UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20459

                                   FORM 10-Q/A

                                (Amendment No. 1)

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

                For the quarterly period ended March 31, 2005 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: 589,176 shares of common stock,
$.01 par value, as of May 12, 2005.

<PAGE>
                                Explanatory Note

This form 10-Q/A amends and restates North Atlantic Trading Company, Inc.'s (the
"Company") form 10-Q for the quarter ended March 31, 2005 filed May 16, 2005
(the "Original Quarterly Report"). The Company has restated its previously
issued financial statements, as of and for the three months ended March 31, 2005
to reflect the correction of errors related to the calculation of the deferred
income tax valuation. During the fourth quarter of 2004, the Company and its
subsidiaries provided a full valuation allowance against its net deferred tax
assets. Following a review of the Company's deferred tax assets and deferred tax
liabilities, the Company determined that in calculating the valuation allowance,
deferred tax liabilities relating to inventories and tax-deductible goodwill had
been inappropriately netted against certain deferred tax assets. It cannot be
determined that the temporary differences related to inventories and goodwill
will reverse during the time period in which the Company's temporary differences
related to its deferred tax assets are expected to reverse or expire. Therefore,
these deferred tax liabilities should not have been utilized to reduce the
amount of the valuation allowance against deferred tax assets. This resulted in
an understatement of the valuation allowance in the amount of these deferred tax
liabilities of $9.8 million and $10.0 million as of December 31, 2004 and March
31, 2005, respectively, and a understatement of income tax expense of $9.8
million and $0.2 million as of and for the year ended December 31, 2004 and as
of and for the three months ended March 31, 2005, respectively. The correction
of this understatement has the effect of increasing deferred tax liabilities,
increasing accumulated deficit and decreasing net income, with no effect on net
cash flows, as of and for the year ended December 31, 2004 and as of and for the
three months ended March 31, 2005..

The Items of the Original Quarterly Report which are amended and restated are as
follows: Item 1 Financial Statements (including Notes 1, 9, 11, and 14 to
Consolidated Financial Statements), Item 2 Management's Discussion and Analysis
of Financial Condition and Results of Operations, and Item 4 Controls and
Procedures. Further, this Form 10-Q/A contains new Exhibits 31.1 and 31.2, dated
the date of the filing of this Form 10-Q/A.

The remaining Items contained within this Form 10-Q/A consist of all other Items
originally contained in the Original Quarterly Report. This Form 10-Q/A does not
reflect events occurring after the filing of the Original Quarterly Report, nor
modify or update those disclosures in any way other than as required to reflect
the effects of the restatement.


                                       2
<PAGE>
PART I
FINANCIAL INFORMATION

Item 1. Financial  Statements

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

<TABLE>
<CAPTION>

                                                                        March 31,                December 31,
                                                                           2005                      2004
                                                                       As Restated,              As Restated,
                                                                          Note 1                    Note 1
                                                                          ------                    ------
<S>                                                              <C>                         <C>
Current assets:
   Cash                                                               $          427            $         2,347
   Accounts receivable, net                                                    7,404                      7,839
   Inventories                                                                37,342                     37,959
   Other current assets                                                        3,786                      5,861
                                                                      ---------------           ----------------

     Total current assets                                                     48,959                     54,006

Property, plant and equipment, net                                            11,280                     10,771

Deferred financing costs                                                      12,478                     13,105

Goodwill                                                                     128,697                    128,697

Other intangible assets, net                                                  10,182                     10,293

Other assets                                                                  16,481                     15,526
                                                                      ---------------           ----------------

     Total assets                                                     $      228,077            $       232,398
                                                                      ===============           ================

Current liabilities:
   Accounts payable                                                   $        3,486            $         7,005
   Accrued expenses                                                            5,421                      4,642
   Accrued interest expense                                                    1,696                      6,274
   Deferred income taxes                                                       4,714                      4,801
   Revolving credit facility                                                  21,900                     14,500
                                                                      ---------------           ----------------

     Total current liabilities                                                37,217                     37,222

Notes payble and long-term debt                                              268,600                    266,622
Deferred income taxes                                                          5,293                      5,005
Postretirement benefits                                                        6,026                      6,061
Pension benefits and other long-term liabilities                               4,095                      4,013
                                                                      ---------------           ----------------

     Total liabilities                                                       321,231                    318,923
                                                                      ---------------           ----------------

Stockholders' Deficit:
   Common stock, voting, $.01 par value authorized shares,
    750,000; issued shares, 591,343, outstanding shares, 589,176,
    shares held in treasury, 2,167 in 2005; and issued and
    outstanding, 591,343 in 2004                                                   6                          6
   Additional paid-in capital                                                  5,322                      5,291
   Loans to stockholders for stock purchase                                     (100)                       (99)
   Accumulated other comprehensive income (loss)                              (1,351)                    (1,351)
   Accumulated deficit                                                       (97,031)                   (90,372)
                                                                      ---------------           ----------------

     Total stockholders' deficit                                             (93,154)                   (86,525)
                                                                      ---------------           ----------------

     Total liabilities and stockholders' deficit                      $      228,077            $       232,398
                                                                      ===============           ================
</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>
                                                                  Three months                   Three months
                                                                      Ended                          Ended
                                                                 March 31, 2005
                                                               As Restated, Note 1              March 31, 2004
                                                               --------------------           --------------------
<S>                                                         <C>                             <C>
Net sales                                                      $            27,347            $            22,105

Cost of sales                                                               13,154                         12,252
                                                               --------------------           --------------------
    Gross profit                                                            14,193                          9,853

Selling, general and administrative expenses                                10,435                         11,439
Restructuring charges                                                        1,896                              -
                                                               --------------------           --------------------
    Operating income (loss)                                                  1,862                         (1,586)

Interest expense and financing costs, net                                    7,550                          8,539
Other expense                                                                  770                             88
                                                               --------------------           --------------------
    Income (loss) before income tax expense (benefit)                       (6,458)                       (10,213)

Income tax expense (benefit)                                                   201                         (3,881)
                                                               --------------------           --------------------
    Net income (loss)                                                       (6,659)                        (6,332)

Preferred stock dividends                                                        -                         (1,613)
                                                               --------------------           --------------------
    Net income (loss) applicable to common shares              $            (6,659)           $            (7,945)
                                                               ====================           ====================

