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, 1998
                                       OR

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

For the transition period from ________ to ___________

Commission file number: 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,  USA  (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:  None
        Securities registered pursuant to section 12(g) of the Act:
Title of Securities: Common Stock, $.01 par value
Exchanges on which Registered: The Nasdaq National Market

         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 25, 1999 was  $28,893,750  based on  3,450,000  such
shares outstanding on such date and the closing sales price for the Common Stock
on such date of $8.375 as reported by the Nasdaq National Market.

         The number of shares of Common Stock of the  registrant  outstanding at
March 29, 1999 was 12,750,000.
                       DOCUMENTS INCORPORATED BY REFERENCE
Notice and Proxy  Statement for the 1999 Annual  Meeting of  Shareholders  to be
held May 18, 1999.

                    Incorporation as to: Part III; Item 10, 11, 12 and 13.

<PAGE>

                                      Index

Part I
Item 1.  Business............................................................  3
Item 2.  Properties.......................................................... 13
Item 3.  Legal Proceedings................................................... 14
Item 4.  Submission of Matters to a Vote of Security Holders................. 14

Part II
Item 5.  Market for the Registrant's Common Equity and Related Security
         Holder Matters...................................................... 15
Item 6.  Selected Financial Data............................................. 16
Item 7.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations............................................... 17
Item 7A. Quantitative and Qualitative Disclosure about Market Risk........... 24
Item 8.  Financial Statements and Supplementary Data......................... 24
Item 9.  Changed in and Disagreements with Accountants on Accounting and
         Financial Disclosure................................................ 24

Part III
Item 10. Directors and Executive Officers of the Registrant.................. 24
Item 11. Executive Compensation.............................................. 24
Item 12. Security Ownership of Certain Beneficial Owners and Management...... 24
Item 13. Certain Relationships and Related Transactions...................... 25

Part IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K... 25

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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  51 are the  Company's
proprietary or licensed  brands.  Among the Company's  proprietary  and licensed
products are nationally  recognized brand names such as Belinda(R),  Bolivar(R),
Casa Blanca(R),  El Rey del Mundo(R), Jose Marti(TM),  J.R Alternative(R),  J.R,
Ultimate(R),  La Finca(R), Romeo y Julieta(TM),  and Santa Clara(R). The Company
is the largest  customer for each of the world's  leading  cigar  manufacturers,
including  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., 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., JR 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 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 three 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  approximately  $103.  Management  utilizes its mail order
catalogs as its primary  advertising  vehicle.  Each  glossy,  color  catalog is
replete with humorous asides and anecdotes written by Lew Rothman, the Company's

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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 updated
its  website as an  additional  means of  advertising.  Retail  mail order sales
increased  17.4% to $62.1  million in 1998,  accounting  for 21.7% of net sales,
compared to $52.9 million in 1997, representing 22.0% 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
trafficed  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 March 1998, the Company
relocated  one of its New York stores to Wall  Street.  Sales  generated  by the
Company's  cigar stores  increased 11.3% to $25.6 million in 1998 accounting for
9.0% of the Company's net sales,  compared to $23.0 million in 1997,  accounting
for 9.6% of the net sales.

Discount Outlet Stores. The Company operates three 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) 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 6.9% to $68.0 million in 1998,
accounting  for  23.7%  of  net  sales,  compared  to  $63.6  million  in  1997,
representing 26.5% of net sales. The Burlington,  North Carolina discount outlet
store commenced operations on October 28, 1998.

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, New Jersey location. In March 1998, the Company began
operating a cigar bar at its Wall Street Court location.

Wholesale Operations

Wholesale  activities are a major component of the Company's business,  enabling
the  Company to obtain  favorable  prices by giving it the  ability to  purchase

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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  29.8%  to  $130.8  million  in 1998,  accounting  for
approximately 45.6% of net sales, compared to $100.8 million in 1997, accounting
for 41.9% 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  8,000 smoke shops, fine restaurants,  taverns,  liquor stores and
other retail  outlets  throughout  the United  States.  Wholesale  catalog sales
increased  23.7% to $56.9  million in 1998,  accounting  for 19.8% of net sales,
compared to $46.0 million in 1997, accounting for 19.1% of net sales.

Cash-and-Carry.  The Company's cash-and-carry wholesale operations are conducted
on a walk-in  basis at its three North  Carolina  discount  outlet  stores.  The
Company  maintains a 5,000 square foot wholesale  store within each of its three
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 34.9% to
$73.9  million in 1998,  accounting  for 25.8% of net sales,  compared  to $54.8
million in 1997, accounting for 22.8% of net sales.

Products

Cigars and Other Tobacco Products

Sales of premium and mass market  cigars and other  tobacco  products  increased
13.2% to $153.1  million for the year ended  December 31, 1998,  accounting  for
53.4% of net sales,  compared to $135.2  million for the year ended December 31,
1997, representing 56.3% 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.
Approximately  90% of the cigars  sold by the  Company  in terms of dollars  are
premium cigars.

The Company sells  approximately  150 brands of premium cigars, of which over 50
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.

<PAGE>

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 $27.50  per  cigar,  the
Company's  branded  premium cigars are typically sold at prices ranging  between
$1.75 to $5.00 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 the highest  ratings of
cigars sold,  including,  among others El Rey del Mundo, La Finca, Belinda, Casa
Blanca and Santa Clara.

In July of 1998, the Company obtained the exclusive rights to distribute Romeo Y
Julieta, one of the world's best-known premium cigar brands.

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, La Rosa Especiales,
         Lew's Smokers, Maria Mancini, Mocha, Mocha Supreme, Rey del Mundo, Tena
         Y Vega, Vintage Hondurans.

         Dominican  Republic:   Bolivar,   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, Romeo Y Julieta, Royal Dominicana.

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

         Mexico:  Mocambo, Santa Clara, Shane

         Jamaica: J.R Alternatives, Whitehall.

         Philippines:  Harrows.

         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

<PAGE>

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 three discount outlet stores in North Carolina.  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 1999:
Montiquia which will be produced in Nicaragua,  and Rosa Especiales,  which will
be produced in Honduras.

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  discount outlet stores.  In 1998, the Company
grossed  approximately $108.2 million from cigarette sales in its North Carolina
discount outlet stores.  Overall cigarette sales grew 30.4% to $108.6 million in
1998,  accounting  for 37.9% of net sales,  compared  to $83.3  million in 1997,
accounting for 34.6% 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

<PAGE>

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 13.8 % to $24.8 million in 1998, accounting for 8.7% of net sales, compared
to $21.8 million in 1997, accounting for 9.1% of net sales.

Sources of Supply

The Company believes that the quality and strength of its business relationships
with the world's  leading  manufacturers  developed  over a 25-year  period have
positioned  it to  obtain an  adequate  supply of  merchandise.  As the  world's
largest premium cigar customer,  the Company is able to purchase its products at
a preferential basis.

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 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.

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 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.

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

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publications  as  Cigar  Aficionado,  Smoke  and the  Tobacconist  and  numerous
newspapers.  Consequently, the Company has not been required to maintain a sales
force (except for retail store staff) 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 spends  approximately 1% of its net
sales  annually in  advertising.  In 1998 the Company  issued eight catalogs and
plans to distribute eight during 1999.

Information Systems

Over the past several  years,  the Company has made a substantial  investment in
its information  systems in order to manage its inventory and monitor sales on a
real time basis.

