UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20459

                                    FORM 10-Q

[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         For the quarterly period ended September 30, 2004 or

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


                        Commission File Number 333-115587


                      NORTH ATLANTIC HOLDING COMPANY, INC.
                      ------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)


             DELAWARE                                20-0709285
             --------                                ----------
  (State or Other Jurisdiction of                  (I.R.S. Employer
   Incorporation or Organization)                 Identification No.)


   257 Park Avenue South, New York, New York           10010-7304
   -----------------------------------------           ----------
   (Address of Principal Executive Offices)            (Zip Code)


                                 (212) 253-8185
                                 --------------
              (Registrant's Telephone Number, Including Area Code)

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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 588,758 shares of common stock,
$.01 par value, as of November 12, 2004.

<PAGE>
PART I
FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

NORTH ATLANTIC HOLDING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
(unaudited)

<TABLE>
<CAPTION>
                                                                         September 30,             December 31,
                                                                             2004                      2003
                                                                             ----                      ----
<S>                                                                   <C>                       <C>
Current assets:
Cash                                                                  $        9,287            $           304
Accounts receivable, net                                                      10,208                     10,384
Inventories                                                                   43,181                     42,257
Income taxes receivable                                                            -                        910
Other current assets                                                          10,669                      3,594
                                                                      ---------------           ----------------

Total current assets                                                          73,345                     57,449

Property, plant and equipment, net                                             8,952                      8,310

Deferred income taxes                                                         22,505                     22,549

Deferred financing costs                                                      13,537                      5,163

Goodwill                                                                     128,945                    128,659

Other intangible assets                                                       10,403                     10,851

Other assets                                                                  15,152                     10,663
                                                                      ---------------           ----------------

Total assets                                                          $      272,839            $       243,644
                                                                      ===============           ================

Current liabilities:
Accounts payable                                                      $        2,287            $         5,275
Accrued expenses                                                               6,009                      6,796
Deferred income taxes                                                          4,654                      4,654
Senior revolving credit facility                                                   -                      6,300
                                                                      ---------------           ----------------

Total current liabilities                                                     12,950                     23,025

Senior notes and Long-term debt                                              200,000                    185,686
Senior discount notes                                                         64,630                          -
Senior revolving credit facility                                              34,800                          -
Deferred income taxes                                                            870                      1,141
Postretirement benefits                                                        7,071                      9,333
Pension benefits and other long-term liabilities                               4,118                      5,946
                                                                      ---------------           ----------------

Total liabilities                                                            324,439                    225,131
                                                                      ---------------           ----------------

Preferred Stock, (mandatory redemption value of $0 and
$65,080, respectively)                                                             -                     65,080
                                                                      ---------------           ----------------

Stockholders' Deficit:
Common stock, voting, $.01 par value authorized shares,
750,000; issued and outstanding shares, 588,758 and 528,241                        6                          5
Additional paid-in capital                                                     4,759                      9,663
Loans to stockholders for stock purchase                                         (98)                      (168)
Accumulated other comprehensive income (loss)                                 (1,229)                    (1,229)
Accumulated deficit                                                          (55,038)                   (54,838)
                                                                      ---------------           ----------------

Total stockholders' deficit                                                  (51,600)                   (46,567)
                                                                      ---------------           ----------------

Total liabilities and stockholders' deficit                           $      272,839            $       243,644
                                                                      ===============           ================

</TABLE>
               The accompanying notes are an integral part of the
                  condensed consolidated financial statements.

                                       2
<PAGE>
NORTH ATLANTIC HOLDING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)

<TABLE>
<CAPTION>
                                                                  Three months                   Three months
                                                                      Ended                          Ended
                                                               September 30, 2004             September 30, 2003
                                                               --------------------           --------------------
<S>                                                           <C>                            <C>
Net sales                                                      $            30,741            $            28,718

Cost of sales                                                               13,775                         11,836
                                                               --------------------           --------------------

Gross profit                                                                16,966                         16,882

Selling, general and administrative expenses                                 5,666                          7,886
                                                               --------------------           --------------------

Operating income (loss)                                                     11,300                          8,996

Interest expense and financing costs, net                                    7,282                          4,817
Other expense                                                               (5,550)                           839
                                                               --------------------           --------------------

Income (loss) before income tax expense (benefit)                            9,568                          3,340

Income tax expense (benefit)                                                 3,636                          1,269
                                                               --------------------           --------------------

Net income (loss)                                                            5,932                          2,071

Preferred stock dividends                                                        -                         (1,839)
                                                               --------------------           --------------------

Net income (loss) applicable to common shares                  $             5,932            $               232
                                                               ====================           ====================

Basic earnings per common share:
Net income (loss)                                                            10.03            $              3.92

Preferred stock dividends                                                        -                          (3.48)
                                                               --------------------           --------------------

Net income (loss) applicable to common shares                                10.03            $              0.44
                                                                                              ====================

Diluted earnings per common share:
Net income (loss)                                                             8.25            $              3.36

Preferred stock dividends                                                        -                          (2.98)
                                                               --------------------           --------------------

Net income (loss) applicable to common shares                                 8.25            $              0.38
                                                               ====================           ====================
(for both Basic and Diluted)


Weighted average common shares outstanding:
Basic                                                                        591.3                          528.2
Diluted                                                                      718.4                          616.8

</TABLE>
               The accompanying notes are an integral part of the
                  condensed consolidated financial statements.

                                       3
<PAGE>
NORTH ATLANTIC HOLDING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)

<TABLE>
<CAPTION>
                                                                   Nine months                    Nine months
                                                                      Ended                          Ended
                                                               September 30, 2004              September 30, 2003
                                                               --------------------           --------------------
<S>                                                            <C>                           <C>
Net sales                                                      $            90,053            $            73,218

Cost of sales                                                               43,094                         32,290
                                                               --------------------           --------------------

Gross profit                                                                46,959                         40,928

Selling, general and administrative expenses                                27,032                         22,352
                                                               --------------------           --------------------

Operating income (loss)                                                     19,927                         18,576

Interest expense and financing costs, net                                   24,301                         14,130
Other expense                                                               (5,037)                        22,857
                                                               --------------------           --------------------

Income (loss) before income tax expense (benefit)                              663                        (18,411)

Income tax expense (benefit)                                                   252                         (6,996)
                                                               --------------------           --------------------

Net income (loss)                                                              411                        (11,415)

Preferred stock dividends                                                   (1,613)                        (5,339)
                                                               --------------------           --------------------

Net income (loss) applicable to common shares                  $            (1,202)           $           (16,754)
                                                               ====================           ====================

Basic and Diluted earnings per common share:
Net income (loss)                                              $              0.72            $            (21.61)

Preferred stock dividends                                                    (2.81)                        (10.11)
                                                               --------------------           --------------------

Net income (loss) applicable to common shares                  $             (2.10)           $            (31.72)
                                                               ====================           ====================


Common stock dividends                                         $             4,884            $                 -
                                                               ====================           ====================

Basic and Diluted earnings per common share:
Common stock dividends                                                        8.25            $                 -
                                                               ====================           ====================


Weighted average common shares outstanding:
Basic                                                                        573.2                          528.2
Diluted                                                                      573.2                          528.2

</TABLE>
               The accompanying notes are an integral part of the
                  condensed consolidated financial statements.

                                       4
<PAGE>
NORTH ATLANTIC HOLDING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

<TABLE>
<CAPTION>
                                                                    Nine months                    Nine months
                                                                       Ended                          Ended
                                                                 September 30, 2004             September 30, 2003
                                                                ---------------------           -------------------
<S>                                                             <C>                            <C>
Cash flows from operating activities:
Net income (loss)                                                       $        411                $      (11,415)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
   Depreciation                                                                  646                           375
   Amortization of other intangible assets                                       448                             -
   Amortization of deferred financing costs                                    1,658                         1,039
   Amortization of interest on senior discount notes                           4,620                             -
   Deferred income taxes                                                        (227)                       (7,002)
   Changes in operating assets and liabilities:
      Accounts receivable, net                                                   176                        (1,594)
      Inventories                                                               (924)                       (1,556)
      Other current assets                                                    (6,165)                       (1,044)
      Other assets                                                            (4,489)                         (868)
      Accounts payable                                                        (2,988)                           81
      Other long-term liabilities                                             (4,090)                         (357)
      Accrued expenses and other                                                 (21)                        4,594
                                                                ---------------------           -------------------
      Net cash provided by (used in) operating activities                    (10,945)                      (17,747)
                                                                ---------------------           -------------------

Cash flows from investing activities:
Capital expenditures                                                          (1,288)                       (1,321)
                                                                ---------------------           -------------------

Net cash provided by (used in) investing activities                           (1,288)                       (1,321)
                                                                ---------------------           -------------------

Cash flows from financing activities:

   Proceeds from revolving credit facility                                    28,500                        (1,000)
   Proceeds from issuance of new senior notes, net                            45,000                             -
   Proceeds from issuance of senior discount notes                            60,010                             -
   Payment of financing costs                                                (10,032)                            -
   Payments on notes payable                                                 (30,686)                            -
   Redemption of preferred stock                                             (65,080)                            -
   Preferred stock cash dividends                                             (1,613)                            -
   Proceeds from issuance of common stock                                          1                             -
   Common stock cash dividends                                                (4,884)                            -
   Senior Secured Term Loan                                                        -                        19,000
   Other                                                                           -                           297
                                                                ---------------------           -------------------

Net cash provided by (used in) financing activities                           21,216                        18,297
                                                                ---------------------           -------------------

Net increase (decrease) in cash                                                8,983                          (771)
Cash, beginning of period                                                        304                           805
                                                                ---------------------           -------------------

Cash, end of period                                             $              9,287            $               34
                                                                =====================           ===================
</TABLE>

On March 8, 2004, the Company declared a dividend totaling approximately $4.9
million to holders of record as of March 26, 2004, which was paid on April 2,
2004.

               The accompanying notes are an integral part of the
                  condensed consolidated financial statements.

                                       5
<PAGE>
NORTH ATLANTIC HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1.  ORGANIZATION

The accompanying condensed consolidated financial statements are presented in
accordance with the requirements of Form 10-Q and, accordingly, do not include
all the disclosures normally required by generally accepted accounting
principles. The condensed consolidated financial statements have been prepared
in accordance with North Atlantic Holding Company, Inc.'s ("the Company")
customary accounting practices and have not been audited. In the opinion of
management, all adjustments necessary to fairly present the results of
operations for the reported interim periods have been recorded and were of a
normal and recurring nature. The year-end balance sheet data was derived from
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles.

These condensed consolidated financial statements of the Company should be read
in conjunction with the financial statements and related notes thereto included
in North Atlantic Trading Company, Inc.'s ("NATC") Annual Report on Form 10-K
for the year ended December 31, 2003 and its subsequent reports on Form 10-Q for
the periods ended March 31 and June 30, 2004. On February 9, 2004, NATC, a
Delaware Corporation, consummated a holding company reorganization whereby the
Company became the parent company of NATC. The holding company reorganization
was effected pursuant to an Agreement and Plan of Merger (the "Merger
Agreement"), dated February 9, 2004, among NATC, the Company and NATC Merger
Sub, Inc., a Delaware corporation and a direct wholly-owned subsidiary of the
Company ("Merger Sub").

Pursuant to the Merger Agreement, (i) Merger Sub was merged with and into NATC
(the "Merger"), with NATC as the surviving corporation; (ii) NATC became a
wholly-owned subsidiary of the Company; (iii) each of the 539,235 issued and
outstanding shares of voting common stock of NATC, par value $0.01 per share,
was converted into the right to receive one share of common stock of the
Company, par value $0.01 per share ("Company Common Stock"); (iv) each issued
and outstanding share of common stock of Merger Sub was converted into one
issued and outstanding share of common stock of NATC, par value $0.01 per share
("NATC Common Stock"); and (v) all of the issued and outstanding shares of the
Company's Common Stock held by NATC were cancelled.

Immediately after the Merger, (i) 539,235 shares of Company Common Stock were
issued and outstanding; and (ii) ten (10) shares of NATC Common Stock were
issued and outstanding.

Subsequently, the Company issued 49,523 shares of Company Common Stock upon the
exercise of certain warrants pursuant to a Warrant Agreement (the "Warrant
Agreement"), dated June 25, 1997, between the Company (as assignee to the NATC's
rights and obligations under the Warrant Agreement) and The Bank of New York, as
warrant agent (as successor to the United States Trust Company of New York). As
of September 30, 2004, (i) 588,758 shares of the Company Common Stock were
issued and outstanding; and (ii) ten (10) shares of NATC Common Stock were
issued and outstanding.

                                       6
<PAGE>
2.  RECAPITALIZATION AND REORGANIZATION:

On February 9, 2004, NATC consummated its general corporate reorganization in
which the Company was created and became the parent company of NATC. On February
17. 2004, NATC consummated the refinancing of its existing debt and preferred
stock and the Company issued senior discount notes as part of the refinancing
The refinancing consisted principally of (1) the offering and sale of $200.0
million principal amount of 9 1/4% senior notes due 2012 by NATC (the "New
Senior Notes"), (2) the entering into by NATC of an amended and restated loan
agreement that provides a $50.0 million senior secured revolving credit facility
(the "Senior Revolving Credit Facility") and (3) the concurrent offering and
sale of $97.0 million aggregate principal amount at maturity of 12 1/4% senior
discount notes due 2014 of the Company (the "Company Notes"). Both the senior
notes and the senior discount notes were offered pursuant to Rule l44A and
Regulation S under the Securities Act of 1933, as amended.