Basic and Diluted earnings per common share:
    Net income (loss)                                          $            (11.29)           $            (11.72)
    Preferred stock dividends                                                    -                          (2.98)
                                                               --------------------           --------------------
    Net income (loss) applicable to common shares              $            (11.29)           $            (14.70)
                                                               ====================           ====================
    Common stock dividends                                     $                 -            $            (4,884)
                                                               ====================           ====================

Basic and Diluted earnings per common share:
    Common stock dividends                                     $                 -            $             (9.04)
                                                               ====================           ====================

Weighted average common shares outstanding:
    Basic                                                                    589.6                          540.4
    Diluted                                                                  589.6                          540.4
</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>
                                                                    Three months                   Three months
                                                                       Ended                          Ended
                                                                   March 31, 2005
                                                                As Restated, Note 1               March 31, 2004
                                                                ---------------------           -------------------
<S>                                                           <C>                             <C>
Cash flows from operating activities:
Net income (loss)                                               $             (6,659)           $           (6,332)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
    Depreciation                                                                 217                           212
    Amortization of other intangible assets                                      111                           110
    Amortization of deferred financing costs                                     628                           687
    Amortization of interest on senior discount notes                          1,978                           963
    Deferred income taxes                                                        201                        (4,063)
    Stock compensation expense                                                    30                           100
    Changes in operating assets and liabilities:
      Accounts receivable, net                                                   435                         4,930
      Inventories                                                                617                        (4,582)
      Other current assets                                                     2,075                         1,052
      Other assets                                                              (955)                          (64)
      Accounts payable                                                        (3,519)                       (2,311)
      Accrued pension liabilities                                                 82                          (548)
      Accrued postretirement liabilities                                         (35)                          416
      Accrued expenses and other                                              (3,799)                        6,637
                                                                ---------------------           -------------------

      Net cash provided by (used in) operating activities                     (8,593)                       (2,793)
                                                                ---------------------           -------------------

Cash flows from investing activities:
    Capital expenditures                                                        (726)                         (182)
    Restricted cash                                                                -                      (160,162)
    Goodwill                                                                       -                           (38)
                                                                ---------------------           -------------------

      Net cash provided by (used in) investing activities                       (726)                     (160,382)
                                                                ---------------------           -------------------

Cash flows from financing activities:
    Proceeds from revolving credit facility                                    7,400                        14,100
    Proceeds from issuance of new senior notes, net                                -                       200,000
    Proceeds from issuance of senior discount notes                                -                        60,010
    Payment of financing costs                                                     -                        (9,420)
    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
Net loans to stockholders for stock purchases                                     (1)                            -
                                                                ---------------------           -------------------

      Net cash provided by (used in) financing activities                      7,399                       167,312
                                                                ---------------------           -------------------

      Net increase (decrease) in cash                                         (1,920)                        4,137

Cash, beginning of period                                                      2,347                           304
                                                                ---------------------           -------------------

Cash, end of period                                             $                427            $            4,441
                                                                =====================           ===================
</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.   RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

The Company is restating its consolidated financial statements to correct an
error in accounting for income taxes. During the fourth quarter of 2004, the
Company and its subsidiaries provided a full valuation allowance against its net
deferred tax assets. Following a review of the Company's deferred tax assets and
deferred tax liabilities, the Company determined that in calculating the
valuation allowance, deferred tax liabilities relating to inventories and
tax-deductible goodwill had been inappropriately netted against certain deferred
tax assets. It cannot be determined that the temporary differences related to
inventories and goodwill will reverse during the time period in which the
Company's temporary differences related to its deferred tax assets are expected
to reverse or expire. Therefore, these deferred tax liabilities should not have
been utilized to reduce the amount of the valuation allowance against deferred
tax assets. This resulted in an understatement of the valuation allowance in the
amount of these deferred tax liabilities of $9.8 million and $10.0 million as of
December 31, 2004 and March 31, 2005, respectively, and an understatement of
income tax expense of $9.8 million and $0.2 million as of and for the year ended
December 31, 2004 and as of and for the three months ended March 31, 2005,
respectively. The correction of this understatement has the effect of increasing
deferred tax liabilities, increasing accumulated deficit and decreasing net
income, with no effect on net cash flows, as of and for the year ended December
31, 2004 and as of and for the three months ended March 31, 2005.

The following tables represent the effect of the restatement on the Company's
Consolidated Financial Statements for the three months ended March 31, 2005:

<TABLE>
<CAPTION>

CONSOLIDATED BALANCE SHEET
--------------------------
                                                          As Previously
                                                             Reported           Adjustment          As Restated
                                                         -----------------    ----------------    ----------------
<S>                                                    <C>                  <C>                 <C>
Deferred income taxes - current                          $              -     $         4,714     $         4,714
Deferred income taxes - non-current                      $              -     $         5,293     $         5,293
Accumulated deficit                                      $        (87,024)    $       (10,007)    $       (97,031)


CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
                                                          As Previously
                                                             Reported           Adjustment          As Restated
                                                         -----------------    ----------------    -----------------

Income tax expense                                       $              -      $          201     $            201
Net income (loss) applicable to common shares            $         (6,458)     $         (201)    $         (6,659)
Basic and Diluted earnings per common share:
  Net income (loss) applicable to common shares          $         (10.95)     $        (0.34)    $         (11.29)


CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
                                                          As Previously
                                                             Reported           Adjustment          As Restated
                                                         -----------------    ----------------    -----------------

Net income (loss)                                        $         (6,458)    $          (201)    $         (6,659)
Deferred income taxes                                    $              -     $           201     $            201
</TABLE>


                                       6
<PAGE>
The following table represents the effect of the restatement on the Company's
Consolidated Balance Sheet as of December 31, 2004:

<TABLE>
<CAPTION>

CONSOLIDATED BALANCE SHEET
--------------------------
                                                        As Previously
                                                           Reported           Adjustment          As Restated
                                                       -----------------    ----------------    ----------------
<S>                                                  <C>                  <C>                  <C>
Deferred income taxes - current                        $              -     $        4,801      $        4,801
Deferred income taxes - non-current                    $              -     $        5,005      $        5,005
Accumulated deficit                                    $        (80,566)    $       (9,806)     $      (90,372)
</TABLE>

2.   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 the Company's 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 the Company's Annual Report on Form 10-K, as amended, for the year ended
December 31, 2004.

On February 9, 2004, North Atlantic Trading Company, Inc. a Delaware corporation
("NATC"), 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.