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 result,  the Company is
able to identify the best selling items and 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,  thus
greatly reducing 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, as well as a list of comparable cigars to
be  recommended if the desired cigar is out of stock.  In addition,  because the
Company's  systems are on-line with all major credit cards,  the Company is able
to obtain  instant  authorization  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

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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), 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, Nicaragua 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:
1-800-JR-CIGARTM , Remedios(R),  Principales(R),  Clemenceau(R), Reynitas(R) and
Jeroboam(R)  and  trademark  applications  are  pending  for the  RectangulareTM
Habana2000TMand  ValentinosTM.  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.  The Company also possess 49 internet domain
names including: 1800jr.com, 1800jrcigars.com,  1-800-jrtobacco.com, 1888jr.com,
1888jrcigars.com,    1888jrtobacco.com,    elreydelmundo.com,    jrcharutos.com,
jrcigares.com,  jrcigarros.com,  jrcigars.com, jrsigari.com,  jrzigarren.com and
santaclaracigars.com.

Employees

As of December 31, 1998, the Company had 942 employees, of whom 416 were engaged
in sales, 24 in finance and administration, 242 in operations and 260 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, 1998,  various  administrative  and other  services have been
performed for the Company by MC Management who had 115  employees,  including 91
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 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

<PAGE>

18  years  for the  sale  of  tobacco  products,  together  with an  appropriate
enforcement  program.  The recent trend is toward  increasing  regulation of the
tobacco  industry,  and the  increase in  popularity  of cigars could lead to an
increase in regulation of cigars.

In August 1996, the Food and Drug  Administration  (the "FDA")  determined  that
nicotine is a drug and that it had  jurisdiction  over  cigarettes and smokeless
tobacco  products,  as  nicotine-delivering   medical  devices,  and  therefore,
promulgated  regulations  restricting  and limiting the sale,  distribution  and
advertising  of  cigarette  and  smokeless  tobacco  products.  Cigars  were not
included in the FDA's  regulations.  The  prohibition  on 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.

Additional  efforts  by  the  FDA  to  increase   regulation  over  tobacco  and
tobacco-related  products  have been  forestalled  by a recent  decision  in the
Fourth  Circuit of the U.S. Court of Appeals.  In August 1998,  that court ruled
that the FDA lacks jurisdiction to regulate tobacco products and struck down all
the  provisions  of the FDA's 1996  regulations.  Brown & Williamson v. FDA, 153
f.3d 155 (4th Cir. 1998). The Fourth Circuit denied a U.S. Department of Justice
petition for rehearing by the Panel or en banc.

On January  19,  1999,  the  Solicitor  General  filed a petition  for a writ of
certiorari  requesting the U.S. Supreme Court review the August 1998 decision of
the Fourth Circuit. A ruling on the petition is expected in the near future. The
FDA's age and  identification  regulations  will  remain in effect  pending  the
outcome of this litigation.

The U.S.  Department of Health and Human Services (the "HHS") Inspector  General
issued a report in February 1999, urging the Federal Trade Commission to require
cigars to carry warning labels similar to those contained on cigarette packages.
This report marks the first time that cigars have  specifically  been identified
for increased regulatory oversight by a federal heath agency.

While the cigar industry has not been subject to federal  regulatory  efforts to
date,  there can be no  assurance  that there will not be an increase in federal
regulation in the future against cigar  manufacturers or  distributors.  The HHS
report   indicates  that  federal   regulatory   effort  directed  toward  cigar
manufacturers and distributors may be increasingly  likely.  The costs to 800-JR
Cigar,  Inc. of increased  government  regulations could have a material adverse
effect on the Company's business and results of operation.

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.  Numerous proposals also have been
considered at the state and local level  restricting  smoking in certain  public
areas,  regulating  point of sale placement and promotion and requiring  warning
labels.

<PAGE>

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 U.S.  Environmental  Protection  Agency  (the  "EPA")  published a report in
January  1993 with  respect to the  respiratory  health  effects of  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.  The study and these reports 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  preempts  claims  based  on  failure  to warn
consumers  about the health hazards of cigarette  smoking,  but does not preempt
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.

<PAGE>

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
second-hand smoke.

The tobacco industry  recently  negotiated  settlements  totaling more that $240
billion with the states seeking  reimbursement  for expenditures by state-funded
medical programs for treatment of tobacco related illnesses.

Recent reports indicate that the federal  government  intends to sue the tobacco
industry seeking  reimbursement for billions of dollars spent by government held
programs to treat smoking-related illnesses. A federal government task force has
been formed to make a recommendation to the U.S. Justice  Department on when and
where to file the lawsuit.  Furthermore, the inability of the federal government
to obtain a portion of the funds  from the state  settlements  with the  tobacco
industry may increase the likelihood of federal  government  litigation  against
the  industry.  The  litigation  could  have a  material  adverse  affect on the
profitability of tobacco and tobacco related products.

While  the  cigar  industry  has not  been  subject  to  similar  health-related
litigation to date, there can be no assurance that there will not be an increase
in  health-related  litigation  in the future  against  cigar  manufacturers  or
distributors.  The costs to the Company of defending prolonged litigation and an
settlement or successful prosecution of any health-related litigation could have
a material adverse effect on the Company's business and results of operation.


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.  Included at this
location is 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.

<PAGE>

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.  The
Company also owns a 128,000 square foot facility in  Burlington,  North Carolina
of which  28,000  square  feet are used as a discount  outlet  store and 100,000
square  feet are used as a  warehouse,  mail  order  distribution  facility  and
wholesale cash and carry outlet.

The Company 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**

* The Company  intends to move this  specialty  store to a larger,  more visible
location in Manhattan and is currently  considering  two retail  spaces:  one on
Madison Avenue and the other on Fifth Avenue.  The Company believes that both of
the potential  locations  will be  sufficient to replace the Company's  existing
store and will afford the Company greater exposure to the public.

** The Company  intends to relocate this store within the Washington  market and
currently is negotiating with the landlord of Washington Square,  located at the
cross  section of  Connecticut  and L Streets.  The Company  believes  that this
location is both  prestigious and highly visible retail space for the Washington
market. The selected space is 1,500 square feet;  approximately 180% the size of
the existing store.

In both  instances the Company will be replacing  older stores,  built 15 and 20
years ago  respectively,  with  modern  facilities  capable  of  displaying  the
expanded number of products the Company now sells.


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  affect  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.

<PAGE>

                                     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, 1998.

                                      1997                    1998
                                      ----                    ----
         Quarter               High          Low       High          Low
         -------               ----          ---       ----          ---
         First                  -           -          $29.25       $19.25
         Second                 -           -          $24.25       $17.75
         Third                $37.00      $17.00       $22.75       $10.25
         Fourth               $38.75      $21.00       $23.25        $9.44

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 29,
1999 was 1,887.

