SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K


(MARK ONE)

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

           FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

                                       OR

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

           FOR THE TRANSITION PERIOD FROM _______________ TO _______________.


COMMISSION FILE NUMBER 333-31931


                      NORTH ATLANTIC TRADING COMPANY, INC.
                      ------------------------------------
             (Exact name of registrant as specified in its charter)

            DELAWARE                                          13-3961898
 ------------------------------                           ------------------
(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)


Registrant's telephone number, including area code:  (212) 253-8185

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]  No [ ].

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy materials or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

As of February 28, 2002, the only class of voting or non-voting common equity
issued and outstanding is the Registrant's Voting Common Stock, par value $.01
per share, 100% of which is owned by 43 holders of record, 35 of whom are
affiliates or employees of the Registrant. There is no trading market for the
Voting Common Stock.

As of February 28, 2002, 528,241 shares of the Registrant's Voting Common Stock,
par value $.01 per share, and no shares of the Registrant's Non-Voting Common
Stock, par value $.01 per share, were outstanding.



NY2:\1139832\01\_F$001!.DOC\64980.0003
<PAGE>
                      North Atlantic Trading Company, Inc.
                          2001 Form 10-K Annual Report


                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                                          PAGE
                                                                                                          ----
<S>                                                                                                       <C>
PART I                                                                                                        3
Item 1.   Business..........................................................................................3
          --------
Item 2.   Properties.......................................................................................13
          ----------
Item 3.   Legal Proceedings................................................................................14
          -----------------
Item 4.   Submission of Matters to a Vote of Security Holders..............................................20
          ---------------------------------------------------

PART II                                                                                                      20
Item 5.   Market for Registrant's Common Stock and Related Stockholder Matters.............................20
          --------------------------------------------------------------------
Item 6.   Selected Financial Data..........................................................................21
          -----------------------

Consolidated Selected Financial Data                                                                         21
Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations............23
          -------------------------------------------------------------------------------------
Item 7A.  Quantitative and Qualitative Disclosures about Market Risk.......................................30
          ----------------------------------------------------------
Item 8.   Financial Statements and Supplementary Data......................................................31
          -------------------------------------------
Item 9.   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.............31
          ------------------------------------------------------------------------------------

PART III                                                                                                     31
Item 10.  Directors and Executive Officers of the Registrant...............................................31
          --------------------------------------------------
  Name                                                                                                       31
Item 11.  Executive Compensation...........................................................................33
          ----------------------

STOCK OPTIONS                                                                                                34

EMPLOYMENT AGREEMENTS                                                                                        34
Item 12.  Security Ownership of Certain Beneficial Owners and Management...................................40
          --------------------------------------------------------------
Item 13.  Certain Relationships and Related Transactions...................................................43
          ----------------------------------------------

PART IV                                                                                                      44
Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................44
          ----------------------------------------------------------------
INDEX TO FINANCIAL STATEMENTS..............................................................................44

INDEX TO EXHIBITS                                                                                            45

SIGNATURES                                                                                                   52

</TABLE>

<PAGE>
                                     PART I

Item 1.      Business

OVERVIEW

           North Atlantic Trading Company, Inc. (the "Company") is a holding
company, which is organized under the laws of the State of Delaware. The Company
has two significant wholly owned subsidiaries: National Tobacco Company, L.P.
("National Tobacco") and North Atlantic Operating Company, Inc. ("NAOC").
National Tobacco is the third largest manufacturer and marketer of loose leaf
chewing tobacco in the United States, selling its products under the brand names
BEECH-NUT REGULAR, BEECH-NUT Wintergreen, TROPHY, HAVANA BLOSSOM and DURANGO.
NAOC is the largest importer and distributor in the United States of premium
cigarette papers and related products, which are sold under the ZIG-ZAG brand
name pursuant to an exclusive long-term distribution agreement with Bollore,
S.A. ("Bollore"). NAOC also contracts for the manufacture of and distributes
Make-Your-Own ("MYO") smoking tobaccos and related products under the ZIG-ZAG
brand name, pursuant to its trademarks.

