officer"


March 27, 1998                  By:___________/s/  Michael E. Colleton__________
                    Michael E. Colleton, Chief Financial Officer, "Principal
                        Financial and Accounting Officer"


         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities and on the dates indicated.

March 27, 1998                  By:___________/s/  LaVonda M. Rothman___________
                                      LaVonda M. Rothman, Secretary and Director


March 27, 1998                  By:___________/s/  Jane Vargas__________________
                                        Jane Vargas, Vice President and Director


March 27, 1998                  By:___________/s/  Maureen Colleton_____________
                                         Maureen Colleton, Director


March 27, 1998                  By:___________/s/  Stephen Bloom________________
                                         Stephen Bloom, Director


March 27, 1998                  By:___________/s/  John Oliva___________________
                                         John Oliva, Director


March 27, 1998                  By:___________/s/  John F. Barry, Jr.___________
                                         John F. Barry, Jr., Director