<PAGE>

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,
                                                  ---------------------------------------------------------------------------
                                                  ---------------------------------------------------------------------------
                                                       1994           1995           1996           1997           1998
                                                       ----           ----           ----           ----           ----
                                                       (dollars in thousands, except per share amounts)
Statement of Income Data:
<S>                                                    <C>            <C>            <C>            <C>            <C>      
Net sales                                              $ 109,297      $ 152,695      $ 191,982      $ 240,348      $ 286,512
Cost of goods sold                                       91,588        130,645        158,007        190,886        233,717
                                                  ------ ------- ----  -------- ----  -------- ----  -------- ----  -------
Gross profit                                              17,709         22,050         33,975         49,462         52,795
Selling, general, and administrative expenses             14,450         18,768         20,954         24,715         28,767
Income from operations                                     2,812          2,789         12,347         23,842         22,451
Interest (expense), income net                             (647)          (627)          (582)                           239
                                                                                                           14
Other income (expenses)
                                                             151              -            (8)             58            550
Income before income taxes                                 2,556          2,312         12,325         24,116         22,928
Provision (benefit) for income taxes                                                                    4,781          9,194
                                                             257           (74)            144
Net income                                           $     2,299    $     2,386     $   12,181     $   19,335     $   13,734
Earnings per share - basic                                                                                      $       1.08
                                                               -              -              -              -
Earnings per share - diluted                                                                                    $       1.08
                                                               -              -              -              -
Weighted average shares outstanding - basic                                                                           12,719
                                                               -              -              -              -
Weighted average shares outstanding - diluted                                                                         12,771
                                                               -              -              -              -
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
                                                               -              -                                            -

                                                   December 31,
                                                  ---------------------------------------------------------------------------
                                                  ---------------------------------------------------------------------------
                                                       1994           1995           1996           1997           1998
                                                       ----           ----           ----           ----           ----
                                                     (dollars in thousands)
Balance Sheet Data:
Working capital                                       $   10,845    $     8,914     $   18,522     $   55,213     $   50,647
Total assets                                              29,951         32,670         42,682         91,262        104,672
Total long-term debt, including current portion            8,955          7,129          8,279         20,833         12,900
Total Stockholders' equity                                 9,704         12,090         23,476         61,176         73,670

(1)  See Note 1 to Notes to Financial Statements-Pro Forma Earnings per share.
</TABLE>

<PAGE>

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

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  business and
growth strategies; (iii) the use of the proceeds to the Company from the Initial
Public  Offering;  (iv) the Company's  ability to identify and address Year 2000
issues; 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 28-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
Company's  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 $192.0 million in the year
ended December 31, 1996 to $240.3 million and $286.5 million, in the years ended
December 31, 1997 and December 31, 1998, 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 three 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.

<PAGE>
<TABLE>
<CAPTION>

                                                                    Year Ended December 31,
                                                  1996                     1997                    1998
                                                  ----                     ----                    ----
                                             $            %            $           %            $           %
                                             -            -            -           -            -           -
                                                                         ($ in millions)
Retail operations:
<S>                                        <C>         <C>          <C>         <C>          <C>         <C>   
     Direct mail cigars.............       $35.5       18.5 %       $52.9       22.0 %       $62.1       21.7 %
     Cigar stores...................        16.2        8.4          23.0        9.6          25.6        9.0
     Discount outlet stores.........        59.7       31.1          63.6       26.5          68.0       23.7
                                            -----------------------------------------------------------------
       Total retail sales...........       111.4       58.0         139.5       58.1         155.7       54.4
                                           ------------------------------------------------------------------

Wholesale operations:
     Direct mail cigars.............        32.6       17.0          46.0       19.1          56.9       19.8
     Cash-and-carry cigarettes*.....48.0    25.0       54.8          22.8       73.9          25.8
                                    --------------------------------------------------------------
       Total wholesale sales........        80.6       42.0         100.8       41.9         130.8       45.6
                                            -----------------------------------------------------------------
Total net sales.....................      $192.0      100.0 %      $240.3      100.0 %      $286.5      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,
                                                  1996                     1997                    1998
                                                  ----                     ----                    ----
                                             $            %            $           %            $           %
                                             -            -            -           -            -           -
                                                                         ($ in millions)
<S>                                        <C>         <C>         <C>          <C>         <C>          <C>   
Cigars/Tobacco*.....................       $93.7       48.8 %      $135.2       56.3 %      $153.1       53.4 %
Cigarettes..........................        78.4       40.8          83.3       34.6         108.6       37.9
Fragrances..........................         7.2        3.8           7.5        3.1           7.6        2.7
Other merchandise...................        12.7        6.6          14.3        6.0          17.2        6.0
                                            -----------------------------------------------------------------
     Total net sales................      $192.0      100.0 %      $240.3      100.0 %      $286.5      100.0 %
                                          =====================================================================
--------------------
* Excludes Cigarettes
</TABLE>

<PAGE>

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.
<TABLE>
<CAPTION>

                                                                         Year Ended December 31,
                                                            1996                  1997                  1998
                                                            ----                  ----                  ----
Revenues:
<S>                                                          <C>                   <C>                   <C>   
     Retail sales...........................                 58.0 %                58.1 %                54.4 %
     Wholesale sales........................                 42.0                  41.9                  45.6
                                            -----------------------------------------------------------------
     Net Sales..............................                100.0                 100.0                 100.0
Cost of goods sold..........................                 82.3                  79.0                  81.6
                                            -----------------------------------------------------------------
Gross profit................................                 17.7                  20.6                  18.4
Selling, general and administrative expenses                 10.9                  10.3                  10.0
Depreciation and amortization...............                  0.4                   0.4                   0.6
                                            -----------------------------------------------------------------
Income from operations......................                  6.4                   9.9                   7.8
Other income (expense):
     Interest (expense), net................                (0.4)                 (0.5)                   0.1
     Other..................................                  0.4                   0.6                   0.3
                                            -----------------------------------------------------------------
Income before income taxes..................                  6.4                  10.0                   8.0
Provision for income taxes..................                  0.1                   2.0                   3.2
                                            -----------------------------------------------------------------
Net income..................................                  6.3 %                 8.0 %                 4.8 %
                                            ===================================================================
</TABLE>

Year Ended December 31, 1998 compared to Year Ended December 31, 1997

Net  sales  were  $286.5   million  and  $240.3   million  for  1998  and  1997,
respectively,  an increase of $46.2  million or 19.2%.  Retail  sales  increased
11.6% to $155.7  million for 1998 from $139.5 for 1997.  The  increase in retail
sales was due  primarily  to a $9.2  million,  or 17.4%  increase in direct mail
cigar sales; a $2.6 million,  or 11.3% increase in cigar store sales; and a $4.4
million or 6.9%  increase  in  discount  outlet  store  sales.  Wholesale  sales
increased  29.8% to $130.8  million  for 1998 from $100.8  million in 1997.  The
increase in  wholesale  sales was due  primarily  to a $10.9  million,  or 23.7%
increase  in  direct  mail  sales  and a $19.1  million,  or 34.9%  increase  in
cash-and-carry  cigarette sales. The overall increase in net sales was primarily
attributable to volume increases in the Company's retail and wholesale  products
sales, and in particular the sale of premium cigars and related products.

Gross  profit  was  $52.8   million  and  $49.5   million  for  1998  and  1997,
respectively,  an increase of $3.3 million or 6.7%. The increase in gross profit
was due to the increase in sales  volume.  As a percentage  of net sales,  gross
profit decreased to 18.4% for 1998 from 20.6% for 1997, primarily due to greater
sales of lower margin cigarettes and unanticipated  slackening in the demand for
premium cigars.

<PAGE>

Selling,  general and  administrative  ("SG&A")  expenses were $28.8 million and
$24.7  million for 1998 and 1997,  respectively,  an increase of $4.1 million or
16.6%,  primarily  due to increased  staffing  costs  related to the opening and
relocation of the Company's warehouse operations from Statesville to Burlington,
North Carolina.  SG&A for 1997 included 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 10.0% for 1998 from 10.3%
for 1997,  due  primarily  to net sales  increasing  at a greater rate than SG&A
expenses.