Concurrently with the closing of the refinancing, NATC also called for the
redemption all of its outstanding 11% senior notes due 2004 (the "Old Senior
Notes"), in accordance with the terms of the indenture governing such notes, at
the applicable redemption price of 100.0% of the principal amount thereof, plus
interest accrued to the redemption date of April 2, 2004. At December 31, 2003,
NATC had outstanding $155.0 million aggregate principal amount of its 11% senior
notes due 2004.

The proceeds from the offering of the New Senior Notes, along with borrowings
under the Senior Revolving Credit Facility (see Notes 5 and 6) and the proceeds
from the concurrent offering of the Company Notes were used to (1) repay $36.6
million outstanding borrowings under the existing senior credit facility (the
"Old Senior Credit Facility"), including borrowings used to finance the cash
purchase price for the acquisition of Stoker, Inc. (see Note 11), (2) redeem
NATC's Old Senior Notes, (3) redeem NATC's existing 12% senior exchange
payment-in-kind preferred stock on March 18, 2004, (4) pay a $5.0 million pro
rata distribution to stockholders of the Company and make a distribution to
certain holders of warrants of the Company, (5) make $2.1 million in incentive
payment to certain key employees and outside directors, and (6) pay fees and
expenses of $12.8 million incurred in connection with the offerings.


3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF PRESENTATION: The condensed consolidated financial statements include
the accounts of the Company and its subsidiaries. For the nine months ended
September 30, 2004, the condensed consolidated statement of operations includes
the accounts of the Company from inception (February 9, 2004) through September
30, 2004 and the accounts of NATC and its subsidiaries from January 1 through
September 30, 2004. For the three months ended September 30, 2003 and the nine
months ended September 30, 2003, the condensed consolidated statement of
operations consists of the accounts of NATC and its subsidiaries. All
significant intercompany accounts have been eliminated.

REVENUE RECOGNITION: The Company recognizes revenues and the related costs upon
transfer of title and risk of loss to the customer.

SHIPPING COSTS: The Company records shipping costs incurred as a component of
selling, general and administrative expenses. Shipping costs incurred were $0.9
million and $0.7 million for the three months ended September 30, 2004 and 2003,
respectively and $2.6 million and $2.0 million for the nine months ended
September 30, 2004 and 2003 respectively.


                                       7
<PAGE>
MASTER SETTLEMENT AGREEMENT ESCROW ACCOUNT: Pursuant to the Master Settlement
Agreement (the "MSA") entered into in November 1998 by most states (represented
by their attorneys general acting through the National Association of Attorneys
General) and subsequent states' statutes, a "cigarette manufacturer" (which is
defined to include a manufacturer of make-your-own cigarette tobacco) has the
option of either becoming a signatory to the MSA or opening, funding, and
maintaining an escrow account to have funds available for certain potential
tobacco-related liabilities, with sub-accounts on behalf of each settling state.
The Company has chosen to open and fund an escrow account as its method of
compliance. It is the Company's policy to record amounts on deposit in the
escrow account for prior years, as well as cash-on-hand to fund its projected
deposit based on its monthly sales for the current year, as an Other non-current
asset. Each year's obligation is required to be deposited in the escrow account
by April 15 of the following year. As of September 30, 2004 and December 31,
2003, the Company has recorded as an Other non-current asset approximately $12.8
million and $8.3 million, respectively. The approximate $12.8 million, as of
September 30, 2004, contains approximately $3.3 million related to the projected
deposit for 2004 sales, which will be deposited April 15, 2005.

COMPREHENSIVE INCOME: The Company's Comprehensive income for the three and nine
months ended September 30, 2004 and 2003 is equal to the Company's Net income
(loss) for the respective periods.


4.  INVENTORIES

Inventories are stated at the lower of cost or market. Cost is determined on the
last-in, first-out ("LIFO") method for approximately 90% of the inventories.
Leaf tobacco is presented in current assets in accordance with standard industry
practice, notwithstanding the fact that such tobaccos are carried longer than
one year for the purpose of curing.

The impact of LIFO resulted in increased operating income of the Company by
approximately $0.9 million and in decreased operating income by approximately
$0.1 million for the three months ended September 30, 2004 and 2003,
respectively; and increased operating income of the Company by $0.5 million and
increased the operating loss by approximately $0.4 million for the nine months
ended September 30, 2004 and 2003, respectively.

The components of inventories are as follows (in thousands):


                                           9/30/04                 12/31/03
                                      --------------            -------------
Raw materials and work in process     $       4,930             $      5,996
Leaf tobacco                                  8,423                    8,274
Finished goods - loose leaf tobacco           4,594                    6,018
Finished goods - MYO products                 8,494                    6,323
Other                                         1,969                    1,350
                                      --------------            -------------

                                             28,410                   27,961
LIFO reserve                                 14,771                   14,296
                                      --------------            -------------
                                      $      43,181             $     42,257
                                      ==============            =============


                                       8
<PAGE>
5.  SENIOR NOTES AND LONG-TERM DEBT

The senior notes and long-term debt are as follows (in thousands):


                                          9/30/04                     12/31/03
                                     -------------                -------------
Senior Discount Notes                $     64,630                 $          -
New Senior Notes                          200,000                            -
Senior Revolving Credit Facility           34,800
Old Senior Notes                                -                      155,000
Notes payable                                   -                       30,686
                                     -------------                -------------
                                     $    299,430                 $    185,686
                                     =============                =============


On February 17, 2004, NATC consummated the refinancing of its existing debt and
preferred stock. The refinancing consisted principally of (1) the offering and
sale of the New Senior Notes, (2) the entering into by NATC of the Senior
Revolving Credit Facility, (3) the concurrent sale of the Company Notes and (5)
the repayment of $30.7 million in notes payable relating principally to the
acquisition of Stoker, Inc. (see Note 11).

The New Senior Notes are senior unsecured obligations of NATC and will mature on
March 1, 2012. The New Senior Notes bear interest at the rate of 9 1/4% per
annum from the date of issuance, or from the most recent date to which interest
has been paid or provided for, and is payable semiannually on March 1 and
September 1 of each year, commencing on September 1, 2004. Each of NATC's
existing subsidiaries jointly and severally guarantees the New Senior Notes on a
senior unsecured basis. Each of NATC's future subsidiaries (other than those
designated unrestricted subsidiaries) will jointly and severally guarantee the
New Senior Notes on a senior unsecured basis. NATC is not required to make
mandatory redemptions or sinking fund payments prior to the maturity of the New
Senior Notes.

On and after March 1, 2008, the New Senior Notes will be redeemable, at NATC's
option, subject to meeting certain requirements in the New Credit Agreement (as
defined in Note 6 below), in whole at any time or in part from time to time,
upon not less than 30 nor more than 60 days prior notice at the following
redemption prices (expressed in percentages of principal amount), if redeemed
during the 12-month period commencing March 1 of the years set forth below, plus
accrued and unpaid interest to the redemption date (subject to the right of
holders of record on the relevant record date to receive interest due on the
relevant interest payment date):

                                       9
<PAGE>
         YEAR                               REDEMPTION PRICE
         ----                               ----------------

         2008                                     104.625%
         2009                                     102.313%
         2010 and thereafter                      100.000%

In addition, prior to March 1, 2008, NATC may redeem the New Senior Notes, at
its option, subject to meeting certain requirements in the New Credit Agreement,
in whole at any time or in part from time to time, upon not less than 30 nor
more than 60 days prior notice at a redemption price equal to 100% of the
principal amount of the New Senior Notes redeemed plus a "make-whole" premium
based on U.S. Treasury rates as of, and accrued and unpaid interest to, the
applicable redemption date.

Further, at any time prior to March 1, 2007, NATC may, at its option, subject to
meeting certain requirements in the New Credit Agreement, redeem up to 35% of
the aggregate principal amount of the New Senior Notes with the net cash
proceeds of one or more equity offerings by the Company or NATC, subject to
certain conditions, at a redemption price equal to 109.250% of the principal
amount thereof, plus accrued and unpaid interest thereon, if any, to the date of
redemption; provided, however, that after any such redemption at least 65% of
the aggregate principal amount of the New Senior Notes issued under the
Indenture remains outstanding. In order to affect the foregoing redemption with
the proceeds of any equity offering, NATC shall make such redemption not more
than 60 days after the consummation of any such equity offering.

Concurrently with the offering of the New Senior Notes, the Company issued $97.0
million aggregate amount at maturity of the Company Notes. Proceeds of
approximately $53.8 million from this issuance were used to make a capital
contribution to NATC. The Company Notes are the Company's senior obligations and
are unsecured. Prior to March 1, 2008, interest will accrue on the Company Notes
in the form of an increase in the accreted value of the Company Notes.
Thereafter, cash interest on the Company notes will accrue and be payable
semi-annually in arrears on March 1 and September 1, commencing on September 1,
2008, at a rate of 12 1/4% per annum. The Company Notes were issued with an
initial accreted value of $618.66 per $1,000 principal amount of maturity of
Company Notes. The accreted value of each Company Note will increase from the
date of issuance until March 1, 2008, at a rate of 12 1/4% per annum, compounded
semi-annually reflecting the accrual of non-cash interest, such that the
accreted value will equal the principal amount at maturity of each Company Note
on March 1, 2008. The Company Notes are not guaranteed by NATC or any of its
subsidiaries and are structurally subordinated to all of NATC and its
subsidiaries' obligations, including the New Senior Notes and the Senior
Revolving Credit Facility. The Company is not required to make mandatory
redemptions or sinking fund payments prior to the maturity of the Company Notes.

On and after March 1, 2009, the Company Notes will be redeemable, at the
Company's option, in whole at any time or in part from time to time, upon not
less than 30 nor more than 60 days prior notice at the following redemption
prices (expressed in percentages of principal amount at maturity), if redeemed
during the 12-month period commencing March 1 of the years set forth below, plus
accrued and unpaid interest to the redemption date (subject to the right of
holders of record on the relevant record date to receive interest due on the
relevant interest payment date):

                                       10
<PAGE>
         YEAR                                  REDEMPTION PRICE
         ----                                  ----------------

         2009                                        106.125%
         2010                                        104.083%
         2011                                        102.042%
         2012 and thereafter                         100.000%

In addition, prior to March 1, 2009, the Company may redeem the Company Notes,
at its option, in whole at any time or in part from time to time, upon not less
than 30 nor more than 60 days prior notice at a redemption price equal to 100%
of the accreted value of the Company Notes redeemed plus a "make-whole" premium
based on U.S. Treasury rates as of, and accrued and unpaid interest to, the
applicable redemption date.

Further, at any time prior to March 1, 2007, the Company may, at its option,
redeem up to 35% of the aggregate principal amount at maturity of the Company
Notes with the net cash proceeds of one or more equity offerings by the Company
or NATC, subject to certain conditions, at a redemption price equal to 106.125%
of the accreted value thereof, plus accrued and unpaid interest thereon, if any,
to the date of redemption; provided, however, that after any such redemption at
least 65% of the aggregate principal amount at maturity of the Company Notes
issued under the Indenture remains outstanding. In order to affect the foregoing
redemption with the proceeds of any equity offering, the Company shall make such
redemption not more than 60 days after the consummation of any such equity
offering.

The Company is dependent on NATC's cash flows to service its debt. The amount of
cash interest to be paid during the next five years is as follows: $0 in each of
2004, 2005, 2006, 2007 and March 1, 2008; $5,941 payable on September 1, 2008
and $5,941 payable on each of March 1 and September 1 thereafter until maturity.


6.  REVOLVING CREDIT FACILITY

In connection with the refinancing, NATC also amended and restated its Old
Senior Credit Facility, entering into the Senior Revolving Credit Facility of
$50.0 million (reducing to $40.0 million in August 2005) with Bank One, N.A., as
agent (the "Agent Bank"), and LaSalle Bank, National Association. The credit
agreement (the "New Credit Agreement") governing the Senior Revolving Credit
Facility includes a letter of credit sublimit of $25.0 million and terminates
three years from the closing date. NATC intends to use the Senior Revolving
Credit Facility for working capital and general corporate purposes. As of
September 30, 2004, NATC had borrowed $34.8 million under the Senior Revolving
Credit Facility. As of December 31, 2003, NATC had borrowed $6.3 million under
the Old Senior Credit Facility.

Indebtedness under the New Credit Agreement is guaranteed by each of NATC's
current and future direct and indirect subsidiaries, and is secured by a first
perfected lien on substantially all of NATC's and its direct and indirect
subsidiaries' current and future assets and property. The collateral includes a
pledge by the Company of its equity interest in NATC and a first priority lien
on all equity interests and intercompany notes held by NATC and each of its
subsidiaries.

                                       11
<PAGE>
Each advance under the New Credit Agreement will bear interest at variable rates
plus applicable margins, based, at NATC's option, on either the prime rate or
LIBOR. The New Credit Agreement provides for voluntary prepayment, subject to
certain exceptions, of loans. In addition, without the prior written consent of
the Agent Bank, NATC will not allow a Change in Control (as defined in the New
Credit Agreement), the sale of any material part of its assets and the assets of
its subsidiaries on a consolidated basis or, subject to certain exceptions, the
issuance of equity or debt. As of September 30, 2004, the weighted average
interest rate on borrowings under the New Credit Agreement was approximately
4.8%.