                                       7
<PAGE>
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 March 31, 2005, (i) 591,343 shares of the Company Common Stock were issued
and 589,176 were outstanding; and (ii) ten (10) shares of NATC Common Stock were
issued and outstanding.

3.   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 (the "New Credit Agreement") that provided 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 New Senior Notes and the Company Notes were offered
pursuant to Rule l44A and Regulation S and subsequently registered 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 of $155.0
million, plus interest accrued to the redemption date of April 2, 2004.

The proceeds from the offering of the New Senior Notes, along with borrowings
under the Senior Revolving Credit Facility (see Notes 7 and 8) 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., (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 $4.9 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 payments to certain
key employees and outside directors, and (6) pay fees and expenses of $12.8
million incurred in connection with the offerings.

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.

As of December 31, 2004 NATC would have failed to meet its original required
minimum fixed charge coverage ratio covenant for the period then ended due to
its operating results in 2004. This would have represented an event of default
under the terms of the New Credit Agreement. This covenant, however, was
eliminated pursuant to the March 30, 2005 amendment to the New Credit Agreement.
On January 19, 2005, the New Credit Agreement was amended to reduce the
revolving credit facility to $35.0 million.


                                       8
<PAGE>
The March 30, 2005 amendment to the New Credit Agreement modified the fixed
charge coverage ratio covenant, which now applies only to quarters ending June
30, 2005 and thereafter, and the minimum consolidated adjusted EBITDA covenant,
which now applies only to quarters ending from June 30, 2004 through March 31,
2005. The fixed charge coverage ratio definition was also amended to include any
future cash equity contributions to NATC. In addition, the amendment changed the
New Credit Agreement maturity date from February 28, 2007 to January 31, 2006.


4.   RESTRUCTURING

In January 2005, the Company engaged the management consulting firm of Alvarez
and Marsal, LLC ("A&M") to identify the potential for performance improvement
opportunities, and to provide for the services of Douglas P. Rosefsky as Chief
Financial Officer.

For the three months ended March 31, 2005, total restructuring charges amounted
to approximately $1.9 million, including, but not limited to, severance and
separation expenses and A&M fees.

In April 2005, the Company appointed Douglas P. Rosefsky (formally Chief
Financial Officer) as President and Chief Executive Officer, Thomas F. Helms,
Jr. (formally Chairman of the Board of Directors, President and Chief Executive
Officer) as Chairman of the Board of Directors, and Brian C. Harriss as Chief
Financial Officer.

5.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION: For the three months ended March 31, 2005, the condensed
consolidated financial statements include the accounts of the Company and its
subsidiaries. For the three months ended March 31, 2004, the condensed
consolidated statement of operations includes the accounts of the Company from
inception (February 9, 2004) through March 31, 2004 and the accounts of NATC and
its subsidiaries for January 1, 2004 through March 31, 2004. 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 $1.1
million and $0.8 million for the three months ended March 31, 2005 and 2004,
respectively.

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.


                                       9
<PAGE>
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. During April 2005, approximately $3.4 million
relating to 2004 sales was deposited. As of March 31, 2005 and December 31,
2004, the Company has recorded approximately $14.2 million and $13.2 million,
respectively, in Other assets. For the three months ended March 31, 2005,
approximately $1.0 million relating to 2005 sales was recorded in Other assets.

COMPREHENSIVE INCOME: The Company's Comprehensive income for the three months
ended March 31, 2005 and 2004 is equal to the Company's Net income (loss) for
the respective periods.


6.   INVENTORIES

Inventories are stated at the lower of cost or market. Cost is determined on the
last-in, first-out ("LIFO") method for approximately 97% 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.

For the three months ended March 31, 2005, inventory quantities were reduced.
This reduction resulted in a liquidation of LIFO inventory quantities carried at
higher costs prevailing in prior years as compared with the cost of 2004
purchases, the effect of which increased cost of goods sold and decreased net
income by approximately $0.4 million.

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


                                              03/31/05              12/31/04
                                         --------------         -------------
Raw materials and work in process        $       4,139          $      4,246
Leaf tobacco                                     7,631                 7,878
Finished goods - loose leaf tobacco              3,458                 3,069
Finished goods - MYO products                    8,121                 8,539
Other                                            2,153                 2,163
                                         --------------         -------------

                                                25,502                25,895
LIFO reserve                                    11,840                12,064
                                         --------------         -------------
                                         $      37,342          $     37,959
                                         ==============         =============


7.   COMPANY NOTES AND NEW SENIOR NOTES

The Company Notes and New Senior Notes are as follows (in thousands):

                                              3/31/05               12/31/04
                                          -------------          -------------
Company Notes                             $     68,600           $     66,622
New Senior Notes                               200,000                200,000
                                          -------------          -------------
                                          $    268,600           $    266,622
                                          =============          =============


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 debt relating principally to the acquisition
of Stoker, Inc.


                                       10
<PAGE>
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, 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, severally and fully and unconditionally 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):

                                            REDEMPTION
         YEAR                                 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 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.


                                       11
<PAGE>
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):

                                            REDEMPTION
         YEAR                                  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 112.250%
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
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
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.


                                       12
<PAGE>
8.   SENIOR REVOLVING CREDIT FACILITY

In connection with the refinancing, NATC also amended and restated its Old
Senior Credit Facility, resulting in a new $50.0 million (reducing to $40.0
million in August 2005) Senior Revolving Credit Facility with Bank One, N.A., as
agent (the "Agent Bank"), and LaSalle Bank, National Association. The New Credit
Agreement governing the new Senior Revolving Credit Facility includes a letter
of credit sublimit of $25.0 million and matures three years from the closing
date. NATC intends to use the Senior Revolving Credit Facility for working
capital and general corporate purposes. On January 19, 2005, the New Credit
Agreement was amended to reduce the Senior Revolving Credit Facility to $35.0
million. As of March 31, 2005 and December 31, 2004, NATC had borrowed $21.9
million and $14.5 million, respectively under the Senior Revolving 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, based, at NATC's option, on either the prime rate plus 1% or LIBOR plus
3%. 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 March 31, 2005, the weighted average interest
rate on borrowings under the New Credit Agreement was approximately 5.7%.

Under the New Credit Agreement, NATC is required to pay the lenders 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 The Company is also required to pay to the lenders letter of
credit fees equal to 3.00% per annum multiplied by the maximum amount available
from time to time to be drawn under such letters of credit issued under the New
Credit Agreement and to the lenders issuing letters of credit a fronting fee of
0.125% per annum multiplied by the aggregate face amount of letters of credit
outstanding during a fiscal quarter plus other customary administrative,
amendment, payment and negotiation charges in connection with such letters of
credit.