Depreciation  expense  was $1.6  million  and $0.9  million  for 1998 and  1997,
respectively,  an increase of $0.7 million primarily due to the opening of three
new stores,  Paramus, New Jersey in July 1997, Wall Street, New York in May 1998
and Burlington, North Carolina in October 1998.

Income from  operations  was $22.5  million and $23.8 million for 1998 and 1997,
respectively,  a decrease of $1.3 million.  As a percentage of net sales, income
from operations  decreased to 7.8% for 1998 from 9.9% for 1997, primarily due to
increased sales of lower margin cigarettes and increasingly  competitive  prices
on premium cigars.

Interest expense was $1.3 million for 1998, the same as in 1997. This expense is
attributable to the interest paid on the notes ("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 $1.8 million and $1.5
million for 1998 and 1997, respectively.  The increase in 1998 was primarily due
to a gain of $0.4 million on the sale of short-term investments.

The  provision  for income taxes in 1998 was $9.2  million,  as compared to $4.8
million  in  1997.  Prior  to  the  offering,   the  Predecessor  Entities  were
corporations that elected to be taxes as S Corporation  pursuant to the Internal
Revenue  Code.  For the period of January 1, 1997 to June 26, 1997, no provision
was made for federal and certain  state and local income  taxes.  In  connection
with the offering,  the Company became  subject to federal and additional  state
income taxes.

As a result of the  foregoing, the Company had net income of $13.7  million in 
1998, compared to $19.3 million in 1997, a decrease of 29.0% or $5.6 million.

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  in 1997.  The
increase in  wholesale  sales was due  primarily  to a $13.4  million,  or 41.1%

<PAGE>

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.

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 1997 and 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 interest  paid on the  Distribution  Notes
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.

Liquidity and Capital Resources

Prior to the offering,  the Company  historically  financed its business through
internally  generated  funds,  bank debt and loans from certain of its principal
stockholders.  Subsequent to the offering, the Company has financed its business
from the initial  public  offering  proceeds  and through  internally  generated
funds. The Company's net cash provided by operating  activities was $6.5 million
for 1998  principally  representing  net income for the year ended  December 31,
1998 and an increase in accounts  payable and accrued  expenses of $8.8 million,
offset by an increase in inventory of $14.3 million.  Net cash used in investing
activities  during  such  period was $1.1  million.  Net cash used in  financing
activities  was  $9.2  million  for  1998,   representing  a  reduction  in  the
distribution  notes  outstanding  by $7.9  million and the  purchase of treasury
stock in the amount of $1.3 million.

<PAGE>

Net proceeds of  approximately  $53.3 million from the Company's  initial public
offering were used for the following  purposes through December 31, 1998: (i) to
repay  outstanding  indebtedness  of $7.3  million,  (ii) $6.0  million  for the
relocation  and  design  of  specialty  stores,  (iii)  $10.5  million  for  the
construction  and  development  of a new  discount  outlet  store and  warehouse
distribution  center, (iv) the quarterly principal payment of distribution notes
of $7.9  million  through  June 30,  1998,  (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)  $3.0  million  for  the  upgrade  of  the  Company's
information  systems,  (vii) interest  payments of $1.4 million through June 30,
1998 on the Distribution  Notes and (viii) $14.9 million for working capital and
general corporate purposes.  The remaining proceeds of $0.8 million are expected
to be used for the expansion of retail selling space at existing discount outlet
stores.

The Company's net cash flow  provided by operating  activities  was $0.3 million
for 1997.  Net cash used in investing  activities  was $23.5 million during such
period, relating to purchases of short-term investments and capital expenditures
at the Company's Burlington location.  Net cash provided by financing activities
was $33.7 million in 1997,  representing  cash from the initial public offering,
offset by  distributions  to stockholders and funds used to repay long-term debt
and a portion of the Distribution Notes.

At December 31, 1998, the Company had working capital of $50.6 million  compared
to $55.2 million at December 31, 1997. The amount for 1998 includes  cash,  cash
equivalents and short-term investments of $18.5 million,  accounts receivable of
$2.6 million,  $49.1 million of inventory and $18.1 million of accounts  payable
and accrued expenses.

As of December 31, 1998, the Company also had available under a credit agreement
a $20.0 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, 1998,  the Company had no borrowings  under this line
of credit, which expires on May 31, 1999.

At  December  31, 1998 the Company  had  outstanding  Distribution  Notes in the
amount of $11.9 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,  discount outlet store,  office
furniture,  and  leasehold  improvements  were $10.7 million and $8.5 million in
1998 and 1997, respectively.  Included in capital expenditures were improvements

<PAGE>

at the Company's Whippany location during 1997 and the purchase, improvement and
furnishing of the Burlington, North Carolina facility in 1998.

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.

Year 2000

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 and other data  sensitive  equipment  to
prepare for Year 2000.  The Company  expects  that by mid 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.

The  Company  has also made  inquiries  of its  significant  vendors and service
providers to determine  the extent to which  interfaces  with such  entities are
vulnerable to Year 2000 issues. Most of those contacted have indicated that they
have begun implementing Year 2000 readiness programs.  The Company is continuing
to  follow-up  with  significant  vendors  and  service  providers  that did not
initially respond, or whose responses were deemed unsatisfactory.

Based upon its current  state of readiness,  the Company  believes that the Year
2000 issue  will not pose  significant  operational  problems  for the  Company.
However,  if all Year 2000 issues are not properly  identified,  there can be no
assurance  that the Year 2000 issue  will not  materially  adversely  impact the
Company's results of operations or adversely affect the Company's  relationships
with customers, vendors, or others. Additionally, there can be no assurance that
the Year 2000 issues of other  entities will not have a material  adverse impact
on the Company's systems or results of operations.

Impact of Recently Issued Accounting Standards

In  June  1998,  the  FASB  issued  SFAS  No.  133,  Accounting  for  Derivative
Instruments and Hedging Activities. This Statement requires that all derivatives
be recorded in the balance sheet as either an asset or liability measured at its
fair  value  and that  changes  in the  derivative's  fair  value be  recognized
currently in earnings  unless specific hedge  accounting  criteria are met. This
statement  is  effective  for fiscal years  beginning  after June 15, 1999.  The
provisions of this  statement  shall not be applied  retroactively  to financial
statements of prior  periods.  The Company is in the process of evaluating  this
statement  and has not yet  determined  the  future  impact on its  consolidated
financial statements.

<PAGE>

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk

The Company invests its available cash in short-term U.S.  Treasury  Obligations
and  commercial  paper.  Although the rate of interest paid on  short-term  U.S.
Treasury  Obligations  and  commercial  paper may  fluctuate  over time based on
changes in the general level of U.S.  interest rates,  the Company believes that
its exposure to market risk  fluctuation  for these  investments is not material
due to the fact that all investments have a maturity of less than one year.

The Company purchases its tobacco products from third party manufacturers, and 
therefore, does not believe that it has exposure to commodity price risk with 
respect to its tobacco inventories.


Item 8.  Financial Statements and Supplementary Data

See  pages  F-1  through  F-27  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

Not applicable


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 1998 Annual  Meeting of  Stockholders  to be filed  pursuant to
Regulation 14A (the "Company's 1998 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 1998 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

<PAGE>

information  set  forth  under  the  headings  "Security  Ownership  of  Certain
Beneficial Owners" and "Security  Ownership of Management" in the Company's 1998
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 1998 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.