Under the New Credit Agreement, NATC is required to pay an annual commitment fee
in variable amounts ranging from 0.50% to 0.65% of the difference between the
commitment amount and the average usage of the facility, payable on a quarterly
basis, on the undrawn and unused portion of the credit facility.

The New Credit Agreement requires NATC and its subsidiaries to meet certain
financial tests: a minimum consolidated Adjusted EBITDA for the six months
ending June 30, 2004 and nine months ending September 30, 2004 and beginning
December 31, 2004, a four-quarter rolling minimum fixed charge coverage ratio,
as defined in the New Credit Agreement. The New Credit Agreement also contains
covenants which, among other things, limit the incurrence of additional
indebtedness, dividends, transactions with affiliates, asset sales,
acquisitions, mergers, prepayments of other indebtedness, liens and encumbrances
and other matters customarily restricted in such agreements. In addition, the
New Credit Agreement requires that certain members of executive management
remain active in the day-to-day operation and management of NATC and its
subsidiaries during the term of the facility.

The New Credit Agreement contains customary events of default, including payment
defaults, breach of representations and warranties, covenant defaults,
cross-acceleration, cross-defaults to certain other indebtedness, certain events
of bankruptcy and insolvency, the occurrence of a Change in Control and judgment
defaults.

NATC satisfied the minimum consolidated Adjusted EBITDA financial covenant test
for the nine months ending September 30, 2004.

Looking forward, due to the lower than anticipated operating performance of the
Company's core businesses, increased expenses resulting from the Company's
decision to proceed more quickly with developmental activities relating to
Zig-Zag Premium Cigarettes and the Company's decision to proceed more slowly
with the integration of the operations of Stoker, Inc. (acquired in November
2003) with a view toward achieving greater overall cost savings, the Company
currently anticipates that NATC will not likely meet the fixed charge coverage
ratio test contained in the New Credit Agreement for the rolling four quarter
periods ended March 31 and June 30, 2005. NATC is currently engaged in
discussions with the lenders under the New Credit Agreement with a view towards
amending the fixed charge coverage ratio test in order to enable NATC to remain
in compliance therewith. Although there can be no assurance, the Company
believes that NATC will be able to negotiate such an amendment on terms
reasonably acceptable to the Company. However, if such an amendment is not able
to be obtained and the covenant is breached, then NATC would be in default under
the New Credit Agreement and the lenders thereunder would have the right to
accelerate payment of all obligations thereunder. Such an acceleration would
also trigger an event of default under the indentures governing the Senior Notes
and the Company Notes. In the case of both the Senior Notes and the Company
Notes, the trustee or the holders of at least 25% in principal amount at


                                       12
<PAGE>
maturity of such notes would have the right, following an event of default, to
declare the obligations thereunder, including accrued and unpaid interest, to be
due and payable immediately. In the event of an acceleration of its obligations
under either the New Credit Agreement or Senior Notes, NATC would not be able to
satisfy its obligations and would likely be required to seek protection from its
creditors under applicable laws. In addition, in the event of an acceleration of
the Company's obligations under the Company Notes, the Company would not be able
to satisfy its obligations and would likely be required to seek protection from
its creditors under applicable law. The Company is wholly dependent on NATC to
service its debt and other obligations.

7.  PROVISION FOR INCOME TAXES

The provision for income taxes for the nine months ended September 30, 2004 and
June 30, 2003 was computed based on the estimated annual effective income tax
rate of 38.0%.

8.  PENSION AND POSTRETIREMENT BENEFIT PLANS

The components of Net Periodic Benefit Cost for the nine months ended September
30 are as follows (in thousands):

<TABLE>
<CAPTION>
                                               PENSION BENEFITS                    OTHER BENEFITS
                                      --------------------------------    ----------------------------------
                                           2004              2003               2004                2003
                                      ---------------    -------------    ---------------    ---------------

<S>                                   <C>                <C>              <C>                <C>
Service cost                          $          221     $        414     $       (2,481)    $          168
Interest cost                                    587              603                134                187
Expected return of plan assets                  (711)            (442)                 -                  -
Amortization of net (gain) loss                   91               63                204                 95
                                      ---------------    -------------    ---------------    ---------------
Net periodic pension cost             $          188     $        638     $       (2,143)    $          450
                                      ===============    =============    ===============    ===============
</TABLE>

Effective December 31, 2003, NATC froze the defined benefit retirement plan for
its salaried employees. Effective June 30, 2004 and July 31, 2004, the Company
also froze the defined benefit retirement plan for the respective hourly
employees of its three collective bargaining units.

Effective September 30, 2004, NATC terminated its postretirement benefit plan
for its salaried employees. Accordingly, NATC recognized a reduction in the
postretirement benefit plan liability of $2,856. NATC had previously disclosed
in its financial statements for the year ended December 31, 2003 that it
expected to contribute $500 to its postretirement plan in 2004 for the payment
of benefits. Plan contributions and benefits have amounted to $455 for the nine
months ended September 30, 2004. Based upon the above decision, management
believes that any future contribution will not be material.


                                       13
<PAGE>
9.  RECONCILIATION OF INCOME (LOSS) PER COMMON SHARE
    (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):

<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 2004
-------------------------------------
                                                         Income                Shares                Per Share
                                                      (Numerator)           (Denominator)              Amount
                                                    -----------------     ------------------     -------------------
<S>                                                 <C>                   <C>                    <C>
Basic:
Net income                                                   $ 5,932
                                                    -----------------

Net income applicable to common shares                       $ 5,932                  591.3                 $ 10.03
                                                    =================     ==================     ===================


Diluted:
Net income                                                   $ 5,932
                                                    -----------------

Net income applicable to common shares                       $ 5,932                  718.9                  $ 8.25
                                                    =================     ==================     ===================


THREE MONTHS ENDED SEPTEMBER 30, 2003
-------------------------------------
                                                         Income                 Shares                Per Share
                                                      (Numerator)           (Denominator)               Amount
                                                    -----------------     -------------------     -------------------

Basic:
Net income                                                   $ 2,071
Less: preferred stock dividends                               (1,839)
                                                    -----------------

Net income applicable to common shares                         $ 232                   528.2                  $ 0.44
                                                    =================     ===================     ===================



Diluted:
Net income                                                   $ 2,071
Less: preferred stock dividends                               (1,839)
                                                    -----------------

Net income applicable to common shares                         $ 232                   616.8                  $ 0.38
                                                    =================     ===================     ===================


NINE MONTHS ENDED SEPTEMBER 30, 2004
------------------------------------
                                                         Income                Shares                Per Share
                                                      (Numerator)           (Denominator)              Amount
                                                    -----------------     ------------------     -------------------

Basic and diluted:
Net income                                                     $ 411
Less: preferred stock dividends                               (1,613)
                                                    -----------------

Net loss applicable to common shares                        $ (1,202)                 573.2                 $ (2.10)
                                                    =================     ==================     ===================


NINE MONTHS ENDED SEPTEMBER 30, 2003
------------------------------------
                                                         Income                Shares                Per Share
                                                      (Numerator)           (Denominator)              Amount
                                                    -----------------     ------------------     -------------------

Basic and diluted:
Net loss                                                   $ (11,415)
Less: preferred stock dividends                               (5,339)
                                                    -----------------

Net loss applicable to common shares                       $ (16,754)                 528.2                $ (31.72)
                                                    =================     ==================     ===================

</TABLE>

On February 9, 2004, in connection with the Merger, all the common shares of
NATC were cancelled and shares of the Company were issued to NATC's shareholders
on a one-for-one basis.

                                       14
<PAGE>
The earnings per share calculations are based on the weighted average number of
shares of common stock outstanding during the respective periods. Common stock
equivalent shares from warrants representing 63,490 shares were excluded from
the computations for the nine months ended September 30, 2004 and 2003,
respectively, and common stock equivalent shares from stock options representing
97,885 and 95,300 shares were excluded from the computations for the nine months
ended September 30, 2004 and 2003, respectively, as their effects are
antidilutive.


10.  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. The
provisions of SFAS 150 relating to mandatorily redeemable non-controlling
interests associated with finite-lived subsidiaries as amended by FASB Staff
Position 150-3, has been deferred, for an indefinite period. The provisions of
SFAS 150 relating to all other financial instruments apply immediately to all
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The implementation of SFAS 150 is delayed for nonpublic companies with
fiscal periods beginning after December 15, 2003. In accordance with the
foregoing, the Company does not anticipate any impact from the adoption of SFAS
150 on its financial statements.

In December 2003, the FASB issued revised Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"). FIN 46 provides guidance on how to
identify a variable interest entity ("VIE") and determine when the assets,
liabilities, non-controlling interest, and results of operations of a VIE need
to be included in a company's consolidated financial statements. FIN 46 also
requires additional disclosures by primary beneficiaries and other significant
variable interest holders. Application of FIN 46 is required for interest in
special-purpose entities for years ending after December 15, 2003. Currently,
the Company has no special-purpose entities. Application of FIN 46 is required
for all other types of VIEs effective January 1, 2005. Although the Company does
not expect FIN 46 to have a material impact on the Company's financial condition
or results of operations, it is continuing to evaluate this complex
interpretation.

In December 2003, the FASB issued a revision of SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," to improve
financial statement disclosures for benefit plans. The project was initiated by
the FASB in 2003 in response to concerns raised by investors and other users of
financial statements about the need for greater transparency of pension
information. SFAS No. 132R requires that companies provide more details about
their plan assets, benefit obligations, cash flows, benefit costs, and other
relevant information. SFAS No. l32R is effective for years ending after December
15, 2003. The Company adopted SFAS No. l32R as of December 31, 2003 and has
provided the required interim disclosures in Note 8, "Pension and Postretirement
Benefit Plans."

In December 2003, the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (the "Act"), which introduces a Medicare prescription drug benefit,
as well as a federal subsidy to sponsors of retiree health care benefit plans
that provide a benefit that is at least actuarially equivalent to the Medicare
benefit, was enacted. In May 2004, the FASB issued Financial Staff Position No.
106-2, "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003" ("FSP 106-2") to
discuss certain accounting and disclosure issues raised by the Act. FSP 106-2


                                       15
<PAGE>
addresses accounting for the federal subsidy for the sponsors of single employer
defined benefit postretirement healthcare plans and disclosure requirements for
plans for which the employer has not yet been able to determine actuarial
equivalency. Except for certain nonpublic entities, FSP 106-2 is effective for
the first interim or annual period beginning after June 15, 2004 (the quarter
ending September 30, 2004 for the Company).

The Company has not yet determined whether the prescription drug benefits
provided under the postretirement plan are actuarially equivalent to the
Medicare benefit as necessary to qualify for the subsidy. The reported net
periodic benefit costs of the postretirement plan in the accompanying Financial
Statements and Notes to the Financial Statements do not reflect the effect of
the Act. Adoption of FSP 106-2 could require revisions to previously reported
information. While the Company may be eligible for benefits under the Act based
on the prescription drug benefits provided in the postretirement plan, the
Company does not believe such benefits will have a material impact on the
Financial Statements.

In addition, specific authoritative guidance on the accounting for the federal
subsidy, one of the provisions of the Act, is pending, and that guidance, when
issued, could require the Company to change previously reported information.
However, it is the Company's current opinion that the impact of any change
presently under discussion due to the accounting for the federal subsidy would
be immaterial.

In accordance with the enactment of the American Job Creation Act of 2004, FASB
has not issued its final statement regarding the accounting treatment. FASB
expects its statement to be finalized in early December 2004. The Company will
evaluate the impact on its financial statements upon issuance of the final
statement by FASB.

11.  STOKER ACQUISITION

On November 17, 2003, NATC acquired the common stock of Stoker, Inc. ("Stoker").
Stoker, headquartered in Dresden, Tennessee, manufactures and markets smokeless
tobacco and make-your-own ("MYO") tobacco and related products under various
brand names.

The purchase price of $22.5 million in cash was financed with borrowings under
the Old Senior Credit Facility. The acquisition has been accounted for under the
purchase method, and the results of Stoker have been included in the Company's
consolidated results from the date of acquisition.

On June 15, 2004, the Company announced plans to cease manufacturing operations
at the Stoker facility in Dresden, Tennessee and consolidate the production into
the Company's current operations in Louisville, Kentucky. In connection with
this consolidation, the Company plans to terminate approximately 85 employee
positions currently located at Stoker during the fourth quarter of 2004. In
connection therewith, severance costs of approximately $0.1 million have been
accrued. With the consolidation of manufacturing facilities, the Company is
expanding its manufacturing at the Louisville facility, including the relocation
of certain equipment from Dresden to Louisville. The Company has also accrued
approximately $0.3 million relating to the removal and temporary storage of
certain Stoker equipment. The above noted costs have been included in the
purchase price allocated to the Stoker acquisition resulting in an increase to
goodwill of $0.3 million, net of deferred taxes.


                                       16
<PAGE>
12.  TERMINATED ASSET PURCHASE AGREEMENT

On February 18, 2003, NATC entered into an asset purchase agreement (the "Star
Cigarette Asset Purchase Agreement") with Star Scientific, Inc. ("Star
Scientific"), and Star Tobacco, Inc., a wholly-owned subsidiary of Star
Scientific ("Star Tobacco" and, together with Star Scientific, "Star"). Pursuant
to the Star Cigarette Asset Purchase Agreement, NATC was to purchase
substantially all of the assets of Star relating to the manufacturing, marketing
and distribution of four discount cigarette brands in the United States (the
"Star Cigarette Assets"). The purchase price for the Star Cigarette Assets was
to have been $80.0 million in cash, subject to certain closing adjustments and
the assumption of certain liabilities related to the Star Cigarette Assets.