The New Credit Agreement required NATC and its subsidiaries to meet certain
financial tests, including a minimum fixed charge coverage ratio and a minimum
consolidated adjusted earnings before interest, taxes, dividends and
amortization ("EBITDA"). 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.


                                       13
<PAGE>
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.

On March 30, 2005, the New Credit Agreement was amended to modify the fixed
charge coverage ratio covenant, which now applies only to quarters ending June
30, 2005 and thereafter, and the minimum consolidated adjusted EBITDA covenant,
which now only applies to quarters ending from June 30, 2004 through March 31,
2005. The fixed charge coverage ratio definition was also amended to include any
future cash equity contributions to the Company. In addition, the amendment
changed the New Credit Agreement maturity date from February 28, 2007 to January
31, 2006.

NATC was in full compliance with all provisions of the New Credit Agreement as
of March 31, 2005.

Looking forward, due to the lower than anticipated operating performance of the
Company's core business and increased net expenses resulting from the Company's
developmental activities relating to Zig-Zag Premium Cigarettes, 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 ending June 30, 2005 and thereafter without the contribution of
additional equity into NATC. In the event that such covenant is breached, NATC
would be in default under the New Credit Agreement, pursuant to which the
lenders would have all rights and remedies available to them at that time,
including the right to accelerate payment of all obligations thereunder. Such an
acceleration would also trigger an event of default under the indentures
governing the New Senior Notes and the Company Notes, allowing an acceleration
of the obligations therunder. In the case of both the New 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 New 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. No adjustments have
been recorded relating to any balance sheet classification of the New Senior
Notes and Company Notes. Although there can be no assurance, NATC believes that
it will be able to successfully negotiate new senior secured financing on
reasonably acceptable terms, refinance out the existing lenders and avoid a
default under the New Credit Agreement, as amended. The Company is wholly
dependent on NATC to service its debt and other obligations.


9.   PROVISION FOR INCOME TAXES

The Company has determined that at March 31, 2005, its ability to realize future
benefits of net deferred tax assets does not meet the "more likely than not"
criteria in SFAS No. 109, "Accounting for Income Taxes"; therefore, a valuation
allowance continues to be recorded. Deferred income tax liabilities are provided
relating to inventories and tax-deductible goodwill that is not amortized for
financial reporting.



                                       14
<PAGE>
10.  PENSION AND POSTRETIREMENT BENEFIT PLANS

The components of Net Periodic Benefit Cost for the three months ended March 31
are as follows (in thousands):

<TABLE>
<CAPTION>
                                             PENSION BENEFITS                    OTHER BENEFITS
                                      --------------------------------    ----------------------------
                                           2005              2004             2005             2004
                                      ---------------    -------------    -------------    -----------

<S>                                  <C>                <C>             <C>             <C>
Service cost                          $           11     $        56      $         40     $      241
Interest cost                                    194              185               37            226
Expected return of plan assets                  (126)            (212)               -              -
Curtailment gain                                   -             (264)               -              -
Amortization of net (gain) loss                   25               28               17            102
                                      ---------------    -------------    -------------    -----------
Net periodic pension cost             $          104     $       (207)    $         94     $      569
                                      ===============    =============    =============    ===========
</TABLE>

NATC has a defined benefit pension plan covering substantially all of its hourly
employees. Benefits for the hourly employees' plan are based on a stated benefit
per year of service, reduced by amounts earned in a previous plan.

Effective June 30, 2004 and July 31, 2004, NATC 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 $3,811. NATC expects to contribute
approximately $500 to its postretirement plan in 2005 for the payment of
benefits. Plan contributions and benefits have amounted to $131 for the three
months ended March 31, 2005. Based upon the above decision, management believes
that any future contributions will not be material.


11.  RECONCILIATION OF INCOME (LOSS) PER COMMON SHARE (DOLLARS AND SHARES IN
     THOUSANDS, EXCEPT PER SHARE AMOUNTS)


THREE MONTHS ENDED MARCH 31, 2005, AS RESTATED, NOTE 1
------------------------------------------------------
<TABLE>
<CAPTION>
                                                             Income             Shares             Per Share
                                                           (Numerator)       (Denominator)          Amount
                                                          --------------    ----------------    ----------------
<S>                                                     <C>                <C>                 <C>
Basic and Diluted:
Net loss                                                  $      (6,659)
                                                          --------------

Net income applicable to common shares                    $      (6,659)              589.6     $        (11.29)
                                                          ==============    ================    ================
</TABLE>

                                       15
<PAGE>
THREE MONTHS ENDED MARCH 31, 2004
---------------------------------
<TABLE>
<CAPTION>

                                                             Income              Shares            Per Share
                                                           (Numerator)       (Denominator)           Amount
                                                          --------------    -----------------   -----------------
<S>                                                      <C>                <C>                <C>
Basic and Diluted:
Net loss                                                  $      (6,332)
Less: preferred stock dividends                                  (1,613)
                                                          --------------

Net income applicable to common shares                    $      (7,945)               540.4    $         (14.70)
                                                          ==============    =================   =================
</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.

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 three months ended March 31, 2005 and 2004,
respectively.


12.  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued SFAS No. 123R (Revised 2004), "Accounting for
Stock Based Compensation" ("SFAS No. 123R"). SFAS No. 123R establishes standards
for the accounting for transactions in which an entity exchanges its equity
instruments for goods or services. It also addresses transactions in which an
entity incurs liabilities in exchange for goods or services that are based on
the fair value of the entity's equity instruments or that may be settled by the
issuance of those equity instruments. SFAS No. 123R eliminates the alternative
to use APB 25's intrinsic value method of accounting that was provided in SFAS
No. 123 as originally issued. SFAS No. 123R requires entities to recognize the
cost of employee services received in exchange for awards of equity instruments
based on the grant-date fair value of those awards (with limited exceptions).
That cost will be recognized over the period during which an employee is
required to provide service in exchange for the award or the vesting period. No
compensation cost is recognized for equity instruments for which employees do
not render the requisite service. A public entity will initially measure the
cost of liability based service awards based on their current fair value; the
fair value of those awards will be remeasured subsequently at each reporting
date through the settlement date. Changes in fair value during the requisite
service period will be recognized as compensation cost over that period. The
provisions of SFAS No. 123R shall become effective for the Company in the first
quarter of 2006 and will apply to all awards granted after June 30, 2005 and to
awards modified, repurchased, or cancelled after that date. The Company is
evaluating SFAS No. 123R and believes it will not have a material effect on
financial results of operations.