<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, 1997 and 1998.................F-3
Consolidated Statements of Income for the Years Ended
   December 31, 1996, 1997 and 1998..........................................F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
   December 31, 1996, 1997 and 1998..........................................F-5
Consolidated Statements of Cash Flows for the Years Ended
   December 31, 1996, 1997 and 1998..........................................F-6
Notes to Consolidated Financial Statements...................................F-7

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.

F-1

<PAGE>

                                          Report of Independent Auditors


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

We have audited the  accompanying  consolidated  balance sheets of 800-JR CIGAR,
Inc. as of December 31, 1997 and 1998 and the related consolidated statements of
income,  stockholders'  equity and cash flows for the years then ended.  We have
also audited the combined  statements of income,  stockholders'  equity and cash
flows of 800-JR  CIGAR,  Inc. for the year ended  December 31, 1996.  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 and schedule 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 1998, and the consolidated results of its operations
and its cash  flows  for the years  then  ended,  and the  combined  results  of
operations and cash flows of 800-JR CIGAR,  Inc. for the year ended December 31,
1996 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
March 10, 1999

F-2

<PAGE>
<TABLE>
<CAPTION>

                                                  800-JR CIGAR, Inc. and Subsidiaries

                                                      Consolidated Balance Sheets
                                      (Dollars in thousands, except share and per share amounts)

                                                                                            December 31
                                                                                      1997              1998
                                                                                ------------------------------------

Assets
Current assets:
<S>                                                                                    <C>           <C>       
   Cash and cash equivalents                                                           $16,572       $   12,759
   Short-term investments                                                               14,981            5,719
   Accounts receivable, net of allowance for doubtful accounts of $78 and $145
    at December 31, 1997 and 1998, respectively                                          2,313            2,568
   Merchandise inventory                                                                34,779           49,056
   Prepaid expenses and other current assets                                             2,155            4,712
   Loans receivable - affiliates and other associated entities                             603              685
   Deferred tax assets                                                                     996            1,183
                                                                                ------------------------------------
Total current assets                                                                    72,399           76,682

Property, equipment and improvements, at cost, net of
 accumulated depreciation and amortization                                              18,518           27,614
Other assets                                                                               243              376
Deferred tax assets                                                                        102                -
                                                                                ====================================
Total assets                                                                           $91,262         $104,672
                                                                                ====================================

Liabilities and stockholders' equity Current liabilities:
   Current portion of distribution notes payable to stockholders                     $   7,933       $    7,933
   Accounts payable                                                                      7,157           16,238
   Accrued expenses                                                                      2,096            1,864
                                                                                ------------------------------------
Total current liabilities                                                               17,186           26,035

Distribution notes payable to stockholders, less current portion                        12,900            4,967
                                                                                ------------------------------------
Total liabilities                                                                       30,086           31,002

Commitments and contingencies

Stockholders' equity:
   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 and
    12,752,000 issued and outstanding at
    December 31, 1997 and 1998, respectively                                               128              128
   Additional paid-in capital                                                           52,716           52,751
   Retained earnings                                                                     8,332           22,066
                                                                                ------------------------------------
                                                                                        61,176           74,945
   Less 114,500 shares of treasury stock, at cost                                            -           (1,275)
                                                                                ------------------------------------
Total stockholders' equity                                                              61,176           73,670
                                                                                ====================================
Total liabilities and stockholders' equity                                             $91,262         $104,672
                                                                                ====================================

See accompanying notes.
</TABLE>

F-3

<PAGE>
<TABLE>
<CAPTION>

                                                  800-JR CIGAR, Inc. and Subsidiaries

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

                                                                             Year ended December 31
                                                                     1996             1997              1998
                                                              ------------------------------------------------------

<S>                                                                  <C>               <C>              <C>     
Net sales                                                            $191,982          $240,348         $286,512
Cost of goods sold                                                    158,007           190,886          233,717
                                                              ------------------------------------------------------
Gross profit                                                           33,975            49,462           52,795

Operating expenses:
   Selling                                                              3,946             5,192            6,271
   General and administrative                                          17,008            19,523           22,496
   Depreciation and amortization                                          674               905            1,577
                                                              ------------------------------------------------------
Income from operations                                                 12,347            23,842           22,451

Other income (expense):
   Interest expense                                                      (789)           (1,269)          (1,295)
   Interest income                                                        207             1,283            1,056
   Rental income                                                          195               202              166
   Insurance settlement                                                   373                 -                -
   Other, net                                                              (8)               58              550
                                                              ------------------------------------------------------
Income before income taxes                                             12,325            24,116           22,928

Provision for income taxes                                                144             4,781            9,194
                                                              ======================================================
Net income                                                         $   12,181        $   19,335       $   13,734
                                                              ======================================================

Per share data:
   Earnings per share - basic                                                                         $    1.08
                                                                                                 ===================
                                                                                                 ===================
   Earnings per share - diluted                                                                       $    1.08
                                                                                                 ===================
                                                                                                 ===================
Weighted-average shares outstanding - basic                                                               12,719
                                                                                                 ===================
                                                                                                 ===================
Weighted-average shares outstanding - diluted                                                             12,771
                                                                                                 ===================

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.
</TABLE>

F-4

<PAGE>
<TABLE>
<CAPTION>

                       800-JR CIGAR, Inc. and Subsidiaries

                 Consolidated Statements of Stockholders' Equity
                             (Dollars in thousands)

                                           Common
                                          Stock of          Common Stock          Additional
                                        Predecessor   ----------------------------  Paid-in     Retained      Treasury
                                          Entities         Shares       Amount      Capital     Earnings        Stock       Total
                                      ----------------------------------------------------------------------------------------------
<S>                                        <C>            <C>        <C>           <C>         <C>            <C>          <C>     
Balance at January 1, 1996                 $ 21              -        $ -           $ 28        $ 12,459       $ (418)     $ 12,090
   Net income                                                                                     12,181                     12,181
   Distribution to stockholders                                                                     (795)                      (795)
                                      ----------------------------------------------------------------------------------------------
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
   Net income                                                                                      13,734                    13,734
   Issuance of common stock                                 2,000                      35                                        35
   Purchase of treasury stock                                                                                  (1,275)       (1,275)
                                      ----------------------------------------------------------------------------------------------
Balance at December 31, 1998               $ -         12,752,000     $128        $52,751        $ 22,066     $(1,275)     $ 73,670
                                      ==============================================================================================

See accompanying notes.
</TABLE>

F-5

<PAGE>
<TABLE>
<CAPTION>

                       800-JR CIGAR, Inc. and Subsidiaries

                      Consolidated Statements of Cash Flows
                             (Dollars in thousands)
                             
                                                                              Year ended December 31
                                                                            1996       1997       1998
                                                                          ----------------------------------

Cash flows from operating activities
<S>                                                                         <C>        <C>        <C>     
Net income                                                                  $12,181    $19,335    $ 13,734
Adjustments to reconcile net income to net cash provided by operating
  activities:
    Depreciation and amortization                                               674        905       1,577
    Provision for uncollectible accounts                                        191         55         209
    Deferred income taxes                                                        (5)    (1,073)        (85)
    Other                                                                        (8)         -           -
    Gain on sale of short-term investments                                        -          -        (399)
    Loss on sale of assets                                                       28          -           -
    Changes in operating assets and liabilities:
     Accounts receivable                                                       (549)      (665)       (464)
     Merchandise inventory                                                   (2,894)   (15,163)    (14,277)
     Prepaid expenses and other current assets                                 (460)    (1,455)     (2,557)
     Other assets                                                               (36)       (78)       (133)
     Accounts payable and accrued expenses                                       68     (1,585)      8,849
                                                                          ----------------------------------
Net cash provided by operating activities                                     9,190        276       6,454