EVOLUTION OF THE COMPANY

           The Company was formed in 1997 to facilitate a corporate
reorganization and related financing in connection with the simultaneous
acquisition of NATC Holdings USA, Inc. ("NATC") and its ZIG-ZAG business (the
"Acquisition"). Prior to the Acquisition, National Tobacco and its corporate
general partner, National Tobacco Finance Corporation ("NTFC"), were wholly
owned subsidiaries of NTC Holding, LLC, a Delaware limited liability company
("LLC"). All of the outstanding interests in LLC, together with certain
subordinated debt obligations, were acquired by the Company in connection with
the Acquisition. LLC transferred all of its assets to the Company, including the
limited and general partnership interests in National Tobacco, and was
subsequently dissolved.

           In 1988, Thomas F. Helms, Jr., Chairman and Chief Executive Officer,
and an investor group led by Lehman Brothers, formed National Tobacco to acquire
the smokeless tobacco division of Lorillard, which had introduced the popular
BEECH-NUT brand in 1897. Together with the management team he assembled in
connection with this initial buyout, Mr. Helms participated in two subsequent
leveraged buyouts prior to 1997, each of which increased the percentage of
management ownership.

           Upon consummation of the Acquisition, NATC and its operating
subsidiary were merged into NAOC. NATC was originally formed by an investor
group to acquire certain assets from UST, Inc. now USST, Inc. ("USST") in March
1993, including, among other rights, the exclusive rights to market and
distribute ZIG-ZAG premium cigarette papers in the United States, Canada and
certain other international markets. In 1938, UST obtained the North American
distribution rights for the ZIG-ZAG brands, which had been originally introduced
in France in 1869, from Bollore, a major French industrial concern.

           The Company's principal executive offices are located in New York,
New York at 257 Park Avenue South, 7th Floor, New York, New York 10010, and its
telephone number is (212) 253-8185.

BUSINESS STRATEGY

           The Company's current business strategy, whether through internal
growth or through acquisitions, is (i) to continue to maximize the sales,
marketing and distribution synergies of its National Tobacco and NAOC
subsidiaries; (ii) to capitalize on the strong brand-name identities and


                                       3
<PAGE>
attributes of its products with a focus on product linkages and extensions; and
(iii) to increase operating efficiencies of its subsidiaries.

INDUSTRY AND MARKETS

           The Company competes in two distinct markets: (1) the Smokeless
Tobacco market and (2) the MYO cigarette market. The Company believes that both
the Smokeless Tobacco market, which includes the loose leaf chewing tobacco
segment, and the MYO cigarette market, which is comprised of the premium
cigarette papers sector and the rapidly emerging MYO smoking tobaccos and
related products sector, are each characterized by non-cyclical demand, relative
brand loyalty, meaningful barriers to entry, minimal capital expenditure
requirements, relatively high profit margins, generally stable wholesale prices
and the ability to generate significant and consistent free cash flows.

Smokeless Tobacco

           Smokeless tobacco products, including chewing tobacco, have a long,
established tradition of use in the United States dating back to colonial times.
Loose leaf chewing tobacco has generally been most popular in the Southeast,
Southwest and rural Northeast and North Central regions of the United States. An
estimated 7 million Americans are regular users of smokeless tobacco products,
according to the Smokeless Tobacco Council.

           The smokeless tobacco industry is comprised of the five product
categories listed below. The Company believes that many consumers of smokeless
tobacco regularly use products in more than one of the following categories. In
addition to the Company, other major manufacturers and marketers in the
smokeless tobacco industry include US Smokeless Tobacco Co., Pinkerton Tobacco
Co., Conwood Corporation and Swisher International Group Inc. The Company
currently offers only loose leaf chewing tobacco products; whereas, most other
competitors offer more than a single smokeless category.

      o     Moist snuff is cured, aged, flavored and finely ground tobacco
            packaged in round fiber or plastic cans.

      o     Loose leaf chewing tobacco is typically made from air-cured leaf
            tobacco, using both domestic and imported tobaccos, aged, flavored
            and packed in foil pouches.

      o     Plug chewing tobacco is made from air-cured leaf tobacco, heavily
            flavored and pressed into small bricks or blocks.

      o     Twist chewing tobacco is made of dark, air-cured leaf tobacco, which
            is twisted into strands that are dried and packaged like a dry,
            pliable rope.

      o     Dry snuff is a powdered tobacco product, which is sometimes flavored
            and is packaged in a variety of containers.