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment
of ARB No. 43, Chapter 4," to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and wasted material (spoilage).
SFAS No. 151 requires that items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal" that was
previously stated in ARB No. 43, Chapter 4. In addition, SFAS No. 151 requires
that allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. The provisions of
this statement shall be effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. The Company does not expect SFAS No. 151 to
have a material impact on the Company's financial condition or results of
operations.


                                       16
<PAGE>
In December 2004, the FASB issued two FASB Staff Positions ("FSP") regarding the
accounting implications of the American Jobs Creation Act of 2004 (the "Act").
The Act provides a deduction for income from qualified domestic production
activities, which will be phased in from 2005 through 2010. In return, the Act
also provides for a two-year phase-out of the existing extra-territorial income
exclusion ("ETI") for foreign sales. Under the guidance in FSP No. FAS 109-1,
"Application of FASB Statement 109, `Accounting for Income Taxes,' to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004," the deduction will be treated as a "special deduction" as
described in FASB Statement No. 109. As such, the special deduction has no
effect on deferred tax assets and liabilities existing at the enactment date.
FSP No. FAS 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of 2004," was
effective for the first quarter of 2005 and had no material impact on the
Company's Condensed Consolidated Financial Statements.

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. In January
2005, the Centers for Medicare and Medicaid Services released the final
regulations implementing the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003. FSP No. 106-2 provides guidance to employers that
have determined that prescription drug benefits available under their retiree
health care benefit plans are at least actuarially equivalent to Medicare Part
D. The Company's postretirement healthcare plans provide for prescription drug
benefits for certain participants. Due to the limited number of participants in
the Company's Hourly postretirement healthcare plans that are affected by the
Act, the adoption of FSP No. 106-2 did not have a material impact on the
Company's financials.

13.  CONTINGENCIES

LITIGATION WITH REPUBLIC TOBACCO

On July 15, 1998, North Atlantic Operating Company, Inc. ("NAOC") and National
Tobacco Company, L.P. ("NTC"), which are subsidiaries of the Company, 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.


                                       17
<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 the Company'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.


                                       18
<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 during the third quarter of 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. On November 30, 2004, the Court of Appeals
ruled that the application for costs should be directed to the District Court.
On December 17, 2004, NATC filed this motion with the District Court. 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, the Company'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 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 and law enforcement
authorities 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.

                                       19
<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 during the third
quarter of 2004. The Import Warehouse Defendants filed a notice of appeal on
July 24, 2004. No briefing schedule has been established.


                                       20
<PAGE>
LITIGATION RELATED TO ALLEGED PERSONAL INJURY

West Virginia Complaints. 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.


                                       21
<PAGE>
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 West Virginia Supreme Court has accepted review of the case
management order and the plaintiffs filed the brief on March 24, 2005. 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.

In addition to the above described legal proceedings, the Company is subject to
other litigation in the ordinary course of its business. The Company does not
believe that any of these other proceedings will have a material adverse effect
on the results of operations, financial position or cash flows of the Company.
For a description of regulatory matters and related industry litigation to which
the Company is a party, see Part I, Item 1. "Business--Regulation" In the
Company's Annual Report on Form 10-K, as amended, for the year ended December
31, 2004.

OTHER EMPLOYMENT MATTERS

The Company may, from time to time, have claims from and make settlements with
former officers or employees.


                                       22
<PAGE>
David I. Brunson, the former President, Chief Financial Officer and Treasurer of
the Company, resigned from the Company effective January 19, 2005, at which time
his employment agreement with the Company (the "Brunson Employment Agreement")
was effectively terminated. Pursuant to the Brunson Employment Agreement, the
Company is required to make certain severance payments to Mr. Brunson, including
$425,000, which was paid within ten business days after January 19, 2005, and an
additional $425,000 payable within the next 12 months. In addition, Mr. Brunson
may become entitled to a bonus payment of up to $725,000 relating to synergies
achieved in the integration of the business of Stoker, Inc. that was acquired by
the Company in 2003. Pursuant to the Brunson Employment Agreement, after the
last severance payment is made, Mr. Brunson will have an option to require the
Company to repurchase all or a portion of his shares of Parent at their fair
market value. The Company will not be obligated to repurchase these shares if,
upon or after the payment, it would be in default under any instrument,
agreement or law by which it is bound; in this case, the repurchase may be
deferred until it can be completed without such default. Similarly, the Company
has an option to repurchase Mr. Brunson's shares at their fair market value. In
the event the Company and Mr. Brunson are unable to agree upon the fair market
value of these shares, an independent investment banking firm will be selected
to determine such fair market value, in accordance with the procedure provided
for by the Brunson Employment Agreement. If neither Mr. Brunson nor the Company
exercise their respective options by the earliest of the fifth anniversary of
the termination of Mr. Brunson's employment or the date on which the Company
refinances, or uses proceeds derived from refinancing, certain of its
obligations, the Company will be required to repurchase Mr. Brunson's shares on
such date unless Mr. Brunson waives his right to require the Company to purchase
his shares. Any liability is deemed, at this time, not to be material to the
Company's Condensed Consolidated Financial Statements.

During the first quarter of 2005, the Company recorded approximately $1.1
million relating to the resignation of Mr. Brunson. Any options or shares of
restricted stock granted to Mr. Brunson vested in full as of the date of such
resignation.

As part of the A&M agreement, as amended in April 2005, the Company will pay a
cash incentive fee to A&M upon the closing of the refinancing of the Company's
existing revolving credit facility equal to 0.5% of the total commitment amount
of the refinancing (reduced by $50,000 per month for the period from April 11,
2005 to the date of such refinancing). A&M is also entitled to a fee based on
improvement in the Company's financial performance as measured against the
Company's 2005 Business Plan, to be paid upon the termination of the engagement.
One portion of the fee will be a specified percentage of the sustainable
annualized EBITDAR improvement, as defined, and the other portion of the fee
will be an amount to be determined by the Board of Directors of the Company in
their reasonable judgment for significant and sustainable improvement in working
capital investment and management, in each case as measured against the
Company's 2005 Business Plan. As of March 31, 2005, no related liability or
expense has been recorded.