Cash flows from investing activities
Purchase of short-term investments                                                -    (14,981)    (25,158)
Proceeds from sale of short-term investments                                      -          -      34,819
Purchase of property and equipment                                           (2,929)    (8,547)    (10,673)
Loans (extended to) repaid by affiliates and other associated entities         (240)       467         (82)
Loans extended to stockholders                                                 (938)      (445)          -
                                                                          ----------------------------------
Net cash used in investing activities                                        (4,107)   (23,506)     (1,094)

Cash flows from financing activities
Proceeds of borrowings under revolving line of credit                           500          -           -
Proceeds from issuance of Common Stock                                            -     54,545          35
Expenses paid in connection with Common Stock offering                            -     (1,275)          -
Payments of distribution notes                                                    -     (3,967)     (7,933)
Payments of long-term debt                                                   (1,850)    (8,279)          -
Payments of capital lease obligations                                           (84)       (89)          -
Purchase of treasury stock                                                        -          -      (1,275)
Distribution to stockholders                                                   (795)    (7,189)          -
                                                                          ----------------------------------
Net cash (used in) provided by financing activities                          (2,229)    33,746      (9,173)
                                                                          ----------------------------------

Net increase (decrease) in cash and cash equivalents                          2,854     10,516      (3,813)
Cash and cash equivalents, beginning of period                                3,202      6,056      16,572
                                                                          ----------------------------------
Cash and cash equivalents, end of period                                    $ 6,056   $ 16,572    $ 12,759
                                                                          ==================================

Supplemental disclosure of cash flow data
Income taxes paid                                                           $    37  $   6,053    $ 11,021
                                                                          ==================================
Interest paid                                                               $   775  $   1,177    $  1,180
                                                                          ==================================

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.
</TABLE>

F-6

<PAGE>

                       800-JR CIGAR, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements
                (Dollars in thousands, except per share amounts)

                                December 31, 1998

1.  Basis of Presentation

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, 1998
proceeds of the  Offering  were used for the  following  purposes:  (i) to repay
outstanding indebtedness of $7,300, (ii) $6,000 for the relocation and design of
specialty  stores,  (iii) $10,500 for a new discount  outlet store and warehouse
distribution  center, (iv) the quarterly principal payment of distribution notes
of $7,900  through June 30, 1998,  (v) payment of signing  bonuses to an officer
and  to  MC  Management  (see  Note  8) in  connection  with  long-term  service
agreements,  (vi) $3,000 for the upgrade of the Company's  information  systems,
(vii)  interest  payments of $1,400  through  June 30, 1998 on the  Distribution
Notes (see Note 5) and (viii) $14,900 for working capital and general  corporate
purposes.  The  remaining  proceeds  of $770  are  expected  to be used  for the
expansion of retail selling space.

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").

F-7

<PAGE>

                      800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                (Dollars in thousands, except per share amounts)

1.  Basis of Presentation (continued)

The accompanying financial statements include the results of operations for 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  received   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.

F-8

<PAGE>

                     800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                (Dollars in thousands, except per share amounts)

1.  Basis of Presentation (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.
<TABLE>
<CAPTION>

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)

<S>                                           <C>              <C>             <C>     
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
                                        ====================================================
</TABLE>

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

F-9


<PAGE>

                     800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                (Dollars in thousands, except per share amounts)

1.  Basis of Presentation (continued)

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 for the year ended December 31, 1997 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.

F-10

<PAGE>

                     800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                (Dollars in thousands, except per share amounts)

1.  Basis of Presentation (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 for the year ended December 31, 1997, is the pro 
forma net income of $14,838.

F-11

<PAGE>

                     800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                (Dollars in thousands, except per share amounts)

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,  is computed using the  straight-line  and  accelerated
methods over the lesser of the  estimated  useful  lives of the related  assets.
These lives range from 3 to 39 years.

Advertising

The Company  expenses the cost of advertising and promotions as incurred.  
Advertising and promotion costs amounted to $1,129, $1,605 and $2,114 for the 
years ended  December 31, 1996, 1997 and 1998, respectively.

F-12

<PAGE>

                     800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                (Dollars in thousands, except per share amounts)

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".  Under this 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.

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 SFAS No. 123,  "Accounting for Stock-Based
Compensation"  (SFAS 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

Earnings per share are  calculated  in accordance  with SFAS  Statement No. 128,
"Earnings  per Share." Basic  earnings per share is computed by dividing  income
available to common stockholders by the weighted-average number of common shares
outstanding  for the period.  The  calculation  of dilutive  earnings  per share
includes the effect of dilutive securities. Pro forma earnings per share amounts

F-13

<PAGE>

                     800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                (Dollars in thousands, except per share amounts)

2.  Summary of Significant Accounting Policies (continued)

have been presented and, where appropriate, restated to conform to the Statement
128 requirements.

Segments of an Enterprise and Related Information

Effective  December 31,  1998,  the Company  adopted SFAS No. 131,  "Disclosures
about Segments of an Enterprise and Related Information"  ("Statement No. 131").
Statement 131  superseded  SFAS No. 14,  "Financial  Reporting for Segments of a
Business  Enterprise".  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.  The adoption of this Statement did not
affect results of operations or financial position of the Company.

Recently Issued Accounting Pronouncements

In June  1998,  the  FASB  issued  SFAS  No.  133,  "Accounting  for  Derivative
Instruments  and  Hedging   Activities."   This  Statement   requires  that  all
derivatives  be recorded in the  balance  sheet as either an asset or  liability
measured at its fair value and that  changes in the  derivative's  fair value be
recognized  currently in earnings unless specific hedge accounting  criteria are
met. This statement is effective for fiscal years beginning after June 15, 1999.
The provisions of this statement shall not be applied retroactively to financial
statements of prior  periods.  The Company is in the process of evaluating  this
statement  and has not yet  determined  the  future  impact on its  consolidated
financial statements.

3.  Acquisition

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.

F-14

<PAGE>

                     800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                (Dollars in thousands, except per share amounts)

4.  Property, Equipment and Improvements

Property, equipment and improvements consist of the following:

                                                         December 31
                                                    1997             1998
                                             -----------------------------------
Land                                             $    1,593        $    2,548
Building and improvements                            11,003            19,164
Machinery and equipment                               2,979             4,005
Furniture and fixtures                                1,754             2,534
Leasehold improvements                                5,283             5,020
Automobiles                                             174               188
                                             -----------------------------------
                                                     22,786            33,459
Less accumulated depreciation and amortization        4,268             5,845
                                             ===================================
                                                    $18,518           $27,614
                                             ===================================

5.  Long-Term Debt and Line of Credit

Long-term debt is comprised as follows:

                                                           December 31
                                                     1997             1998
                                             -----------------------------------
Distribution Notes payable to stockholders,
  due in quarterly installments, with
  interest at 7.0% through June 1, 2000             $19,833           $11,900
Additional Distribution Notes payable to 
  stockholders, due June 1, 2000, with 
  interest at 7.0%                                    1,000             1,000
                                             -----------------------------------
                                                     20,833            12,900
Less current portion                                  7,933             7,933
                                             ===================================
Long-term debt                                      $12,900        $    4,967
                                             ===================================

During  1998,  the Company  entered  into a $20,000  line of credit with a bank,
which expires on May 31, 1999.  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%.  There were no borrowings  outstanding  under
this line of credit at December 31, 1998.