On July 15, 2003, NATC and Star reached a mutual agreement to terminate the Star
Cigarette Asset Purchase Agreement. Pursuant to the termination agreement, Star
Scientific retained a $2.0 million earnest money deposit that had been placed
into escrow by NATC and the parties executed releases of any liabilities arising
out of the Star Cigarette Asset Purchase Agreement.

Through June 30, 2003, NATC incurred $2.9 million of direct costs, including the
$2.0 million earnest money deposit referred to above, in connection with this
transaction. These costs have been expensed during the quarter ended June 30,
2003 and are included in Other expenses.


13.  CONTINGENCIES

LITIGATION WITH REPUBLIC TOBACCO

On July 15, 1998, North Atlantic Operating Company, Inc. ("NAOC) and National
Tobacco Company, L.P. ("NTC") filed a complaint (the "Kentucky Complaint")
against Republic Tobacco, Inc. and its affiliates ("Republic Tobacco") in
Federal District Court for the Western District of Kentucky. Republic Tobacco
imports and sells Roll-Your-Own ("RYO") premium cigarette papers under the brand
names JOB and TOP as well as other brand names. The Kentucky Complaint alleges,
inter alia, that Republic Tobacco's use of exclusivity agreements, rebates,
incentive programs, buy-backs and other activities related to the sale of
premium cigarette papers in the southeastern United States violate federal and
state antitrust and unfair competition laws and that Republic Tobacco defaced
and directed others to deface NAOC's point of purchase vendor displays for
premium cigarette papers by covering up the ZIG-ZAG brand name and advertising
material with advertisements for Republic Tobacco's RYO cigarette paper brands.
The Kentucky Complaint alleges that these activities constitute unfair
competition under federal and state laws.

On June 30, 1998, Republic Tobacco filed a complaint against NATC, NAOC and NTC
in the U.S. District Court of the Northern District of Illinois (the "Illinois
Complaint") and served it on NATC after the institution of the Kentucky action.
In the Illinois Complaint, Republic Tobacco seeks declaratory relief with
respect to NATC's claims. In addition, the Illinois Complaint alleges that
certain actions taken by NATC to inform its customers of its claims against
Republic Tobacco constitute tortuous interference with customer relationships,
false advertising, violations of Uniform Deceptive Trade Practices and Consumer


                                       17
<PAGE>
Fraud Acts, defamation and unfair competition. In addition, although not
included in its original complaint but in its amended complaint, Republic
Tobacco alleged that NATC has unlawfully monopolized and attempted to monopolize
the market on a national and regional basis for premium cigarette papers.
Republic sought unspecified compensatory damages, injunctive relief and
attorneys fees and costs.

On October 20, 2000, Republic Tobacco filed a motion to dismiss, stay, or
transfer the Kentucky Complaint to the Illinois Court. On December 19, 2000, the
Court denied Republic Tobacco's motion, holding that it was premature. The Court
noted also that it had communicated with the Court in Illinois and that it had
concluded that Republic Tobacco may not be entitled to any preference on forum
selection, which would ordinarily be given because it was first to file. The
Kentucky complaint is still on file.

Prior to the completion of discovery, the Court dismissed Republic Tobacco's
antitrust claims against NATC. After discovery was completed in 2001, both
parties moved for summary judgment on the others claims. In April 2002, the
District Court for the Northern District of Illinois decided the summary
judgment motions by dismissing all claims of both NATC and Republic Tobacco and
its affiliates, except for Republic Tobacco's claim of defamation per se against
NATC, on which it granted summary judgment on liability in favor of Republic
Tobacco, and a Lanham Act false advertising claim, based on the same facts as
the defamation claim, for equitable relief. In February 2003, the District Court
granted Republic's motion for summary judgment on NATC's counterclaim that
Republic tortuously interfered with NATC's business relationships and economic
advantage. The only claim that remained to be tried was Republic's Lanham Act
claim and damages on the defamation claim on which the Court previously ruled
that Republic could only obtain equitable relief if successful.

On July 8, 2003, following a four-day trial, an Illinois jury returned a verdict
in favor of Republic on the defamation claims of $8.4 million in general damages
and $10.2 million in punitive damages, for a total damage award of $18.6
million. NATC recorded an $18.8 million charge during the second quarter 2003
relating to this transaction. NATC filed post-trial motions for a new trial and,
in the alternative, for a reduction of the awards. On August 1, 2003, NATC
posted a judgment bond in the amount of $18.8 million with the U.S. District
Court. This was accomplished by obtaining a $19.0 million senior secured term
loan pursuant to a July 31, 2003 amendment to NATC's existing credit facility.
On November 20, 2003, the court ruled that the awards were excessive and reduced
the awards by approximately 60%, with the award of compensatory damages being
reduced to $3.36 million and the award of punitive damages being reduced to
$4.08 million, for a total of $7.44 million. On December 18, 2003, Republic
accepted these reduced awards. NATC reversed $11.16 million during the fourth
quarter 2003 due to this court ruling.

On January 8, 2004, NATC appealed the final judgment, including the finding of
liability in this case as well as the amount of the award. On January 22, 2004,
Republic filed a general notice of cross appeal and argued in its appellate
briefs that the judgment should be affirmed and also asserted, in its
cross-appeal, that the original judgment should be reinstated despite its
acceptance of the District Court's order reducing the judgment amount.

On September 1, 2004, the Court of Appeals issued its ruling affirming the
finding of liability against NATC for defamation, but reducing the amount of the
damage award to $3.0 million. The Court of Appeals also affirmed the dismissal
of NATC's antitrust claim against Republic and the dismissal of Republic's
motion to re-instate the original jury award of $18.8 million. As a result of
these rulings, in October 2004 NATC received approximately $4.5 million relating
to the cash bond it had posted with the Court in 2003. This amount was included
in Other income as of September 30, 2004.


                                       18
<PAGE>
NATC has also applied to the Court of Appeals for an order awarding NATC
approximately $1.0 million for the difference in the expense of the original
bond of $18.8 million and the subsequent reduced bond of $7.0 million, on the
one hand, and the lesser expense NATC would have incurred to bond the final $3.0
million judgment, on the other hand. That motion has been fully briefed and the
parties are waiting for the Court to rule.

LITIGATION RELATED TO COUNTERFEITING

Texas Infringing Products Litigation. In Bollore, S.A. v. Import Warehouse,
Inc., Civ. No. 3-99-CV-1196-R (N.D. Texas), Bollore, NATC's Licensor of ZIG-ZAG
brand premium cigarette papers, obtained a sealed order allowing it to conduct a
seizure of infringing and counterfeit ZIG-ZAG products in the United States. On
June 7, 1999, seizures of products occurred in Michigan and Texas. Subsequently,
all named defendants have been enjoined from buying and selling such infringing
or counterfeit goods. Bollore and NATC have negotiated settlements with all
defendants. These defendants included Import Warehouse, Ravi Bhatia, Tarek Makki
and Adham Makki. Those settlements included a consent injunction against
distribution of infringing or counterfeit goods.

On May 18, 2001, NATC, in conjunction with Bollore, conducted raids on the
businesses and homes of certain defendants previously enjoined (including Tarek
Makki and Adham Makki) from selling infringing or counterfeit ZIG-ZAG brand
products in the Bollore S.A. v. Import Warehouse litigation. Evidence was
uncovered that showed that these defendants and certain other individuals were
key participants in importing and distributing counterfeit ZIG-ZAG premium
cigarette papers. After a two day hearing in the U.S. District Court for the
Northern District of Texas, on May 30, 2001, the Court held the previously
enjoined defendants in contempt of court, and enjoined the additional new
defendants, including Ali Makki, from selling infringing or counterfeit ZIG-ZAG
premium cigarette papers.

NATC entered into a settlement with the defendants, the principal terms of which
included a cash payment, an agreed permanent injunction, the withdrawal of the
defendants' appeal of the civil contempt order, an agreed judgment of $11.0
million from the civil contempt order and an agreement to forbear from enforcing
that $11.0 million money judgment until such time in the future that the
defendants violate the terms of the permanent injunction. Two of the defendants,
Tarek Makki and Adham Makki, also agreed to provide complete information
concerning the counterfeiting conspiracy as well as information on other parties
engaged in the purchase and distribution of infringing ZIG-ZAG premium cigarette
papers.

On February 17, 2004, NATC and Bollore filed a motion in the U.S. District Court
for the Northern District of Texas, which had issued the original injunctions
against the infringing defendants, seeking, with respect to respondents Adham
Makki, Tarek Makki and Ali Makki, to have the $11.0 million judgment released
from the forbearance agreement and to have the named respondents held in
contempt of court. The motion alleged that the three respondents had trafficked
in counterfeit ZIG-ZAG cigarette papers after the execution of the settlement,
citing evidence that all three had been charged in the United States District
Court for the Eastern District of Michigan with criminal violations of the
United States counterfeiting laws by trafficking in counterfeit ZIG-ZAG
cigarette papers, which trafficking occurred after the settlement agreement.


                                       19
<PAGE>
On April 13, 2004, the Court entered an order (the "Contempt 2 Order"), finding
Ali Mackie, Tarek Makki, Adham Mackie and their companies Best Price Wholesale
(the "Makki Defendants") and Harmony Brands LLC in civil contempt, freezing all
of their assets, releasing the July 12, 2002 Final Judgment of $11.0 million
from the forbearance agreement as to the Makki Defendants, and again referring
the matter to the United States Attorney for Criminal Prosecution. Subsequent to
the entry of the Contempt 2 Order, the Company settled with defendant Harmony
Brands and its members for the amount of $750,000 and the entry of a permanent
injunction. The Company is seeking to execute on the outstanding $11.0 million
judgment against the remaining Makki Defendants and those efforts are currently
underway.

Pursuant to the U.S. Distribution Agreement and a related agreement between
Bollore and NATC, any collections on the judgments issued in the Bollore v.
Import Warehouse case are to be divided evenly between Bollore and NATC after
the payment of all expenses.

On February 7, 2002, Bollore, NAOC and NATC filed a motion with the District
Court in the Texas action seeking to hold Ravi Bhatia and Import Warehouse Inc.
in contempt of court for violating the terms of the consent order and injunction
entered against those defendants. NATC alleges that Mr. Bhatia and Import
Warehouse sold counterfeit goods to at least three different companies over an
extended period of time. On June 27, 2003, the Court found Import Warehouse and
Mr. Bhatia in contempt of court for violating an existing injunction barring
those parties from distributing infringing ZIG-ZAG cigarette paper products. The
Court requested that NATC and Bollore (NATC's co-plaintiff in the case) file a
submission detailing the damages incurred. NATC and Bollore filed their
submission on July 25, 2003 which reported and requested damages of $2.4
million.

On July 1, 2004, the Court issued an Order awarding approximately $2.5 million
in damages to NATC for the damages incurred by the Company as a result of the
Import Warehouse Defendants' civil contempt. On July 15, 2004, the Court entered
a Final Judgment in that amount for which defendants Import Warehouse, Inc. and
Ravi Bhatia are jointly and severally liable. After NATC and Bollore commenced
collection proceedings, Import Warehouse paid NATC and Bollore an amount equal
to the entire judgment plus the expenses incurred in collection. Accordingly,
approximately $1.2 million has been recorded in Other income as of September 30,
2004. The Import Warehouse Defendants filed a notice of appeal on July 24, 2004.
No briefing schedule has been established.

LITIGATION RELATED TO ALLEGED PERSONAL INJURY

Trial of the West Virginia complaints against the smokeless tobacco defendants
has been postponed indefinitely, as described below. On October 6, 1998 NTC was
served with a summons and complaint on behalf of 65 individual plaintiffs in an
action in the Circuit Court of Kanawha County, West Virginia, entitled Kelly
Allen, et al. v. Philip Morris Incorporated, et al. (Civil Action Nos.
98-C-240l). On November 13, 1998, NTC was served with a second summons and
complaint on behalf of 18 plaintiffs in an action in the Circuit Court of
Kanawha County, West Virginia, entitled Billie J. Akers, et al. v. Philip Morris
Incorporated et al. (Civil Action Nos. 98-C-2696 to 98-C-2713). The complaints
are identical in most material respects. In the Allen case, the plaintiffs have
specified the defendant companies for each of the 65 cases. NTC is named in only
one action. One Akers plaintiff alleged use of an NTC product, alleging lung
cancer.

                                       20
<PAGE>
On September 14, 2000, NTC was served with a summons and complaint on behalf of
539 separate plaintiffs filed in Circuit Court of Ohio County, West Virginia,
entitled Linda Adams, et al. v. Philip Morris Inc., et al. (Civil Action Nos.
00-C-373 to 00-C-911). Only one of these plaintiffs alleged use of a product
currently manufactured by NTC. The time period during which this plaintiff
allegedly used the product has not yet been specified. Thus, it is not yet known
whether NTC is a proper defendant in this case.