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


                                       23
<PAGE>
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 and restructuring charges
("Adjusted EBITDAR").

The table below presents financial information about reported segments for the
three months ended March 31, 2005 and 2004, respectively (in thousands):

<TABLE>
<CAPTION>

       FOR THE                                 MAKE             PREMIUM
 THREE MONTHS ENDED:        SMOKELESS          YOUR          MANUFACTURED
    MARCH 31, 2005           TOBACCO            OWN           CIGARETTES           OTHER         ELIMINATIONS        TOTAL
-----------------------   --------------    ------------    ----------------    -------------    -------------    -------------
<S>                     <C>                <C>             <C>                <C>               <C>             <C>
Net sales                 $       9,835     $    16,139     $           180     $      1,193     $          -     $     27,347
Operating income                    574           4,112                (985)          (1,839)               -            1,862
Adjusted EBITDAR                  1,131           4,126                (956)             127                -            4,428
Assets                           58,292         278,642               2,775           33,893         (145,525)         228,077

    MARCH 31, 2004
-----------------------

Net sales                 $      11,240     $     9,560      $           16     $      1,289     $          -      $    22,105
Operating income                  1,665          (1,732)             (1,395)            (124)               -           (1,586)
Adjusted EBITDAR                  4,406          (1,623)             (1,373)             (57)               -            1,353
Assets                           72,706         274,287               2,982           12,826           57,894          420,695
</TABLE>

The table set forth below is a reconciliation of the Company's Net income (loss)
to Adjusted EBITDAR for the three months ended March 31, 2005 and 2004,
respectively (in thousands):

<TABLE>
<CAPTION>
                                                           FOR THE THREE MONTHS ENDED:
                                                                    MARCH 31
                                                         -----------------------------------
                                                              2005                2004
                                                         ----------------    ---------------
<S>                                                     <C>                <C>
Net income (loss), as restated                           $        (6,659)    $       (6,332)
Interest expense, net and amortization
of deferred financing fees                                         7,550              8,539
Income tax expense (benefit)                                         201             (3,881)
Depreciation                                                         217                212
Other expense                                                        770                 88
LIFO adjustment                                                      225                225
Stock option compensation expense                                     30                100
Postretirement/pension expense                                       198                295
Restructuring charges                                              1,896                  -
Incentive payments in conjunction
 with recapitalization                                                 -              2,107
                                                         ----------------    ---------------

Adjusted EBITDAR                                         $         4,428     $        1,353
                                                         ================    ===============
</TABLE>

                                       24
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

During the fourth quarter of 2004, the Company and its subsidiaries provided a
full valuation allowance against its net deferred tax assets. Following a review
of the Company's deferred tax assets and deferred tax liabilities, the Company
determined that in calculating the valuation allowance, deferred tax liabilities
relating to inventories and tax-deductible goodwill had been inappropriately
netted against certain deferred tax assets. It cannot be determined that the
temporary differences related to inventories and goodwill will reverse during
the time period in which the Company's temporary differences related to its
deferred tax assets are expected to reverse or expire. Therefore, these deferred
tax liabilities should not have been utilized to reduce the amount of the
valuation allowance against deferred tax assets. This resulted in an
understatement of the valuation allowance in the amount of these deferred tax
liabilities of $9.8 million and $10.0 million as of December 31, 2004 and March
31, 2005, respectively, and an understatement of income tax expense of $9.8
million and $0.2 million as of and for the year ended December 31, 2004 and as
of and for the three months ended March 31, 2005, respectively. The correction
of this understatement has the effect of increasing deferred tax liabilities,
increasing accumulated deficit and decreasing net income, with no effect on net
cash flows, as of and for the year ended December 31, 2004 and as of and for the
three months ended March 31, 2005. All amounts have been restated to reflect
this change.

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, 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 MARCH 31, 2005 AND 2004

Net Sales. Net sales for the three months ended March 31, 2005 were $27.3
million, an increase of $5.2 million or 23.5% from the corresponding period of
the prior year.

Net sales of the smokeless tobacco segment for the current period decreased $1.4
million or 12.5% from the corresponding period of the prior year. The volume of
the Company's brands declined 14.1% in net cases due to promotional activity
during the first quarter of 2004 as compared to limited promotional activity
during the first quarter of 2005, coupled with a continuing decline in the
segment.

Net sales of the Company's MYO segment increased $6.6 million or 68.8% in
comparison to the corresponding period of the prior year. Within the MYO
segment, premium cigarette paper sales increased $6.2 million or 155.0% from the
corresponding period of the prior year due to the timing in significant
promotional activities occurring in the fourth quarter of 2003 resulting in
weakened sales during the first quarter of 2004. The MYO cigarette tobaccos and
related product sales increased $0.4 million or 7.1% in comparison to the
corresponding period of the prior year. The aggregate volume in net cases
increased 15.8% reflecting higher sales of lower price product.


                                       25
<PAGE>
Gross Profit. Gross profit for the three months ended March 31, 2005 totaled
$14.2 million, an increase of $4.3 million or 43.4% from the corresponding
period of the prior year.

Gross profit of the smokeless tobacco segment decreased $0.5 million or 10.0%
from the corresponding period of the prior year. Gross margin for this segment
increased to 45.9% of net sales for the current period from 44.2% in the
corresponding period of the prior year due several factors, including lower
manufacturing costs per case.

Gross profit of the MYO segment for the current period increased $4.5 million or
100.0% in comparison to the corresponding period of the prior year. The gross
margin of the MYO segment increased to 55.6% of net sales for the current period
in comparison to 46.9% for the corresponding period of the prior year. This
increase in gross margin was due principally to product mix resulting from
increased sales of its higher premium cigarette papers.

Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses for the three months ended March 31, 2005 were $10.4
million, a decrease of $1.0 million or 8.8% in comparison to the corresponding
period of the prior year. Of this decrease, $2.1 million relates to management
incentive payments incurred in conjunction with the refinancing in February
2004, offset by increased legal and professional fees of $0.6 million, freight
of $0.4 million and other of $0.1 million.

Interest Expense and Amortization of Financing Costs. Interest expense and
amortization of financing costs decreased $1.0 million or 11.6% to $7.6 million
for the three months ended March 31, 2005 as compared to the corresponding
period of the prior year. This decrease was due principally to the write off of
old deferred financing costs during the first quarter of 2004, relating to the
recapitalization and reorganization consummated in February 2004, as more fully
described in Note 3 to the Condensed Consolidated Financial Statements contained
herein.