           According to information provided by the Smokeless Tobacco Council,
manufacturers' sales for the smokeless tobacco industry were $1.10 billion in
1990 and $2.03 billion in 2000, representing a compounded annual growth rate of
5.7%. This increase is primarily related to the increase in manufacturers' sales
of moist snuff which have grown from $706 million in 1990 to $1.66 billion in
2000, representing a compounded annual sales growth rate of 8.1% and an increase
in volume from 42.5 million pounds in 1990 to 59.9 million pounds in 2000,
representing a compounded annual volume growth rate of 3.2%. Manufacturers'
sales of other smokeless tobacco products were $334 million in 1990 and $318


                                       4
<PAGE>
million in 2000, representing a compounded annual sales rate of decline of 0.4%.
During the same period, the volume of such other smokeless tobacco products
declined from 66.9 million pounds to 46.5 million pounds, a compounded annual
volume rate of decline of 3.3%. Loose leaf chewing tobacco declined from 62
million pounds to 45 million pounds during this period, a compounded annual
volume rate of decline of 2.9%.

           Loose leaf chewing tobacco products are typically sold through the
following retail distribution channels: mass merchandisers, convenience stores,
discount tobacco stores, food stores, chain and independent drug stores.
Discount tobacco retailers are becoming an increasingly important distribution
channel for all tobacco products, including loose leaf chewing tobacco, with
their volume growing to approximately 20% of all tobacco sales in 2000. Certain
retailers purchase loose leaf chewing tobacco direct from manufacturers,
although most purchase through wholesale distributors.

MYO Cigarettes

           Although rapidly emerging, the MYO cigarette market remains a minor
component of the overall United States cigarette industry. If viewed in total as
a part of that industry, sales of MYO smoking tobacco and related products would
represent an estimated market share of 1.3% in 2001. In 2001, the United States
cigarette industry sold approximately 425 billion cigarettes, which were
consumed by approximately 24% of the adult population.

           The MYO products are typically sold through the following retail
distribution channels: convenience stores, mass merchandisers, discount tobacco
stores, food stores and chain and independent drug stores. Certain retailers
purchase MYO products direct from manufacturers, although most purchase through
wholesale distributors.

PRODUCTS

           Currently, the Company manufactures and markets loose leaf chewing
tobacco and imports and distributes premium cigarette papers and related
products and contract manufactures and markets MYO smoking tobaccos and related
products.

Loose Leaf Chewing Tobacco

           Loose leaf chewing tobacco products can be broadly characterized as
either full-flavored or mild. According to A.C. Nielsen, in 2001 full-flavored
products accounted for approximately 45% of the loose leaf volume and mild
flavored products comprised an estimated 55%. Loose leaf chewing tobacco is made
from aged, air-cured tobacco, which is processed and flavored and then packaged
in foil pouches. The BEECH-NUT brands are available in two flavors: Regular and
Wintergreen. BEECH-NUT REGULAR is a full-flavored product, which is ranked
second in market share in the full-flavored loose leaf chewing tobacco category,
and third overall. BEECH-NUT WINTERGREEN was introduced by Lorillard in 1979 and
has the largest market share of any flavored loose leaf brand. National Tobacco
introduced its TROPHY brand into the mild product category in 1992. In addition
to the BEECH-NUT brands and TROPHY, National Tobacco currently produces a
regional brand, HAVANA BLOSSOM, sold primarily in West Virginia, Pennsylvania
and Ohio and a value brand, DURANGO, which was introduced in March 1998.

Premium Cigarette Papers and MYO Smoking Tobaccos and Related Products

           Although premium cigarette papers are sold in a variety of different
widths and styles, the Company's primary styles are its standard width ZIG-ZAG
White, ZIG-ZAG 1 1/4 width French Orange and ZIG-ZAG Kutcorners, which is


                                       5
<PAGE>
designed for easier hand-rolling. Other paper products sold under the ZIG-ZAG
name are 1 1/2 sized cigarette papers and a ZIG-ZAG waterproof paper that is
sold in Canada. MYO smoking tobacco products include ZIG-ZAG Gold Standard and
Classic American Blend tobaccos. MYO related products include ZIG-ZAG cigarette
tubes and ZIG-ZAG cigarette rolling and injector machines.

SALES AND MARKETING

           Currently through its National Tobacco subsidiary, the Company has an
88 person nationwide sales organization. National Tobacco and NAOC operate under
a Sales Representation Agreement, pursuant to which National Tobacco also
markets NAOC's products.

           Historically, NAOC's sales efforts have been focused on wholesalers
in the large chain convenience store, drug store and mass merchandising channels
without calling on retail outlets; whereas, National Tobacco's sales efforts are
focused on both wholesalers and retail merchants in these channels as well as
the food store and discount tobacco store channels. Subsequent to the
Acquisition, the Company has expanded the sales of its Smokeless Tobacco and MYO
products into geographical markets and retail channels where they previously had
been underdeveloped.