On September 19, 2000, NTC was served with a second summons and complaint on
behalf of 561 separate plaintiffs filed in Circuit Court of Ohio County, West
Virginia, entitled Ronald Accord, et al. v. Philip Morris Inc., et al. (Civil
Action Nos. 00-C-923 to 00-C-1483). A total of five of these plaintiffs alleged
use of a product currently manufactured by NTC. One of these plaintiffs does not
specify the time period during which the product was allegedly used. Another
alleges use that covers, in part, a period when NTC did not manufacture the
product. On motion by cigarette company defendants, this claim was dismissed on
February 11, 2004, for failure to follow the case management order. Of the
remaining three, one alleges consumption of a competitor's chewing tobacco from
1966 to 2000 and NTC's Beech-Nut chewing tobacco from 1998 to 2000; another
alleges a twenty-four year smoking history ending in 1995 and consumption of
Beech-Nut chewing tobacco from 1990 to 1995; and the last alleges a thirty-five
year smoking history ending in 2000, and consumption of NTC's Durango Ice
chewing tobacco from 1990 to 2000 (although Durango Ice did not come onto the
market until 1999).

In November 2001, NTC was served with an additional four separate summons and
complaints in actions filed in the Circuit Court of Ohio County, West Virginia.
The actions are entitled Donald Nice v. Philip Morris Incorporated, et al.
(Civil Action No. 01-C-479), Korene S. Lantz v. Philip Morris Incorporated, et
al. (Civil Action No. 01-C-480), Ralph A. Prochaska, et al. v. Philip Morris,
Inc., et al. (Civil Action No. 01-C-481), and Franklin Scott, et al. v. Philip
Morris, Inc., et al., (Civil Action No. 0l-C-482).

All of the West Virginia smokeless tobacco actions have been consolidated before
the West Virginia Mass Litigation Panel for discovery and trial of certain
issues. Trial of these matters was planned in two phases. In the initial phase,
a trial was to be held to determine whether tobacco products, including all
forms of smokeless tobacco, cigarettes, cigars and pipe and roll-your-own
tobacco, can cause certain specified diseases or conditions. In the second
phase, individual plaintiffs would attempt to prove that they were in fact
injured by tobacco products. Fact and expert discovery in these cases has
closed, however, in the cigarette cases the Court has allowed additional
discovery.

The claims against NTC in the various consolidated West Virginia actions include
negligence, strict liability, fraud in differing forms, conspiracy, breach of
warranty and violations of the West Virginia consumer protection and antitrust
acts. The complaints in the West Virginia cases request unspecified compensatory
and punitive damages.

The manufacturers of smokeless tobacco products (as well as the manufacturers of
cigarettes) moved to sever the claims against the smokeless tobacco manufacturer
defendants from the claims against the cigarette manufacturer defendants. That
motion was granted and the trial date on the smokeless tobacco claims has now
been postponed indefinitely.

The trial court has now vacated the initial trial plan in its entirety because
of concerns that its provisions violated the dictates of the United States
Supreme Court's decision in State Farm Mutual Automobile Insurance Company v.
Campbell, 538 U.S. 408 (2003). A new trial plan has not yet been implemented
with regard to the consolidated claims against the cigarette manufacturer
defendants. The claims against the smokeless tobacco manufacturer defendants
remain severed and indefinitely stayed.


                                       21
<PAGE>
Minnesota Complaint. On September 24, 1999, NTC was served with a complaint in a
case entitled Tuttle v. Lorillard Tobacco Company, et al. (Case No. C2-99-7105),
brought in Minnesota. The other manufacturing defendants are Lorillard and The
Pinkerton Tobacco Company. The Complaint alleges that plaintiff's decedent was
injured as a result of using NTC's (and, prior to the formation of NTC,
Lorillard's) Beech-Nut brand and Pinkerton's Red Man brand of loose-leaf chewing
tobacco. Plaintiff asserts theories of liability, breach of warranty, fraud, and
variations on fraud and misrepresentation. Plaintiff specifically requests in
its complaint an amount of damages in excess of fifty thousand dollars ($50,000)
along with costs, disbursements and attorneys' fees, and ". . . an order
prohibiting defendants from disseminating in Minnesota further misleading
advertising and making further untrue, deceptive and/misleading statements about
the health effects and/or addictive nature of smokeless tobacco products. . . ."
After discovery, summary judgment motions were filed on behalf of all
defendants. On March 3, 2003, the Court granted defendants' motions, dismissing
all claims against all defendants and the Court has since denied the plaintiff's
motion for reconsideration. Plaintiff has appealed the dismissal. Briefing has
been completed. Oral argument before the Court of Appeals was held on February
11, 2004. On July 30, 2004, the Court of Appeals affirmed the dismissal of all
of the claims.


14.  SEGMENT INFORMATION

In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," the Company has three reportable segments. The
smokeless tobacco segment manufactures smokeless tobacco products which are
distributed primarily through wholesale and food distributors in the United
States. The make-your-own segment imports and distributes premium cigarette
papers and contract manufactures and distributes cigarette tobaccos and related
products primarily through wholesale distributors in the United States. The
premium cigarette segment distributes contract manufactured cigarettes through
wholesale distributors in the United States.

The accounting policies of these segments are the same as those of the Company.
Segment data includes a charge allocating all corporate costs to each operating
segment. Eliminations and Other includes the assets of the Company not assigned
to segments and the elimination of intercompany accounts between segments. The
Company evaluates the performance of its segments and allocates resources to
them based on earnings before interest, taxes, depreciation, amortization,
certain non-cash charges and other income and expenses ("Adjusted EBITDA").

The table below presents financial information about reported segments for the
three months and nine months ended September 30, 2004 and 2003, respectively (in
thousands):


                                       22
<PAGE>
<TABLE>
<CAPTION>
         FOR THE                                    MAKE             PREMIUM
   THREE MONTHS ENDED:          SMOKELESS           YOUR           MANUFACTURED        ELIMINATIONS
   SETPEMBER 30, 2004            TOBACCO            OWN             CIGARETTES           AND OTHER           TOTAL
--------------------------    ---------------    ------------    -----------------    ----------------   ---------------
<S>                           <C>                <C>             <C>                  <C>                <C>
Net sales                     $       12,231     $    18,244     $             42     $           224    $       30,741
Operating income                       4,293           8,158               (1,118)                (33)           11,300
Adjusted EBITDA                        3,050           6,196               (1,077)                (30)            8,139
Assets                                71,514         285,572                4,100             (88,347)          272,839

   SEPTEMBER 30, 2003
--------------------------

Net sales                     $        9,097     $    19,595     $             26     $             -    $       28,718
Operating income                       3,075           7,498               (1,577)                  -             8,996
Adjusted EBITDA                        3,581           7,745               (1,577)                  -             9,749
Assets                                64,785         264,761                1,508            (106,260)          224,794


         FOR THE                                    MAKE             PREMIUM
   NINE MONTHS ENDED:           SMOKELESS           YOUR           MANUFACTURED        ELIMINATIONS
   SETPEMBER 30, 2004            TOBACCO            OWN             CIGARETTES           AND OTHER           TOTAL
--------------------------    ---------------    ------------    -----------------    ----------------   ---------------

Net sales                     $       37,782     $    51,307     $            165     $           799    $       90,053
Operating income                      10,174          13,431               (3,624)                (54)           19,927
Adjusted EBITDA                       10,925          13,173               (3,518)                (30)           20,550
Assets                                71,514         285,572                4,100             (88,347)          272,839

   SEPTEMBER 30, 2003
--------------------------

Net sales                      $      26,715     $    46,477     $             26     $             -     $      73,218
Operating income                       6,843          13,310               (1,577)                  -            18,576
Adjusted EBITDA                        8,466          13,857               (1,577)                  -            20,746
Assets                                64,785         264,761                1,508            (106,260)          224,794

</TABLE>

The table set forth below is a reconciliation of the Company's Net income (loss)
to Adjusted EBITDA for the three months and nine months ended September 30, 2004
and 2003, respectively (in thousands):

<TABLE>
<CAPTION>
                                                              FOR THE THREE MONTHS ENDED:           FOR THE NINE MONTHS ENDED:
                                                                     SEPTEMBER 30                           SEPTEMBER 30
                                                         -----------------------------------    -----------------------------------
                                                              2004                2003               2004               2003
                                                         ----------------    ---------------    ----------------   ----------------
<S>                                                     <C>                  <C>                <C>               <C>
Net income (loss)                                        $         5,932     $        2,071     $           411    $       (11,415)
Interest expense, net and amortization
of deferred financing fees                                         7,282              4,817              24,301             14,130
Income tax expense (benefit)                                       3,636              1,269                 252             (6,996)
Depreciation                                                         217                125                 646                375
Other expense                                                     (5,550)               839              (5,037)            22,857
LIFO adjustment                                                     (925)               (50)               (475)               400
Stock option compensation expense                                    100                184                 300                307
Postretirement/pension expense                                    (2,553)               494              (1,955)             1,088
Incentive payments in conjunction with recapitalization                                   -               2,107                  -
                                                         ----------------    ---------------    ----------------   ----------------

Adjusted EBITDA                                          $         8,139     $        9,749     $        20,550    $        20,746
                                                         ================    ===============    ================   ================
</TABLE>

                                       23
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

The Company competes in three distinct markets: (1) the smokeless tobacco
market; (2) the Make-Your-Own ("MYO") cigarette market; and (3) the premium
manufactured cigarette market. The smokeless tobacco market includes the loose
leaf chewing tobacco sector. The MYO cigarette market is comprised of the MYO
premium cigarette papers sector and the MYO cigarette tobaccos and related
products sector. The Company's subsidiaries manufacture and market loose leaf
chewing tobacco, import and distribute MYO premium cigarette papers, contract
manufacture and market MYO cigarette tobaccos and related products, and contract
manufacture and market premium manufactured cigarettes. To date, net sales of
the Company's premium manufactured cigarette segment continues in its
development phase and net sales of this segment have not been significant.


                              RESULTS OF OPERATIONS

COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

Net Sales. Net sales for the three months ended September 30, 2004 were $30.7
million, an increase of $2.0 million or 7.0% from the corresponding period of
the prior year.

Net sales of the smokeless tobacco segment for the current period increased $3.1
million or 34.4% from the corresponding period of the prior year, with the
Stoker acquisition (see Note 11 to the Consolidated Financial Statements
contained herein) accounting for $3.9 million of such net sales. The volume of
the Company's NTC brands declined 16.9% in net pounds and the acquired Stoker
brands increased 6.7%, generating an aggregate reduction in net pounds of 8.1%
for the period. Net sales were favorably impacted by two price increases of
approximately 5% each on the Company's NTC brands, which were initiated in the
third quarters of 2003 and 2004.

Net sales of the Company's MYO segment decreased $1.4 million or 7.1% in
comparison to the corresponding period of the prior year despite a $2.0 million
gain due to the Stoker acquisition. Within the MYO segment, premium cigarette
paper sales decreased $2.3 million or 15.3% from the corresponding period of the
prior year due to a reduction in promotional activity in the third quarter of
2004 as the Company focused on maintaining prices to enhance the longer term
profitability of this mature segment. The MYO cigarette tobaccos and related
product sales increased $0.9 million or 19.6% in comparison to the corresponding
period of the prior year, with the Stoker acquisition accounting for $2.0
million of such net sales. Despite this overall net sales increase, aggregate
volume in net pounds declined 15.0% due to increased competition coupled with
associated price reductions or discounting, which the Company chose not to fully
match.

Gross Profit. Gross profit for the three months ended September 30, 2004 totaled
$17.0 million, an increase of $0.1 million or 0.6% from the corresponding period
of the prior year.

Gross profit of the smokeless tobacco segment increased $0.8 million or 15.1%
from the corresponding period of the prior year due to increased sales
associated with the Stoker acquisition. Gross margin for this segment decreased
to 49.6% of net sales for the current period from 58.2% in the corresponding
period of the prior year due principally to greater sales of lower margin Stoker
products coupled with higher manufacturing costs per case, both of which were
partially offset by the Company's two price increases on NTC's brands of
approximately 5% each.

                                       24
<PAGE>
Gross profit of the MYO segment for the current period decreased $0.7 million or
6.0% in comparison to the corresponding period of the prior year. The gross
margin of the MYO segment increased to 59.9% of net sales for the current period
in comparison to 59.2% for the corresponding period of the prior year. This
increase in gross margin was due principally to a favorable impact on cost of
goods sold due to the LIFO inventory adjustment.

Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses for the three months ended September 30, 2004 were $5.7
million, a decrease of $2.2 million or 27.8% in comparison to the corresponding
period of the prior year. Of this decrease, $2.9 million resulted from the
termination of the post-retirement benefit plan for salaried employees, $0.8
million to reduced compensation accruals and $0.4 million to a reduction in
health care cost accruals, all of which were partially offset by increased
expenses of $1.1 million related to the continuing development of the premium
manufactured cigarette segment and by $0.9 million in expenses relating to the
integration of Stoker's operations, which were acquired on November 17, 2003.

Interest Expense and Amortization of Financing Costs. Interest expense and
financing costs increased $2.5 million or 51.2% to $7.3 million for the three
months ended September 30, 2004 as compared to the corresponding period of the
prior year. This increase was due principally to higher average outstanding
indebtedness resulting from the recapitalization and reorganization consummated
in February 2004, as more fully described in Note 2 to the Financial Statements
contained herein.

Other Income (Expense). Other income of $5.6 million for the three months ended
September 30, 2004 resulted from recoveries relating to the Illinois Complaint
described in Note 13 to the Financial Statements contained herein and recoveries
associated with counterfeiting litigation (as also described in Note 13). The
expense of $0.8 million for the three months ended September 30, 2003 related to
funding costs of the judgment bond associated with the Illinois Complaint.