Other Income (Expense). Other expense was $0.8 million for the three months
ended March 31, 2005 as compared to an expense of $0.1 million during the
corresponding period of the prior year. This increase relates principally to
higher litigation and related expenses associated with counterfeiting activity.

Restructuring Charges. For the three months ended March 31, 2005, total
restructuring charges amounted to approximately $1.9 million, including, but not
limited to, severance and separation expenses and A&M fees. The Company
anticipates incurring additional expenses relating to the restructuring during
2005.

Income Tax Benefit (Expense). The Company has determined that at December 31,
2004, its ability to realize future benefits of net deferred tax assets does not
meet the "more likely than not" criteria in SFAS No. 109, "Accounting for Income
Taxes". Therefore, only deferred tax expense related to inventories and
tax-deductible goodwill is being recorded in 2005. Tax expense of $0.2 million
for the three months ended March 31, 2005 was recorded, compared to a benefit of
$3.9 million for the corresponding period of the prior year. As of March 31,
2005, a valuation allowance continues to be recorded. The effective income tax
rate for the three months ended June 30, 2004 was 38.0%.


                                       26
<PAGE>
Net Income (Loss). Due to the factors described above, net loss for the three
months ended March 31, 2005 was $6.7 million compared to $6.3 million for the
corresponding period of the prior year.


                         LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2005, working capital was $11.7 million compared to $16.8 million
at December 31, 2004. This decrease was the result of decreased other current
assets of $2.1 million, decreased inventory of $0.6 million, decreased accounts
receivable of $0.4 million, lower cash balance of $1.9 million, an increase in
the revolving credit facility of $7.4 million offset by decreased accrued
liabilities of $3.8 million, decreased accounts payable of $3.5 million and
decreased deferred tax liabilities of $0.1 million.

For the three months ended March 31, 2005, net cash used in operating activities
was $8.6 million compared with $2.7 million in the corresponding period of the
prior year. The change was due primarily to the payment of interest relating to
the New Senior Notes partially offset by a decrease in accounts receivable.

For the three months ended March 31, 2005, net cash used in investing activities
was $0.7 million compared with $160.4 million in the corresponding period of the
prior year. The change was due primarily to the restricted cash used to pay off
the Old Senior Notes in April 2004, relating to the refinancing in February
2004.

For the three months ended March 31, 2005, net cash provided by financing
activities was $7.4 million compared with $167.3 million in the corresponding
period of the prior year. The change was due primarily to the refinancing in
February 2004.

As more fully discussed below (under "Senior Revolving Credit Facility/New
Credit Agreement") and in Note 8 to the Condensed Consolidated Financial
Statements contained in Item 1 of this report, the Company anticipates that NATC
will not likely meet its fixed charge coverage ratio covenant under the New
Credit Agreement for the rolling four quarter periods ending June 30, 2005 and
thereafter without the contribution of additional equity into NATC.

NATC expects to be able to fund its seasonal working capital requirements
through its operating cash flows and, if needed, bank borrowings under the
Senior Revolving Credit Facility and, if necessary and subject to the Company's
ability to refinance, borrowings under the facility provided by such
refinancing. As of March 31, 2005, NATC had additional availability of $13.1
million under the revolving credit portion of its New Credit Agreement.

For the three months ending March 31, 2005, capital expenditures totaled
approximately $0.7 million. The Company believes that its capital expenditure
requirements for 2005 will be approximately $3.0-5.0 million due to the Stoker
integration, 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, bank borrowings under the
Senior Revolving Credit Facility and, if necessary and subject to the Company's
ability to refinance, borrowings under the facility provided by such
refinancing.


                                       27
<PAGE>
SENIOR REVOLVING CREDIT FACILITY / NEW CREDIT AGREEMENT
-------------------------------------------------------

The New Credit Agreement required NATC and its subsidiaries to meet certain
financial tests, including a four-quarter rolling minimum fixed charge coverage
ratio for quarters ending June 30, 2005 and thereafter.

Looking forward, due to the lower than anticipated operating performance of the
Company's core business and increased net expenses resulting from the Company's
developmental activities relating to Zig-Zag Premium Cigarettes, 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 ending June 30, 2005 and thereafter without the contribution of
additional equity into NATC. In the event that such covenant is breached, NATC
would be in default under the New Credit Agreement, pursuant to which the
lenders would have all rights and remedies available to them at that time,
including the right to accelerate payment of all obligations thereunder. Such an
acceleration would also trigger an event of default under the indentures
governing the New Senior Notes and the Company Notes, allowing an acceleration
of the obligations therunder. In the case of both the New 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 New 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. No adjustments have
been recorded relating to any balance sheet classification of the New Senior
Notes and Company Notes. Although there can be no assurance, NATC believes that
it will be able to successfully negotiate new senior secured financing on
reasonably acceptable terms, refinance out the existing lenders and avoid a
default under the New Credit Agreement, as amended. The Company is wholly
dependent on NATC to service its debt and other obligations.

For a general description of the New Credit Agreement and the Senior Revolving
Credit Facility, as well as the Company Notes and the New Senior Notes, see
Notes 7 and 8 to the Condensed Consolidated Financial Statements included herein
which information is incorporated herein by reference.

CONTRACTUAL OBLIGATIONS
-----------------------

Certain contractual obligations are summarized in our Annual Report on Form
10-K, as amended, for the year ended December 31, 2004 under the heading
"Contractual Obligations" in "Management's Discussion and Analysis of Financial
Condition and Results of Operations." As of March 31, 2005, there had been no
material changes outside the ordinary course of our business in such contractual
obligations from December 31, 2004.


                                       28
<PAGE>
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 affect 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 comply with certain New Credit Agreement financial covenants, extend
the maturity date of the New Credit Agreement or obtain alternative financing,
and its ability to implement its business strategy successfully, which may 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 current 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.

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 what was previously disclosed in
the Company's Form 10-K, as amended, for the year ended December 31, 2004.


ITEM 4. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures
----------------------------------

The Company's management, with the participation of the Company's principal
executive and principal financial officers, 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 March 31, 2005. In connection with the restatement
described in Note 1 to the Company's consolidated financial statements,
management determined that there was a material weakness in the Company's
internal control over financial reporting as of March 31, 2005, as more fully
described below. Based on their evaluation, the Company's principal executive
and principal financial officers concluded that the Company's disclosure
controls and procedures were not effective as of March 31, 2005 because of the
material weakness discussed below.


