ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

Alec Bradley Cigar Corporation (the "Company") is an importer and distributor of cigars. The Company primarily sells to two types of customers:
(1) distributors, including but not limited to wine and liquor wholesalers; and
(2) retailers, including but not limited to tobacco shops, convenience stores, bars, restaurants and country clubs.

Management's discussion and analysis contains various forward-looking statements. These statements consist of any statement other than a recitation of historical fact and can be identified by the use of forward-looking terminology such as "may," "expect," "anticipate," "estimate" or "continue" or use of negative or other variations or comparable terminology.

The Company cautions that these statements are further qualified by important factors that could cause actual results to differ materially from those contained in the forward-looking statements, that these forward-looking statements are necessarily speculative, and there are certain risks and uncertainties that could cause actual events or results to differ materially from those referred to in such forward-looking statements.

The following discussion should be read in conjunction with the information contained in the financial information and the notes thereto appearing elsewhere in this report.

Results of Operations

Three months ending March 31, 2005 Compared to March 31, 2004

Revenues

Revenues for three months of 2005 were $412,565, an increase of $37,490, or 10.0% from $375,075 for 2004. This was attributable to the milder weather conditions across the country during the first quarter of 2005 as compared to 2004. Due to indoor smoking restrictions throughout the country which requires many cigar smokers to smoke outdoors, cigar smokers are less likely to smoke outdoors (and purchase cigars) when weather conditions are unfavorable. The company's gross profit increased for 2005 as compared to 2004 to $177,848, an increase of $12,691, or 7.6%, from $165,157. Gross profit, as a percentage of sales was 43.1% and 44.0% respectively for the three-month periods ending March 31, 2005 and 2004. The increase in gross profit dollars was directly attributable to the increase in sales (units and dollars).

Selling Expenses

Selling expenses for 2005 were $81,985, an increase of $28,049, or 52%, from $53,936 in 2004. Selling expenses include all compensation and related benefits for the sales personnel and advertising and promotional costs. Selling expenses represented 19.9% of revenues in 2005, compared to 14.4% in 2004. The increase was primarily attributable to increases in commission expense of $5,996 and advertising of $22,850.

General and Administrative Expenses

General and administrative expenses for 2005 were $116,640, an increase of $14,580, or 14.3%, from $102,060 in 2004. General and administrative expenses primarily include salaries, supplies, and general operating expenses. The increase in general and administrative expenses is primarily attributable to the increases in professional fees of $8,610, rent of $4,612, and travel of $3,434 and partially offset by reductions in payroll and related costs of $3,000. General and administrative expenses represented 28.3% of revenues in 2005, compared to 27.2% in 2004.

Liquidity and Capital Resources

The Company had a net loss of $20,777 for the three months ended March 31, 2005. The loss is primarily attributable to an increase in general and administrative expenses and selling expenses as described above.

The Company's cash balance as of March 31, 2005 increased by $92,278 from December 31, 2004 to $205,895. During the first quarter of 2005 cash provided by operations was approximately $123,800 as compared to ($137,852) during the first quarter of 2004. The increase in net cash primarily resulted from decreases in inventory of $117,438, accounts receivable of $2,538, and increases in accounts payable of $31,994. This was partially offset by decreases in taxes payable of $9,079, and loss from operations plus the effect of non-cash items (depreciation expense).

The Company's working capital was approximately $262,000 at March 31, 2005, compared to approximately $282,200 at December 31, 2004. The decrease in working capital was primarily attributable to the Company's repayment of related party loans, loss of approximately $20,800 less the effect of net of non-cash items (depreciation expense) of $927.

During the fourth quarter of 2004, The Company negotiated a loan with its principal shareholder. Management believes that the cash generated from the Company's operations and the existing credit terms will be adequate to support its cash requirements for capital expenditures and maintenance of working capital for the next 12 months.