Income Tax Benefit (Expense). Income tax expense was $3.6 million for the three
months ended September 30, 2004 compared to $1.3 million for the corresponding
period of the prior year due to the higher operating results in 2004. The
effective income tax rate used for both periods was 38.0%.

Net Income (Loss). Due to the factors described above, net income for the three
months ended September 30, 2004 was $5.9 million compared to $2.1 million for
the corresponding period of the prior year.


                                       25
<PAGE>
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

Net Sales. Net sales for the nine months ended September 30, 2004 were $90.0
million, an increase of $16.8 million or 23.0% from the corresponding period of
the prior year.

Net sales of the smokeless tobacco segment for the current period increased
$11.1 million or 41.6% from the corresponding period of the prior year, with
Stoker acquisition accounting for $11.3 million of such net sales. The impact of
an 8.1% volume decline in net pounds of NTC's brands in the Company's smokeless
tobacco segment was partially offset by an 8.9% volume gain in net pounds of the
Stoker brands and by the two price increases on the Company's NTC brands
described above.

Net sales of the Company's MYO segment increased $4.8 million or 10.3% in
comparison to the corresponding period of the prior year. Within the MYO
segment, premium cigarette paper sales decreased $0.2 million or 0.6% from the
corresponding period of the prior year due to a reduction in promotional
activity and a focus on maintaining prices to enhance longer-term profitability.
The MYO cigarette tobacco and related products net sales increased by $5.0
million or 40.3% in comparison to the corresponding period of the prior year,
with the Stoker acquisition accounting for $5.8 million of such net sales.

Gross Profit. Gross profit for the nine months ended September 30, 2004 totaled
$46.9 million, an increase of $6.0 million or 14.7% from the corresponding
period of the prior year due to the increase in net sales described above.

Gross profit of the smokeless tobacco segment increased $3.8 million or 26.6%
from the corresponding period of the prior year due principally to the Stoker
acquisition. Gross margin for this segment decreased 5.7% to 47.9% of net sales
for the current period from the corresponding period of the prior year due
principally to greater sales of lower margin Stoker products coupled with higher
manufacturing costs per case which, together, were partially offset by the
Company's two price increase on NTC's brands of approximately 5% each, which
occurred in the third quarters of 2003 and 2004.

Gross profit of the MYO segment for the current period increased $2.1 million or
7.9%, compared to the corresponding period of the prior year due primarily to
the increase in net sales associated with the Stoker acquisition. The gross
margin of the MYO segment decreased 1.3% to 55.9% of net sales for the current
period in comparison to the corresponding period of the prior year. This
reduction in gross margin was due principally to additional sales of the
relatively lower margin Stoker MYO cigarette tobacco and related products
coupled with higher manufacturing costs per case and, to a lesser extent, a
stronger Euro in comparison to the U.S. dollar.

Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses for the nine months ended September 30, 2004 were $27.0
million, an increase of $4.7 million or 20.9% compared to the corresponding
period of the prior year. Of this increase, $2.1 million was attributable to the
continuing investment in the development of the premium manufactured cigarette
segment, $2.1 to employee incentive payments made in connection with the
recapitalization and reorganization, $2.8 million relating to the integration of
Stoker's operations which were acquired on November 17, 2003 and $0.3 million
for employee recruitment costs, all of which were partially offset by the $2.9
million benefit due to the termination of the post-retirement benefit plan for
salaried employees.

Interest Expense and Amortization of Financing Costs. Interest expense and
financing costs were $24.3 million, an increase of $10.2 million or 72.0% for
the nine months ended September 30, 2004, as compared to the corresponding
period of the prior year. This increase was due principally to higher weighted
average outstanding indebtedness resulting from the previously detailed
recapitalization and reorganization.


                                       26
<PAGE>
Other Income (Expense). Other income of $5.0 million for the nine months ended
September 30, 2004 were attributable to recoveries relating to the Illinois
Complaint and to recoveries associated with counterfeiting litigation. Other
expenses of $22.9 million for the nine months ended September 30, 2003 were due
to the costs of $2.9 million associated with the termination of the Star
Cigarette Asset Purchase Agreement (see Note 12 to the Consolidated Financial
Statements contained herein) and to the incurrence of $18.8 million in costs
associated with the bonding of the verdict in the Illinois Complaint.

Income Tax Expense (Benefit). Income tax expense was $0.3 million for the nine
months ended September 30, 2004 compared to a benefit of $7.0 million for the
corresponding period of the prior year due primarily to the other income of $5.0
million, described above. The effective income tax rate for both periods was
38.0%.

Net Income (Loss). Due to the factors described above, the net income for the
nine months ended September 30, 2004 was $0.4 million compared to a net loss of
$11.4 million for the corresponding period of the prior year.


                       LIQUIDITY AND CAPITAL REQUIREMENTS

At September 30, 2004, working capital was $60.4 million compared to $34.4
million at December 31, 2003. The higher working capital position was the result
of higher cash balances and increased other current assets relating to
recoveries relating to the Illinois verdict (see Note 13 to the Consolidated
Financial Statements contained herein) and to recoveries associated with the
counterfeiting litigation (also see Note 13) and the refinancing of the
revolving credit facility (see Note 6 to the Financial Statements contained
herein), which were partially offset by lower accounts payable and accrued
expenses.

As more fully discussed below (under "Senior Revolving Credit Facility/New
Credit Agreement") and in Note 6 to the Consolidated Financial Statements
contained in Item 1 of this report, the Company anticipates that NATC will not
likely meet its fixed charge ratio requirement under the New Credit Agreement
(as defined below) for the rolling four quarter periods to end March 31 and June
30, 2005. NATC is engaged in discussions with the lenders under the New Credit
Agreement with a view toward an amendment of the fixed charge coverage ratio
requirement that would enable NATC to be in compliance therewith. Although there
can be no assurance, the Company believes that NATC will be able to negotiate a
satisfactory amendment. However, if a satisfactory amendment is not achieved and
the covenant is not satisfied, NATC would be in default under the New Credit
Agreement and the lenders thereunder would have the right to accelerate payment
of all obligations thereunder. Such acceleration would also trigger an event of
default under the indentures governing the Senior Notes (as defined in Note 2 to
the Financial Statements contained herein) and the Company Notes (as defined in
Note 2 to the Financial Statements contained herein) and potential acceleration
of the obligations thereunder. In the event of an acceleration of the
obligations under either the New Credit Agreement or Senior Notes, NATC would
not be able to satisfy its obligations and would likely be required to seek
protection from its creditors under applicable laws. In addition, in the event
of an acceleration of the Company's obligations under the Company Notes, the
Company would not be able to satisfy its obligations and would likely be
required to seek protection from its creditors under applicable law. The Company
is wholly dependent on NATC to service its debt and other obligations.


                                       27
<PAGE>
NATC expects to be able to fund its seasonal working capital requirements
through its operating cash flows and, if needed and subject to its ability to be
in compliance with the New Credit Agreement, bank borrowings under the Senior
Revolving Credit Facility (as defined in Note 2 to the Financial Statements
contained herein). As of September 30, 2004, NATC had additional availability of
$15.2 million under its committed $50.0 million Senior Revolving Credit
Facility.

For the nine months ending September 30, 2004, capital expenditures totaled
approximately $1.3 million. The Company believes that its capital expenditure
requirements for 2004 will be approximately $6.0 million due to costs associated
with the consolidation of its manufacturing locations, the purchasing of certain
manufacturing equipment and the continuing investment in data and related
systems.

The Company believes that it will be able to fund its capital expenditure
requirements from operating cash flows and, if needed and subject to its ability
to be in compliance with the New Credit Agreement, borrowings under the Senior
Revolving Credit Facility, should be adequate to satisfy its reasonably
foreseeable operating capital requirements.

On February 17, 2004, NATC consummated the refinancing of its existing debt and
preferred stock. The refinancing consisted principally of (1) the offering and
sale of the New Senior Notes, (2) the entering into by NATC of the Senior
Revolving Credit Facility, (3) the concurrent sale of the Company Notes and (4)
the repayment of $30.7 million in notes payable relating principally to the
acquisition of Stoker, Inc. (see Note 11 to the Financial Statements herein).

NEW SENIOR NOTES

The New Senior Notes are senior unsecured obligations of NATC and will mature on
March 1, 2012. The New Senior Notes bear interest at the rate of 9 1/4% per
annum from the date of issuance, or from the most recent date to which interest
has been paid or provided for, and is payable semiannually on March 1 and
September 1 of each year, commencing on September 1, 2004. Each of NATC's
existing subsidiaries jointly and severally guarantees the New Senior Notes on a
senior unsecured basis. Each of NATC's future subsidiaries (other than those
designated unrestricted subsidiaries) will jointly and severally guarantee the
New Senior Notes on a senior unsecured basis. NATC is not required to make
mandatory redemptions or sinking fund payments prior to the maturity of the New
Senior Notes.

On and after March 1, 2008, the New Senior Notes will be redeemable, at NATC's
option, subject to meeting certain requirements in the New Credit Agreement, in
whole at any time or in part from time to time, upon not less than 30 nor more
than 60 days prior notice at the following redemption prices (expressed in
percentages of principal amount), if redeemed during the 12-month period
commencing March 1 of the years set forth below, plus accrued and unpaid
interest to the redemption date (subject to the right of holders of record on
the relevant record date to receive interest due on the relevant interest
payment date):

         YEAR                              REDEMPTION PRICE
         ----                              ----------------

         2008                                    104.625%
         2009                                    102.313%
         2010 and thereafter                     100.000%


                                       28
<PAGE>
In addition, prior to March 1, 2008, NATC may redeem the New Senior Notes, at
its option, in whole at any time or in part from time to time, upon not less
than 30 nor more than 60 days prior notice at a redemption price equal to 100%
of the principal amount of the New Senior Notes redeemed plus a "make-whole"
premium based on U.S. Treasury rates as of, and accrued and unpaid interest to,
the applicable redemption date.

Further, at any time prior to March 1, 2007, NATC may, at its option, subject to
meeting certain requirements in the New Credit Agreement, redeem up to 35% of
the aggregate principal amount of the New Senior Notes with the net cash
proceeds of one or more equity offerings by the Company or NATC, subject to
certain conditions, at a redemption price equal to 109.250% of the principal
amount thereof, plus accrued and unpaid interest thereon, if any, to the date of
redemption; provided, however, that after any such redemption at least 65% of
the aggregate principal amount of the New Senior Notes issued under the
Indenture remains outstanding. In order to affect the foregoing redemption with
the proceeds of any equity offering, NATC shall make such redemption not more
than 60 days after the consummation of any such equity offering.

COMPANY NOTES

Concurrently with the offering of the New Senior Notes, the Company issued $97.0
million aggregate amount at maturity of the Company Notes. The net proceeds of
approximately $53.8 million from this issuance were used to make a capital
contribution to NATC. The Company Notes are the Company's senior obligations and
are unsecured. Prior to March 1, 2008, interest will accrue on the Company Notes
in the form of an increase in the accreted value of the Company Notes.
Thereafter, cash interest on the Company notes will accrue and be payable
semi-annually in arrears on March 1 and September 1, commencing on September 1,
2008, at a rate of 12 1/4% per annum. The Company Notes were issued with an
initial accreted value of $618.66 per $1,000 principal amount of maturity of
Company Notes. The accreted value of each Company Note will increase from the
date of issuance until March 1, 2008, at a rate of 12 1/4% per annum, compounded
semi-annually reflecting the accrual of non-cash interest, such that the
accreted value will equal the principal amount at maturity of each Company Note
on March 1, 2008. The Company Notes are not guaranteed by NATC or any of its
subsidiaries and are structurally subordinated to all of NATC and its
subsidiaries' obligations, including the New Senior Notes and the Senior
Revolving Credit Facility. The Company is not required to make mandatory
redemptions or sinking fund payments prior to the maturity of the Company Notes.

On and after March 1, 2009, the Company Notes will be redeemable, at the
Company's option, in whole at any time or in part from time to time, upon not
less than 30 nor more than 60 days prior notice at the following redemption
prices (expressed in percentages of principal amount at maturity), if redeemed
during the 12-month period commencing March 1 of the years set forth below, plus
accrued and unpaid interest to the redemption date (subject to the right of
holders of record on the relevant record date to receive interest due on the
relevant interest payment date):

         YEAR                                REDEMPTION PRICE
         ----                                ----------------

         2009                                      106.125%
         2010                                      104.083%
         2011                                      102.042%
         2012 and thereafter                       100.000%


                                       29
<PAGE>
In addition, prior to March 1, 2009, the Company may redeem the Company Notes,
at its option, in whole at any time or in part from time to time, upon not less
than 30 nor more than 60 days prior notice at a redemption price equal to 100%
of the accreted value of the Company Notes redeemed plus a "make-whole" premium
based on U.S. Treasury rates as of, and accrued and unpaid interest to, the
applicable redemption date.

Further, at any time prior to March 1, 2007, the Company may, at its option,
redeem up to 35% of the aggregate principal amount at maturity of the Company
Notes with the net cash proceeds of one or more equity offerings by the Company
or NATC, subject to certain conditions, at a redemption price equal to 106.125%
of the accreted value thereof, plus accrued and unpaid interest thereon, if any,
to the date of redemption; provided, however, that after any such redemption at
least 65% of the aggregate principal amount at maturity of the Company Notes
issued under the Indenture remains outstanding. In order to affect the foregoing
redemption with the proceeds of any equity offering, the Company shall make such
redemption not more than 60 days after the consummation of any such equity
offering.