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.

F-15

<PAGE>

                     800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                (Dollars in thousands, except per share amounts)

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

The  Distribution  Notes and  Additional  Notes  payable to  stockholders  as of
December 31, 1998 will mature as follows:

     1999                                                     $   7,933
     2000                                                         4,967
                                                         ===================
                                                                $12,900
                                                         ===================

6.  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, 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.

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.

The provision for income taxes consists of the following:

                                          Year ended December 31
                                 1996              1997              1998
                           -----------------------------------------------------

Current income taxes:
   Federal taxes                 $    -           $ 4,186           $7,427
   State and local taxes            149             1,668            1,852
Deferred income taxes                (5)           (1,073)             (85)
                           -----------------------------------------------------
                                   $144           $ 4,781           $9,194
                           =====================================================

F-16

<PAGE>

                     800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                (Dollars in thousands, except per share amounts)

6.  Income Taxes (continued)

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, 1997 and 1998 are as follows:

                                                     Year ended December 31
                                                      1997             1998
                                             -----------------------------------

Deferred tax assets:
   Book over tax depreciation                      $   102          $      -
   Allowance for doubtful accounts                      32                59
   Inventory capitalization and reserves               485               520
   Amortization of signing bonuses                       -               389
   Other book accruals                                 479               453
                                             -----------------------------------
Total deferred tax assets                            1,098             1,421

Deferred tax liability:
   Tax over book depreciation                            -               238
                                             -----------------------------------
                                             ===================================
Net deferred tax assets                             $1,098            $1,183
                                             ===================================

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.

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
                                               =================================

F17

<PAGE>

                     800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                (Dollars in thousands, except per share amounts)

6.  Income Taxes (continued)

A reconciliation  setting forth the differences between the actual effective tax
rate for the year ended December 31, 1998 and the pro forma  effective tax rates
for the years  ended  December  31, 1996 and 1997 of the  Company,  and the U.S.
federal  statutory tax rate for the years ended December 31, 1996, 1997 and 1998
is as follows:

                                                 1996        1997         1998
                                             -----------------------------------

Federal statutory rate                           34.3%       34.4%        35.0%
State and local taxes, net of federal tax
  benefits                                        6.5         6.5          5.1
                                             ===================================
Effective tax rate                               40.8%       40.9%        40.1%
                                             ===================================

7.  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.  Effective  November 1998, the
Company contributes an amount equal to 100% of the first 5% of salaries that the
employees contribute.  The Company made no contributions to the plan in 1997 and
made contributions of $196 to the plan in 1998.

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.  During 1998,  2,146 shares
were issued under the plan and remain outstanding at December 31, 1998.

F-18

<PAGE>

                     800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                (Dollars in thousands, except per share amounts)

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

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  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 these  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.

F-19

<PAGE>

                     800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                (Dollars in thousands, except per share amounts)

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

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      of        Exercise      of
                                       Price     Shares                  Shares
                                  ----------------------------------------------
Outstanding at January 1, 1997        $ -          -          $ -          -
   Granted                             17.00     450,000       17.00      20,000
                                        -          -           25.38      10,000
   Exercised                            -          -            -          -
   Canceled                            17.00     (35,000)       -          -
                                  ----------------------------------------------
Outstanding at January 1, 1998         17.00     415,000       19.79      30,000
   Granted                              -          -            -          -
   Exercised                            -          -            -          -
   Canceled                            17.00     (14,000)       -          -
                                  ----------------------------------------------
Outstanding at December 31, 1998       17.00     401,000      $19.79      30,000
                                  ==============================================
Options exercisable at
  December 31, 1998                   $17.00     134,000      $19.79       6,000
                                  ==============================================

There were no options exercisable at December 31, 1997.

Stock options outstanding at December 31, 1998 are summarized as follows:

                                                         Weighted-Average
                                          Outstanding        Remaining
                                          Options at     Contractual Life
                                           December
        Range of Exercise Price            31, 1998
----------------------------------------------------------------------------

$17.00 per share                               421,000         9 years
$25.38 per share                                10,000         9 years
                                       ==================
$17.00 to $25.38 per share                     431,000
                                       ==================

F-20

<PAGE>


                     800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                (Dollars in thousands, except per share amounts)

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

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

SFAS 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 SFAS 123.  The fair value of these equity  awards
was estimated at the date of 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%;  expected  volatility of 73%; expected option
life of 7 years; and an expected dividend yield of 0%.

The weighted-average  grant fair value of options granted during 1997 was $12.30
per share. The total compensation  related to stock-based  compensation  awards,
net of related income tax benefits,  under SFAS 123 for 1997 and 1998 would have
been approximately $532 and $1,037, respectively.

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 and 1998,  is as
follows:

                                                             1997       1998
                                                        ------------------------

Pro forma net income                                       $14,306     $12,697
Pro form  net income per share of common stock - basic       $1.27       $1.00
Pro forma net income per share of common stock - diluted     $1.26        $.99

8.  Related Party Transactions

From time to time, prior to the Offering, the Company made or received cash 
advances from the stockholders.  Such advances bore interest at 9% and had no 
established due dates.  Net interest income amounted to $78, $169 and $-0- in 
1996, 1997 and 1998, respectively.

During 1997 and 1998, the Company purchased cigars from affiliated companies 
aggregating approximately $7.6 million and $8.2 million, respectively.  The 
affiliated entities are partially owned by an officer/director and by another 
director of the Company.

F-21

<PAGE>


                     800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                (Dollars in thousands, except per share amounts)

8.  Related Party Transactions (continued)

The Company has a management  agreement with a management company which provides
certain administrative  services to the Company. The management company is owned
by a director of the  Company.  Management  fee  expense in 1996,  1997 and 1998
amounted to $3,071, $4,132 and $4,525, respectively. In addition, the management
company  paid rent to the Company in the amount of $146 in 1996,  1997 and 1998.
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.

9.  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.

Future minimum lease  payments for operating  leases as of December 31, 1998 are
as follows:
                                                             Operating
                                                               Leases
                                                         -------------------

1999                                                          $   801
2000                                                              599
2001                                                              620
2002                                                              620
2003                                                              635
Thereafter                                                      1,027
                                                         -------------------
Total minimum lease payments                                   $4,302
                                                         ===================

F-22

<PAGE>

                     800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                (Dollars in thousands, except per share amounts)

9.  Commitments and Contingencies (continued)

Rental expense under operating leases amounted to $817, $922 and $1,024 in 1996,
1997 and 1998, respectively.

Litigation

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.

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 $619,  $642 and $1,078 in
1996, 1997 and 1998, respectively.

10.  Computation of Basic and Diluted Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per
share for 1998:

Numerator:
   Net income                                                        $13,734
                                                              ==================

Denominator:
   Denominator for basic earnings per share - weighted-
     average shares                                                   12,719

   Effect of dilutive securities - stock options                          52
                                                              ------------------

Denominator for diluted earnings per share - adjusted
     weighted-average shares and assumed conversion                   12,771
                                                              ==================

Basic earnings per share                                            $   1.08
                                                              ==================

Diluted earnings per share                                          $   1.08
                                                              ==================

F-23

<PAGE>

                     800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                (Dollars in thousands, except per share amounts)

11.  Segment Reporting

The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise 
and Related Information" in 1998, which changes the way the Company reports 
information about its operating segments.