           National Tobacco's loose leaf chewing tobacco has historically been
distributed through approximately 1,300 wholesale tobacco and food distributors.
In 2001, BEECH-NUT REGULAR, TROPHY AND DURANGO represented 59.7%, 24.3% and
10.7%, respectively, of National Tobacco's total sales. At the retail level,
National Tobacco's loose leaf chewing tobacco products are promoted through
in-store volume and price-discount programs and the use of innovative, high
visibility point-of-purchase floor and shelf displays, banners and posters.
National Tobacco has not been reliant upon nor does it conduct any advertising
in the consumer media.

           NAOC's premium cigarette papers have historically been distributed
through approximately 1,100 wholesale distributors. Sales by NAOC of its ZIG-ZAG
White and ZIG-ZAG French Orange premium cigarette papers are the most important
products in terms of sales, and they accounted for 72.8% of NAOC's total sales
in 2001. The majority of ZIG-ZAG premium cigarette papers promotional activity
is at the distributor level and consists of distributor promotions, trade shows
and trade advertising. The MYO smoking tobaccos and related products promotional
activity is more focused at the retail level with spending on point of sale and
space management and at the consumer level with price off promotions, primarily
through the use of coupons.

           The Company's largest customer is The McLane Company, which accounted
for approximately 10.1% of its smokeless tobacco and MYO revenues in 2001. The
loss of this customer could have a material adverse effect on the results of
operations or financial condition of the Company. The Company does not believe
that the loss of any other customer would have a material effect on operations
of the Company in the intermediate term.

TRADEMARKS AND TRADE SECRETS

           National Tobacco has numerous registered trademarks relating to its
loose leaf chewing tobacco products, including the trademarks for its BEECH-NUT
and TROPHY products. These trademarks, which are significant to National
Tobacco's business, expire periodically and are renewable for additional 20-year
terms upon expiration. Flavor formulae relating to National Tobacco's and NAOC's
tobacco products, which are key assets of their businesses, are maintained under
strict secrecy. The ZIG-ZAG trade name and trademark for premium cigarette
papers and related products are owned by Bollore and have been exclusively


                                       6
<PAGE>
licensed to NAOC. The ZIG-ZAG trademark with respect to tobacco and related
products is owned by NAOC and was obtained as part of the Acquisition.

RAW MATERIALS, PRODUCT SUPPLY AND INVENTORY MANAGEMENT

Loose Leaf Chewing Tobacco

           National Tobacco's loose leaf chewing tobacco is produced from
air-cured leaf tobacco. National Tobacco utilizes tobaccos grown domestically in
Pennsylvania and Wisconsin and imported from many countries, including but not
limited to, Argentina, Brazil, Columbia, France, Germany, Indonesia, Italy,
Mexico, and the Philippines. Management does not believe that it is dependent on
any single country source for tobacco. Pursuant to an agreement with Lancaster
Leaf Tobacco Company of Pennsylvania ("Lancaster"), Lancaster, under
instructions from National Tobacco, (i) purchases and processes tobacco on an
exclusive basis, (ii) stores tobacco inventory purchased on behalf of National
Tobacco and (iii) generally maintains a 12- to 24-months supply of National
Tobacco's various tobacco types at its facilities. National Tobacco generally
maintains a one- to two-months operating supply of tobacco in its Louisville
facility.

           Other than raw tobacco, the ingredients used in National Tobacco's
finished loose leaf chewing tobacco products include food grade flavorings, all
of which have been approved by the FDA and other federal agencies. National
Tobacco is not dependent upon any one supplier for those raw materials or for
the supply of its products' packaging.

           National Tobacco generally maintains a one- to two-months supply of
finished products. This supply is primarily maintained at its manufacturing
facilities in Louisville, Kentucky. Finished products are also maintained in
five bonded public warehouses to facilitate distribution.

Premium Cigarette Paper and MYO Smoking Tobaccos and Related Products

           Pursuant to the Distribution Agreements with Bollore, NAOC must
purchase its premium cigarette papers from Bollore, subject to Bollore
fulfilling its obligations under these agreements. If Bollore is unable or
unwilling to perform its obligations or ceases its cigarette paper manufacturing
operation, in each case as set forth in the Distribution Agreements, NAOC may
seek third-party suppliers and continue the use of the ZIG-ZAG trademark.
Additionally, to maintain a steady supply of product, Bollore is required to
maintain in a public warehouse in the United States a two months supply of
emergency inventory at Bollore's expense. See "Distribution Agreements" below.