The Company is dependent on NATC's cash flows to service its debt. The amount of
cash interest to be paid during the next five years is as follows: $0 in each of
2004, 2005, 2006, 2007 and March 1, 2008; $5,941 payable on September 1, 2008
and $5,941 payable on each of March 1 and September 1 thereafter until maturity.

SENIOR REVOLVING CREDIT FACILITY / NEW CREDIT AGREEMENT

In connection with the refinancing, NATC also amended and restated its Old
Senior Credit Facility, entering into the new Senior Revolving Credit Facility
of $50.0 million (reducing to $40.0 million in August 2005) with Bank One, N.A.,
as agent (the "Agent Bank"), and LaSalle Bank, National Association. The credit
agreement (the "New Credit Agreement") governing the Senior Revolving Credit
Facility includes a letter of credit sublimit of $25.0 million and terminates
three years from the closing date. NATC intends to use the Senior Revolving
Credit Facility for working capital and general corporate purposes. As of
September 30, 2004, NATC had borrowed $34.8 million under the Senior Revolving
Credit Facility. As of December 31, 2003, NATC had borrowed $6.3 million under
the Old Senior Credit Facility.

Indebtedness under the New Credit Agreement is guaranteed by each of NATC's
current and future direct and indirect subsidiaries, and is secured by a first
perfected lien on substantially all of NATC's and its direct and indirect
subsidiaries' current and future assets and property. The collateral includes a
pledge by the Company of its equity interest in NATC and a first priority lien
on all equity interests and intercompany notes held by NATC and each of its
subsidiaries.

Each advance under the New Credit Agreement will bear interest at variable rates
plus applicable margins, based, at NATC's option, on either the prime rate or
LIBOR. The New Credit Agreement provides for voluntary prepayment, subject to
certain exceptions, of loans. In addition, without the prior written consent of
the Agent Bank, NATC will not allow a Change in Control (as defined in the New
Credit Agreement), the sale of any material part of its assets and the assets of
its subsidiaries on a consolidated basis or, subject to certain exceptions, the
issuance of equity or debt. As of September 30, 2004, the weighted average
interest rate on borrowings under the New Credit Agreement was approximately
4.8%.

                                       30
<PAGE>
Under the New Credit Agreement, NATC is required to pay an annual commitment fee
in variable amounts ranging from 0.50% to 0.65% of the difference between the
commitment amount and the average usage of the facility, payable on a quarterly
basis, on the undrawn and unused portion of the credit facility.

The New Credit Agreement requires NATC and its subsidiaries to meet certain
financial tests: a minimum consolidated Adjusted EBITDA for the six months
ending June 30, 2004 and nine months ending September 30, 2004 and beginning
December 31, 2004, a four-quarter rolling minimum fixed charge coverage ratio,
as defined in the New Credit Agreement. The New Credit Agreement also contains
covenants which, among other things, limit the incurrence of additional
indebtedness, dividends, transactions with affiliates, asset sales,
acquisitions, mergers, prepayments of other indebtedness, liens and encumbrances
and other matters customarily restricted in such agreements. In addition, the
New Credit Agreement requires that certain members of executive management
remain active in the day-to-day operation and management of NATC and its
subsidiaries during the term of the facility.

The New Credit Agreement contains customary events of default, including payment
defaults, breach of representations and warranties, covenant defaults,
cross-acceleration, cross-defaults to certain other indebtedness, certain events
of bankruptcy and insolvency, the occurrence of a Change in Control and judgment
defaults.

NATC satisfied the minimum consolidated Adjusted EBITDA financial covenant test
for the nine months ending September 30, 2004.

Looking forward, due to the lower than anticipated operating performance of the
Company's core businesses, increased expenses resulting from the Company's
decision to proceed more quickly with developmental activities relating to
Zig-Zag Premium Cigarettes and the Company's decision to proceed more slowly
with the integration of the operations of Stoker, Inc. (acquired in November
2003) with a view toward achieving greater overall cost savings, the Company
currently anticipates that NATC will not likely meet the fixed charge coverage
ratio test contained in the New Credit Agreement for the rolling four quarter
periods ended March 31 and June 30, 2005. NATC is currently engaged in
discussions with the lenders under the New Credit Agreement with a view towards
amending the fixed charge coverage ratio test in order to enable NATC to remain
in compliance therewith. Although there can be no assurance, the Company
believes that NATC will be able to negotiate such an amendment on terms
reasonably acceptable to the Company. However, if such an amendment is not able
to be obtained and the covenant is breached, then NATC would be in default under
the New Credit Agreement and the lenders thereunder would have the right to
accelerate payment of all obligations thereunder. Such an acceleration would
also trigger an event of default under the indentures governing the Senior Notes
and the Company Notes. In the case of both the Senior Notes and the Company
Notes, the trustee or the holders of at least 25% in principal amount at
maturity of such notes would have the right, following an event of default, to
declare the obligations thereunder, including accrued and unpaid interest, to be
due and payable immediately. In the event of an acceleration of its obligations
under either the New Credit Agreement or Senior Notes, NATC would not be able to
satisfy its obligations and would likely be required to seek protection from its
creditors under applicable laws. In addition, in the event of an acceleration of
the Company's obligations under the Company Notes, the Company would not be able
to satisfy its obligations and would likely be required to seek protection from
its creditors under applicable law. The Company is wholly dependent on NATC to
service its debt and other obligations.


                                       31
<PAGE>
CONTRACTUAL CASH OBLIGATIONS

The following table summarizes the Company's contractual cash obligations,
excluding interest expenses, at September 30, 2004, after giving effect to the
refinancing of NATC's existing debt and preferred stock (in thousands):

<TABLE>
<CAPTION>

       CONTRACTUAL CASH                                   LESS                                               AFTER
         OBLIGATIONS                   TOTAL           THAN 1 YEAR       1-3 YEARS        4-5 YEARS         5 YEARS
-------------------------------    ---------------    --------------    -------------    ------------    --------------
<S>                                <C>                <C>               <C>              <C>             <C>
Senior Discount Notes              $       64,630     $           -     $          -     $         -     $      64,630

New Senior Notes                          200,000                 -                -               -           200,000

Senior Revolving Credit Facility           34,800                 -           34,800               -                 -

Operating leases                            3,862               760            1,161             614             1,327
                                   ---------------    --------------    -------------    ------------    --------------

                                   $      303,292     $         760     $     35,961     $       614     $     265,957
                                   ===============    ==============    =============    ============    ==============
</TABLE>

The Company believes that NATC's operating cash flows, together with the Senior
Revolving Credit Facility, should be adequate to satisfy its reasonably
foreseeable operating capital requirements. As indicated above, availability of
the Senior Revolving Credit Facility will be subject to NATC's ability to be in
compliance with the New Credit Agreement.


FORWARD-LOOKING STATEMENTS

The Company cautions the reader that certain statements in the Management's
Discussion and Analysis of Financial Condition and Results of Operations section
as well as elsewhere in this Form 10-Q are "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are not guarantees of future performance. They
involve risks, uncertainties and other important factors, including the risks
discussed below. The Company's actual future results, performance or achievement
of results may differ materially from any such results, performance or
achievement implied by these statements. Among the factors that could effect the
Company's actual results and could cause results to differ from those
anticipated in the forward-looking statements contained herein is the Company's
ability to implement its business strategy successfully, which will be dependent
on business, financial, and other factors beyond the Company's control,
including, among others, federal, state and/or local regulations and taxes;
competitive pressures; prevailing changes in consumer preferences; consumer
acceptance of new product introductions and other marketing initiatives; market
acceptance of the Company's distribution programs; access to sufficient
quantities of raw material or inventory to meet any sudden increase in demand;
disruption to historical wholesale ordering patterns; product liability
litigation; and any disruption in access to capital necessary to achieve the
Company's business strategy.

                                       32
<PAGE>
The Company cautions the reader not to put undue reliance on any forward-looking
statements. In addition, the Company does not have any intention or obligation
to update the forward-looking statements in this document. The Company claims
the protection of the safe harbor for forward-looking statements contained in
Section 21E of the Securities Exchange Act of 1934.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

There have not been any significant changes with respect to quantitative and
qualitative disclosures about market risk from that previously disclosed in
NATC's Form 10-K for the year ended December 31, 2003.


ITEM 4.  CONTROLS AND PROCEDURES.

The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), as of September 30, 2004. Based on their evaluation, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective as of September 30,
2004.

There has been no change in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15-d-15(f) under the Exchange Act)
that occurred during the Company's fiscal quarter ended September 30, 2004, that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.


                                     PART II
                                OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

LITIGATION WITH REPUBLIC TOBACCO

On July 15, 1998, North Atlantic Operating Company, Inc. ("NAOC) and National
Tobacco Company, L.P. ("NTC") filed a complaint (the "Kentucky Complaint")
against Republic Tobacco, Inc. and its affiliates ("Republic Tobacco") in
Federal District Court for the Western District of Kentucky. Republic Tobacco
imports and sells Roll-Your-Own ("RYO") premium cigarette papers under the brand
names JOB and TOP as well as other brand names. The Kentucky Complaint alleges,
inter alia, that Republic Tobacco's use of exclusivity agreements, rebates,
incentive programs, buy-backs and other activities related to the sale of
premium cigarette papers in the southeastern United States violate federal and
state antitrust and unfair competition laws and that Republic Tobacco defaced
and directed others to deface NAOC's point of purchase vendor displays for
premium cigarette papers by covering up the ZIG-ZAG brand name and advertising
material with advertisements for Republic Tobacco's RYO cigarette paper brands.
The Kentucky Complaint alleges that these activities constitute unfair
competition under federal and state laws.


                                       33
<PAGE>
On June 30, 1998, Republic Tobacco filed a complaint against NATC, NAOC and NTC
in the U.S. District Court of the Northern District of Illinois (the "Illinois
Complaint") and served it on NATC after the institution of the Kentucky action.
In the Illinois Complaint, Republic Tobacco seeks declaratory relief with
respect to NATC's claims. In addition, the Illinois Complaint alleges that
certain actions taken by NATC to inform its customers of its claims against
Republic Tobacco constitute tortuous interference with customer relationships,
false advertising, violations of Uniform Deceptive Trade Practices and Consumer
Fraud Acts, defamation and unfair competition. In addition, although not
included in its original complaint but in its amended complaint, Republic
Tobacco alleged that NATC has unlawfully monopolized and attempted to monopolize
the market on a national and regional basis for premium cigarette papers.
Republic sought unspecified compensatory damages, injunctive relief and
attorneys fees and costs.

On October 20, 2000, Republic Tobacco filed a motion to dismiss, stay, or
transfer the Kentucky Complaint to the Illinois Court. On December 19, 2000, the
Court denied Republic Tobacco's motion, holding that it was premature. The Court
noted also that it had communicated with the Court in Illinois and that it had
concluded that Republic Tobacco may not be entitled to any preference on forum
selection, which would ordinarily be given because it was first to file. The
Kentucky complaint is still on file.

Prior to the completion of discovery, the Court dismissed Republic Tobacco's
antitrust claims against NATC. After discovery was completed in 2001, both
parties moved for summary judgment on the others claims. In April 2002, the
District Court for the Northern District of Illinois decided the summary
judgment motions by dismissing all claims of both NATC and Republic Tobacco and
its affiliates, except for Republic Tobacco's claim of defamation per se against
NATC, on which it granted summary judgment on liability in favor of Republic
Tobacco, and a Lanham Act false advertising claim, based on the same facts as
the defamation claim, for equitable relief. In February 2003, the District Court
granted Republic's motion for summary judgment on NATC's counterclaim that
Republic tortuously interfered with NATC's business relationships and economic
advantage. The only claim that remained to be tried was Republic's Lanham Act
claim and damages on the defamation claim on which the Court previously ruled
that Republic could only obtain equitable relief if successful.

On July 8, 2003, following a four-day trial, an Illinois jury returned a verdict
in favor of Republic on the defamation claims of $8.4 million in general damages
and $10.2 million in punitive damages, for a total damage award of $18.6
million. NATC recorded an $18.8 million charge during the second quarter 2003
relating to this transaction. NATC filed post-trial motions for a new trial and,
in the alternative, for a reduction of the awards. On August 1, 2003, NATC
posted a judgment bond in the amount of $18.8 million with the U.S. District
Court. This was accomplished by obtaining a $19.0 million senior secured term
loan pursuant to a July 31, 2003 amendment to NATC's existing credit facility.
On November 20, 2003, the court ruled that the awards were excessive and reduced
the awards by approximately 60%, with the award of compensatory damages being
reduced to $3.36 million and the award of punitive damages being reduced to
$4.08 million, for a total of $7.44 million. On December 18, 2003, Republic
accepted these reduced awards. NATC reversed $11.16 million during the fourth
quarter 2003 due to this court ruling.


                                       34
<PAGE>
On January 8, 2004, NATC appealed the final judgment, including the finding of
liability in this case as well as the amount of the award. On January 22, 2004,
Republic filed a general notice of cross appeal and argued in its appellate
briefs that the judgment should be affirmed and also asserted, in its
cross-appeal, that the original judgment should be reinstated despite its
acceptance of the District Court's order reducing the judgment amount.

