OBJECTIVE: To discover the importance of social sources of tobacco to young people as opposed to commercial sources; to describe the peer market for cigarettes in schools and the consequences for young people of their involvement in it. STUDY DESIGN: Cross sectional questionnaire survey, one-to-one interviews, and focus groups. SETTING: Seven schools in Birmingham, UK. SUBJECTS: All students in two randomly selected classes from each school completed the questionnaire, and never smokers, occasional smokers, and regular smokers were interviewed. RESULTS: Two thirds of occasional smokers and one quarter of regular smokers obtained cigarettes socially, mostly for free. A few smokers regularly bought their cigarettes from others. Among friendship groups, both smokers and non-smokers were involved in the exchange of cigarettes, often for money, which is a common activity. A few young people use the selling of cigarettes to fund their own smoking. Some young people, smokers and non-smokers, are involved in semi-commercial selling of cigarettes. All school students are aware of where to purchase cigarettes from non-friends, which is only used "in emergency" because of the high price. One school had a strong punishment policy for students caught with cigarettes. In this school, more people bought singles from the peer market and the price was higher. CONCLUSIONS: The passing and selling of cigarettes in school is a common activity, which from the young persons perspective, ensures that all share cross counter purchases. A few people are prepared to use the peer market for monetary gain and it appears to be responsive to external conditions. The peer market might mean that efforts to control illegal sales of cigarettes are not as effective as hoped.