The  Company has two  segments,  determined  by type of customer  and made up of
retail and wholesale  operations.  The Company's  retail  division sells cigars,
tobacco  products,  cigarettes,  fragrances and other merchandise to the general
public through direct mail order,  cigar stores, and discount outlet stores. The
Company's   wholesale   division   sells  cigars  and  cigarettes  to  wholesale
distributors through the wholesale mail order and wholesale cigarette operations
located within the Company's  discount outlet stores.  The Company operates only
throughout the United States.

The reportable  segments are each managed separately because the Company markets
these segements of the business separately.  Although revenues of the retail and
wholesale  divisions are further monitored based upon marketing and distribution
channel, overall profitability is measured only at the retail/wholesale level.

The Company evaluates performance based on profit or loss from operations before
income taxes. The accounting policies of the reportable segments are the same as
those  described  in  the  summary  of  significant   accounting  policies.  The
accounting for the assets of each segment is the same as in consolidation.

F-24

<PAGE>

                     800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                (Dollars in thousands, except per share amounts)

11.  Segment Reporting (continued)

                                               Year ended December 31
                                          1996          1997           1998
                                    --------------------------------------------

Net sales
   Retail                                 $111,400       $139,500       $155,639
   Wholesale                                80,582        100,848        130,873
                                    ============================================
Total consolidated net sales              $191,982       $240,348       $286,512
                                    ============================================

Depreciation and amortization expense
   Retail                              $       329    $       445    $     1,062
   Wholesale                                   345            410            351
                                    --------------------------------------------
Total segment depreciation and
  amortization expense                         674            855          1,413
                                    --------------------------------------------

Reconciling item
   Corporate depreciation expense                -             50            164
                                    --------------------------------------------
Total consolidated depreciation and
  amortization expense                 $       674    $       905    $     1,577
                                    ============================================

Interest income
   Retail                              $        53    $        29    $         -
   Wholesale                                   154            143              -
                                    --------------------------------------------
Total segment interest revenue                 207            172              -
                                    --------------------------------------------

Reconciling item
   Corporate income                              -          1,111          1,056
                                    --------------------------------------------
Total consolidated interest income     $       207    $     1,283    $     1,056
                                    ============================================

Interest expense
   Retail                              $        24    $       579    $       651
   Wholesale                                   765            690            644
                                    --------------------------------------------
Total consolidated interest expense    $       789    $     1,269    $     1,295
                                    ============================================

Income tax expense
   Retail                              $       209    $     2,002    $     4,226
   Wholesale                                   (65)         4,339          5,188
                                    --------------------------------------------
Total segment income tax expense               144          6,341          9,414
                                    --------------------------------------------

Reconciling item
   Corporate income tax (benefit)                -        (1,560)          (220)
                                    --------------------------------------------
Total income tax expense                $       144   $     4,781    $     9,194
                                    ============================================

F-25

<PAGE>

                     800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                (Dollars in thousands, except per share amounts)

11.  Segment Reporting (continued)

                                                  Year ended December 31
                                          1996          1997           1998
                                    --------------------------------------------

Segment net income
   Retail                              $     4,421    $     7,329    $     5,709
   Wholesale                                 7,760         11,663          7,354
                                    --------------------------------------------
Total segment net income                    12,181         18,992         13,063
                                    --------------------------------------------

Reconciling item
   Corporate net income                          -            343            671
                                    --------------------------------------------
Total consolidated net income           $    12,181    $    19,335   $    13,734
                                    ============================================

Total assets
   Retail                               $    17,734    $    22,805   $    44,324
   Wholesale                                 24,948         29,584        43,779
                                    --------------------------------------------
                                             42,682         52,389        88,103
                                    --------------------------------------------

Reconciling item
   Corporate assets                              -          38,873        16,569
                                    --------------------------------------------
Total consolidated assets               $    42,682    $    91,262      $104,672
                                    ============================================

Capital expenditures
   Retail                               $     2,454    $     8,351   $     9,962
   Wholesale                                    475            196           711
                                    --------------------------------------------
Total capital expenditures              $     2,929    $     8,547   $    10,673
                                    ============================================

F-26

<PAGE>


                     800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
                (Dollars in thousands, except per share amounts)

12.  Quarterly Results of Operations (Unaudited)

The following is a summary of the unaudited  quarterly results of operations for
1998 and 1997:

                                                  Quarter Ended
                                ------------------------------------------------
                                  March 31   June 30   September 30  December 31
                                ------------------------------------------------

 1998
 Net sales                         $62,196   $70,042     $73,177       $81,097
 Gross profit                       12,564    13,682      14,903        11,646
 Net income                          3,532     3,940       4,335         1,927
 Per share data:
    Earnings per share - basic         .28       .31         .34           .15
    Earnings per share - diluted       .27       .31         .34           .15
 Weighted-average number of
   common shares outstanding - basic 12,750    12,750      12,733        12,640
 Weighted-average number of common
    shares outstanding - diluted     12,873    12,833      12,733        12,640


 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

(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.

F-27

<PAGE>

                       800-JR CIGAR, Inc. and Subsidiaries

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

                                                      Additions
                                           --------------------------------
                                           Charged   Charged
                               Beginning to Cost and to Other  Deductions Ending
     Description                Balance    Expense   Accounts     (A)    Balance
--------------------------------------------------------------------------------

Year ended December 31, 1998
Allowance for doubtful accounts   $ 78     $209       $  -      $142        $145
                                ================================================

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

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

(A) Represented write-offs of accounts, net of recoveries.

S-1

<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    Lease Agreement dated July 19, 1993 by and between J.R. Tobacco of
              America, 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.

     10.13    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.

     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.

     23.1     Consent of Ernst & Young LLP.

     27.0     Financial Data Schedule.

<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 29, 1999                  By:__/s/ Lew Rothman___________________________
                                  Lew Rothman, Chairman of the Board, President,
                                  Chief Executive Officer


March 29, 1999                  By:__/s/ Michael E. Colleton____________________
                                  Michael E. Colleton, Chief Financial Officer


March 29, 1999                  By:__/s/ LaVonda Rothman________________________
                                  LaVonda Rothman, Secretary and Director


March 29, 1999                  By:__/s/ Jane Vargas____________________________
                                  Jane Vargas, Vice President and Director

         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 29, 1999                  By:__/s/ Maureen Colleton_______________________
                                  Maureen Colleton, Director


March 29, 1999                  By:__/s/ Stephen Bloom__________________________
                                  Stephen Bloom, Director


March 29, 1999                  By:__/s/ John Oliva_____________________________
                                  John Oliva, Director


March 29, 1999                  By:__/s/ John F. Barry Jr.______________________
                                  John F. Barry Jr., Director

<PAGE>

                         Consent of Independent Auditors


We consent to the incorporation by reference in the Registration Statement (Form
S-8 No.  333-58397)  pertaining to the 1997 Long-Term  Incentive  Plan, the 1997
Non-Employee  Directors' Stock Plan and the 1997 Employee Stock Purchase Plan of
800-JR  CIGAR,  Inc. of our report  dated March 10,  1999,  with  respect to the
consolidated financial statements and schedule of 800-JR CIGAR, Inc. included in
the Annual Report (Form 10-K) for the year ended December 31, 1998.

                                                             ERNST & YOUNG LLP


MetroPark, New Jersey
March 30, 1999