On September 1, 2004, the Court of Appeals issued its ruling affirming the
finding of liability against NATC for defamation, but reducing the amount of the
damage award to $3.0 million. The Court of Appeals also affirmed the dismissal
of NATC's antitrust claim against Republic and the dismissal of Republic's
motion to re-instate the original jury award of $18.8 million. As a result of
these rulings, in October 2004 NATC received approximately $4.5 million relating
to the cash bond it had posted with the Court in 2003. This amount was included
in Other income as of September 30, 2004.

NATC has also applied to the Court of Appeals for an order awarding NATC
approximately $1.0 million for the difference in the expense of the original
bond of $18.8 million and the subsequent reduced bond of $7.0 million, on the
one hand, and the lesser expense NATC would have incurred to bond the final $3.0
million judgment, on the other hand. That motion has been fully briefed and the
parties are waiting for the Court to rule.

LITIGATION RELATED TO COUNTERFEITING

Texas Infringing Products Litigation. In Bollore, S.A. v. Import Warehouse,
Inc., Civ. No. 3-99-CV-1196-R (N.D. Texas), Bollore, NATC's Licensor of ZIG-ZAG
brand premium cigarette papers, obtained a sealed order allowing it to conduct a
seizure of infringing and counterfeit ZIG-ZAG products in the United States. On
June 7, 1999, seizures of products occurred in Michigan and Texas. Subsequently,
all named defendants have been enjoined from buying and selling such infringing
or counterfeit goods. Bollore and NATC have negotiated settlements with all
defendants. These defendants included Import Warehouse, Ravi Bhatia, Tarek Makki
and Adham Makki. Those settlements included a consent injunction against
distribution of infringing or counterfeit goods.

On May 18, 2001, NATC, in conjunction with Bollore, conducted raids on the
businesses and homes of certain defendants previously enjoined (including Tarek
Makki and Adham Makki) from selling infringing or counterfeit ZIG-ZAG brand
products in the Bollore S.A. v. Import Warehouse litigation. Evidence was
uncovered that showed that these defendants and certain other individuals were
key participants in importing and distributing counterfeit ZIG-ZAG premium
cigarette papers. After a two day hearing in the U.S. District Court for the
Northern District of Texas, on May 30, 2001, the Court held the previously
enjoined defendants in contempt of court, and enjoined the additional new
defendants, including Ali Makki, from selling infringing or counterfeit ZIG-ZAG
premium cigarette papers.

NATC entered into a settlement with the defendants, the principal terms of which
included a cash payment, an agreed permanent injunction, the withdrawal of the
defendants' appeal of the civil contempt order, an agreed judgment of $11.0
million from the civil contempt order and an agreement to forbear from enforcing
that $11.0 million money judgment until such time in the future that the
defendants violate the terms of the permanent injunction. Two of the defendants,
Tarek Makki and Adham Makki, also agreed to provide complete information
concerning the counterfeiting conspiracy as well as information on other parties
engaged in the purchase and distribution of infringing ZIG-ZAG premium cigarette
papers.

                                       35
<PAGE>
On February 17, 2004, NATC and Bollore filed a motion in the U.S. District Court
for the Northern District of Texas, which had issued the original injunctions
against the infringing defendants, seeking, with respect to respondents Adham
Makki, Tarek Makki and Ali Makki, to have the $11.0 million judgment released
from the forbearance agreement and to have the named respondents held in
contempt of court. The motion alleged that the three respondents had trafficked
in counterfeit ZIG-ZAG cigarette papers after the execution of the settlement,
citing evidence that all three had been charged in the United States District
Court for the Eastern District of Michigan with criminal violations of the
United States counterfeiting laws by trafficking in counterfeit ZIG-ZAG
cigarette papers, which trafficking occurred after the settlement agreement.

On April 13, 2004, the Court entered an order (the "Contempt 2 Order"), finding
Ali Mackie, Tarek Makki, Adham Mackie and their companies Best Price Wholesale
(the "Makki Defendants") and Harmony Brands LLC in civil contempt, freezing all
of their assets, releasing the July 12, 2002 Final Judgment of $11.0 million
from the forbearance agreement as to the Makki Defendants, and again referring
the matter to the United States Attorney for Criminal Prosecution. Subsequent to
the entry of the Contempt 2 Order, the Company settled with defendant Harmony
Brands and its members for the amount of $750,000 and the entry of a permanent
injunction. The Company is seeking to execute on the outstanding $11.0 million
judgment against the remaining Makki Defendants and those efforts are currently
underway.

Pursuant to the U.S. Distribution Agreement and a related agreement between
Bollore and NATC, any collections on the judgments issued in the Bollore v.
Import Warehouse case are to be divided evenly between Bollore and NATC after
the payment of all expenses.

On February 7, 2002, Bollore, NAOC and NATC filed a motion with the District
Court in the Texas action seeking to hold Ravi Bhatia and Import Warehouse Inc.
in contempt of court for violating the terms of the consent order and injunction
entered against those defendants. NATC alleges that Mr. Bhatia and Import
Warehouse sold counterfeit goods to at least three different companies over an
extended period of time. On June 27, 2003, the Court found Import Warehouse and
Mr. Bhatia in contempt of court for violating an existing injunction barring
those parties from distributing infringing ZIG-ZAG cigarette paper products. The
Court requested that NATC and Bollore (NATC's co-plaintiff in the case) file a
submission detailing the damages incurred. NATC and Bollore filed their
submission on July 25, 2003 which reported and requested damages of $2.4
million.

On July 1, 2004, the Court issued an Order awarding approximately $2.5 million
in damages to NATC for the damages incurred by the Company as a result of the
Import Warehouse Defendants' civil contempt. On July 15, 2004, the Court entered
a Final Judgment in that amount for which defendants Import Warehouse, Inc. and
Ravi Bhatia are jointly and severally liable. After NATC and Bollore commenced
collection proceedings, Import Warehouse paid NATC and Bollore an amount equal
to the entire judgment plus the expenses incurred in collection. Accordingly,
approximately $1.2 million has been recorded in Other income as of September 30,
2004. The Import Warehouse Defendants filed a notice of appeal on July 24, 2004.
No briefing schedule has been established.


                                       36
<PAGE>
LITIGATION RELATED TO ALLEGED PERSONAL INJURY

Trial of the West Virginia complaints against the smokeless tobacco defendants
has been postponed indefinitely, as described below. On October 6, 1998 NTC was
served with a summons and complaint on behalf of 65 individual plaintiffs in an
action in the Circuit Court of Kanawha County, West Virginia, entitled Kelly
Allen, et al. v. Philip Morris Incorporated, et al. (Civil Action Nos.
98-C-240l). On November 13, 1998, NTC was served with a second summons and
complaint on behalf of 18 plaintiffs in an action in the Circuit Court of
Kanawha County, West Virginia, entitled Billie J. Akers, et al. v. Philip Morris
Incorporated et al. (Civil Action Nos. 98-C-2696 to 98-C-2713). The complaints
are identical in most material respects. In the Allen case, the plaintiffs have
specified the defendant companies for each of the 65 cases. NTC is named in only
one action. One Akers plaintiff alleged use of an NTC product, alleging lung
cancer.

On September 14, 2000, NTC was served with a summons and complaint on behalf of
539 separate plaintiffs filed in Circuit Court of Ohio County, West Virginia,
entitled Linda Adams, et al. v. Philip Morris Inc., et al. (Civil Action Nos.
00-C-373 to 00-C-911). Only one of these plaintiffs alleged use of a product
currently manufactured by NTC. The time period during which this plaintiff
allegedly used the product has not yet been specified. Thus, it is not yet known
whether NTC is a proper defendant in this case.

On September 19, 2000, NTC was served with a second summons and complaint on
behalf of 561 separate plaintiffs filed in Circuit Court of Ohio County, West
Virginia, entitled Ronald Accord, et al. v. Philip Morris Inc., et al. (Civil
Action Nos. 00-C-923 to 00-C-1483). A total of five of these plaintiffs alleged
use of a product currently manufactured by NTC. One of these plaintiffs does not
specify the time period during which the product was allegedly used. Another
alleges use that covers, in part, a period when NTC did not manufacture the
product. On motion by cigarette company defendants, this claim was dismissed on
February 11, 2004, for failure to follow the case management order. Of the
remaining three, one alleges consumption of a competitor's chewing tobacco from
1966 to 2000 and NTC's Beech-Nut chewing tobacco from 1998 to 2000; another
alleges a twenty-four year smoking history ending in 1995 and consumption of
Beech-Nut chewing tobacco from 1990 to 1995; and the last alleges a thirty-five
year smoking history ending in 2000, and consumption of NTC's Durango Ice
chewing tobacco from 1990 to 2000 (although Durango Ice did not come onto the
market until 1999).

In November 2001, NTC was served with an additional four separate summons and
complaints in actions filed in the Circuit Court of Ohio County, West Virginia.
The actions are entitled Donald Nice v. Philip Morris Incorporated, et al.
(Civil Action No. 01-C-479), Korene S. Lantz v. Philip Morris Incorporated, et
al. (Civil Action No. 01-C-480), Ralph A. Prochaska, et al. v. Philip Morris,
Inc., et al. (Civil Action No. 01-C-481), and Franklin Scott, et al. v. Philip
Morris, Inc., et al., (Civil Action No. 0l-C-482).

All of the West Virginia smokeless tobacco actions have been consolidated before
the West Virginia Mass Litigation Panel for discovery and trial of certain
issues. Trial of these matters was planned in two phases. In the initial phase,
a trial was to be held to determine whether tobacco products, including all
forms of smokeless tobacco, cigarettes, cigars and pipe and roll-your-own
tobacco, can cause certain specified diseases or conditions. In the second
phase, individual plaintiffs would attempt to prove that they were in fact
injured by tobacco products. Fact and expert discovery in these cases has
closed, however, in the cigarette cases the Court has allowed additional
discovery.

The claims against NTC in the various consolidated West Virginia actions include
negligence, strict liability, fraud in differing forms, conspiracy, breach of
warranty and violations of the West Virginia consumer protection and antitrust
acts. The complaints in the West Virginia cases request unspecified compensatory
and punitive damages.

                                       37
<PAGE>
The manufacturers of smokeless tobacco products (as well as the manufacturers of
cigarettes) moved to sever the claims against the smokeless tobacco manufacturer
defendants from the claims against the cigarette manufacturer defendants. That
motion was granted and the trial date on the smokeless tobacco claims has now
been postponed indefinitely.

The trial court has now vacated the initial trial plan in its entirety because
of concerns that its provisions violated the dictates of the United States
Supreme Court's decision in State Farm Mutual Automobile Insurance Company v.
Campbell, 538 U.S. 408 (2003). A new trial plan has not yet been implemented
with regard to the consolidated claims against the cigarette manufacturer
defendants. The claims against the smokeless tobacco manufacturer defendants
remain severed and indefinitely stayed.

Minnesota Complaint. On September 24, 1999, NTC was served with a complaint in a
case entitled Tuttle v. Lorillard Tobacco Company, et al. (Case No. C2-99-7105),
brought in Minnesota. The other manufacturing defendants are Lorillard and The
Pinkerton Tobacco Company. The Complaint alleges that plaintiff's decedent was
injured as a result of using NTC's (and, prior to the formation of NTC,
Lorillard's) Beech-Nut brand and Pinkerton's Red Man brand of loose-leaf chewing
tobacco. Plaintiff asserts theories of liability, breach of warranty, fraud, and
variations on fraud and misrepresentation. Plaintiff specifically requests in
its complaint an amount of damages in excess of fifty thousand dollars ($50,000)
along with costs, disbursements and attorneys' fees, and ". . . an order
prohibiting defendants from disseminating in Minnesota further misleading
advertising and making further untrue, deceptive and/misleading statements about
the health effects and/or addictive nature of smokeless tobacco products. . . ."
After discovery, summary judgment motions were filed on behalf of all
defendants. On March 3, 2003, the Court granted defendants' motions, dismissing
all claims against all defendants and the Court has since denied the plaintiff's
motion for reconsideration. Plaintiff has appealed the dismissal. Briefing has
been completed. Oral argument before the Court of Appeals was held on February
11, 2004. On July 30, 2004, the Court of Appeals affirmed the dismissal of all
of the claims.


ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

          a.        Exhibits

          31.1      Certification by the Chief Executive Officer pursuant to
                    rule 13-14(a) or 15d-14(a) of the Securities Exchange Act of
                    1934, as adopted pursuant to section 302 of the
                    Sarbanes-Oxley Act of 2002.

          31.2      Certification by the Chief Financial Officer pursuant to
                    rule 13-14(a) or 15d-14(a) of the Securities Exchange Act of
                    1934, as adopted pursuant to section 302 of the
                    Sarbanes-Oxley Act of 2002.

          32.1      Certification by the Chief Executive Officer pursuant to 18
                    U.S.C. ss. 1350, as adopted by Section 906 of the
                    Sarbanes-Oxley Act of 2002.

          32.2      Certification by the Chief Financial Officer pursuant to 18
                    U.S.C. ss. 1350, as adopted by Section 906 of the
                    Sarbanes-Oxley Act of 2002.


         b.         Reports on Form 8-K.

         (i)        None


                                       38
<PAGE>
                                   SIGNATURES


         Pursuant to the requirements 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.


                                          NORTH ATLANTIC HOLDING COMPANY, INC.


Date: November 15, 2004                   /s/ Thomas F. Helms, Jr.
                                          ---------------------------------
                                          Thomas F. Helms, Jr.
                                          Chief Executive Officer


                                          /s/ David I. Brunson
                                          ---------------------------------
                                          David I. Brunson
                                          Chief Financial Officer












                                       39