                                       29
<PAGE>
Restatement of Previously Issued Consolidated Financial Statements
------------------------------------------------------------------

During the fourth quarter of 2004, the Company and its subsidiaries provided a
full valuation allowance against its net deferred tax assets. Following a review
of the Company's deferred tax assets and deferred tax liabilities, the Company
determined that in calculating the valuation allowance, deferred tax liabilities
relating to inventories and tax-deductible goodwill had been inappropriately
netted against certain deferred tax assets. It cannot be determined that the
temporary differences related to inventories and goodwill will reverse during
the time period in which the Company's temporary differences related to its
deferred tax assets are expected to reverse or expire. Therefore, these deferred
tax liabilities should not have been utilized to reduce the amount of the
valuation allowance against deferred tax assets. This resulted in an
understatement of the valuation allowance in the amount of the deferred tax
liabilities of $9.8 million and $10.0 million as of December 31, 2004 and March
31, 2005, respectively, and an understatement of income tax expense of $9.8
million and $0.2 million for the year ended December 31, 2004 and for the three
months ended March 31, 2005, respectively. The correction of this understatement
has the effect of increasing deferred tax liabilities, increasing accumulated
deficit and decreasing net income, with no effect on net cash flows, as of and
for the year ended December 31, 2004 and as of and for the three months ended
March 31, 2005.

The Company evaluated the materiality of the correction on its consolidated
financial statements using the guidelines of Staff Accounting Bulletin No. 99,
"Materiality" and concluded that the effects of the corrections were material to
its consolidated financial statements as of and for the year ended December 31,
2004 and as of and for the three months ended March 31, 2005. As a result, the
Company concluded that it will restate such previously issued consolidated
financial statements to recognize the impact of the correction. See Note 1 -
Restatement of Consolidated Financial Statements, in the notes to the
consolidated financial statements included under Item 1 within this Quarterly
Report on Form 10-Q/A.

Internal Control Over Financial Reporting
-----------------------------------------

The Company has determined that, as of December 31, 2004, it had a deficiency in
internal controls over the valuation of deferred income tax assets.
Specifically, the Company did not have adequate controls over the accounting for
and the review and approval of income tax related financial statement accounts
requiring a significant degree of technical knowledge related to deferred tax
assets and liabilities. As a result of the ineffective review, an error in the
deferred tax valuation allowance was not detected prior to the issuance of the
2004 consolidated financial statements. This control deficiency resulted in the
restatement of the Company's 2004 annual and first quarter 2005 consolidated
financial statements as described in Note 1 to the consolidated financial
statements. In addition, unless effectively remediated, this control deficiency
could result in a misstatement to deferred tax valuation allowance that could
result in a material misstatement to the annual or interim financial statements.
Accordingly, management determined that this control deficiency constitutes a
material weakness. A material weakness is a control deficiency, or combination
of control deficiencies, that results in a more than remote likelihood that a
material misstatement of the annual or interim financial statements will not be
prevented or detected.

Management's Remediation Plan
-----------------------------

The Company is in the process of determining the remedial steps necessary to
eliminate the material weakness relating to financial disclosure controls that
resulted in the restatement and intends to engage the services of consultants
with appropriate levels of income tax accounting knowledge to assist in the
review of complex tax matters.


                                       30
<PAGE>
Changes in Internal Control
---------------------------

Other than the changes discussed above, 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 March 31, 2005, that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting. However, subsequent to August 11, 2005, the Company is in
the process of determining the remedial steps necessary to eliminate the
material weakness relating to financial disclosure controls that resulted in the
restatement and intends to engage the services of consultants with appropriate
levels of income tax accounting knowledge to assist in the review of complex tax
matters.



                                     PART II
                                OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS
         -----------------

Reference is made to the information contained in Note 13 to the Condensed
Consolidated Financial Statements included herein, which information is
incorporated herein by reference.


ITEM 6.   EXHIBITS
          --------


         10.1       Employment Agreement, dated March 10, 2005, between North
                    Atlantic Trading Company, Inc. and Brian Harriss (supersedes
                    the Employment Agreement, dated March 10, 2005, between
                    North Atlantic Trading Company, Inc. and Brian Harriss,
                    attached as Exhibit 10.1 to the Company's Current Report on
                    Form 8-K filed with the U.S. Securities and Exchange
                    Commission on April 14, 2005) (incorporated herein by
                    reference to Exhibit 10.1 to the Registrant's Quarterly
                    Report on Form 10-Q for the quarter ended March 31, 2005
                    filed with the Securities and Exchange Commission on May 16,
                    2005).

         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.


          *         The Certifications by the Chief Executive Officer and Chief
                    Financial Officer pursuant to 18 U.S.C. ss. 1350, as adopted
                    by Section 906 of the Sarbanes-Oxley Act of 2002, are no
                    longer included because the registrant is no longer required
                    to file reports pursuant to Section 15(d) of the Securities
                    Exchange Act of 1934.


                                       31
<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: August 19, 2005                /s/ Douglas P. Rosefsky
                                    --------------------------------------------
                                    Douglas P. Rosefsky
                                    Chief Executive Officer

                                     /s/ Brian C. Harriss
                                    --------------------------------------------
                                    Brian C. Harriss
                                    Chief Financial Officer






                                       32
<PAGE>
                                  EXHIBIT INDEX

         No.        Description
         ---        -----------

        10.1        Employment Agreement, dated March 10, 2005, between North
                    Atlantic Trading Company, Inc. and Brian Harriss (supersedes
                    the Employment Agreement, dated March 10, 2005, between
                    North Atlantic Trading Company, Inc. and Brian Harriss,
                    attached as Exhibit 10.1 to the Company's Current Report on
                    Form 8-K filed with the U.S. Securities and Exchange
                    Commission on April 14, 2005) (incorporated herein by
                    reference to Exhibit 10.1 to the Registrant's Quarterly
                    Report on Form 10-Q for the quarter ended March 31, 2005
                    filed with the Securities and Exchange Commission on May 16,
                    2005).

        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.

          *         The Certifications by the Chief Executive Officer and Chief
                    Financial Officer pursuant to 18 U.S.C. ss. 1350, as adopted
                    by Section 906 of the Sarbanes-Oxley Act of 2002, are no
                    longer included because the registrant is no longer required
                    to file reports pursuant to Section 15(d) of the Securities
                    Exchange Act of 1934.


                                       33