           NAOC maintains an adequate supply of product in addition to the
immediately available, two-month emergency inventory on hand at the expense of
Bollore. By its purchasing patterns, NAOC builds inventory outside promotional
periods in order to have adequate inventory to meet increased demand during
promotional periods. NAOC's inventory is maintained at the Company's
manufacturing facility in Louisville, Kentucky and in bonded public warehouses
located in Reno, Nevada and Pittsburgh, Pennsylvania.

           NAOC obtains its MYO smoking tobaccos primarily from international
sources and is not dependent on any one type of tobacco for its blend. The MYO
related products are purchased in finished form from several suppliers.
Management believes adequate inventories are maintained and that its sources of
supply are adequate for projected needs.


                                       7
<PAGE>
MANUFACTURING

           National Tobacco manufactures its loose leaf chewing tobacco products
and NAOC contracts for the manufacture of its premium cigarette papers,
cigarette tubes, rolling and injecting machines and MYO smoking tobaccos. In the
case of its MYO smoking tobacco products, NAOC packages these products at its
manufacturing facility in Louisville, Kentucky. The Company believes that its
production capabilities, quality control procedures, research and development
activities and overall facilities and equipment are adequate and are vital to
maintaining the high-quality brand image and operating efficiency of its
operations.

Production and Quality Control

           The Company's production process utilizes proprietary production
processes and techniques, including strict quality control. During the course of
each production day, the Company's quality control group periodically tests the
quality of the tobacco, casings (flavorings in syrup form), application of
casings and packaging. The Company utilizes sophisticated quality control and
pilot plant production equipment to test and closely monitor the quality of its
products. The quality of the Company's products is largely the result of using
high grade tobacco leaf, food-grade flavorings and an ongoing analysis of
tobacco cut, flavorings and moisture content.

           Given the importance of contract manufacturing to the Company, the
Company's quality control group also seeks to ensure that established standards
are strictly adhered to by the contract manufacturers, especially with regard to
the MYO related products.

Research and Development

           The Company has a Research and Development Department that
reformulates existing loose leaf and MYO tobaccos products in an effort to
maintain a high level of product consistency and to facilitate the use of less
costly raw materials without sacrificing product quality. The Company believes
that for all of its tobacco products, including MYO, it has been and will
continue to be able to develop cost effective blends of tobacco and flavorings
that will maintain or reduce overall costs without compromising high product
quality. The Research and Development Department is also responsible for new
product development, such as the recently introduced Zig-Zag Little Cigars.

           The Company, primarily through National Tobacco, spent approximately
$532,000, $464,000 and $487,000 on its research and development and quality
control efforts for the years 1999, 2000 and 2001, respectively.

Facilities and Equipment

           The Louisville, Kentucky plant, which is owned by National Tobacco,
was formerly used by Lorillard for the manufacture of cigarettes, little cigars
and chewing tobacco. This approximately 600,000 square foot facility occupies a
26 acre urban site near downtown Louisville. The facility's structures occupy
approximately one-half of the total acreage. The facilities are in good
condition and have received regular maintenance and capital improvement.
Approximately two-thirds of the plant is currently utilized, thus, there is
substantial excess manufacturing and storage capacity. The existing structures
provide ample space to accommodate an expansion of the Company.


                                       8
<PAGE>
COMPETITION

           National Tobacco is the third largest manufacturer and marketer of
loose leaf chewing tobacco. The other three principal competitors in the loose
leaf chewing tobacco segment, which, together with National Tobacco, generate
approximately 95% of this segment's sales, are Pinkerton Tobacco Co., Conwood
Corporation and Swisher International Group Inc. Management believes that moist
snuff products are used interchangeably with loose leaf products by many
consumers and, as a result, USST, Inc., the largest manufacturer of moist snuff
(and of all smokeless tobacco products when taken as a whole) is a significant
competitor. As indicated above under "Industry and Markets," sales of moist
snuff have grown over the past decade while sales of loose leaf have declined
over that same period. In addition, the three previously named companies in the
loose leaf segment also manufacture and market moist snuff.

           NAOC is the largest importer and distributor in North America of
premium cigarette papers. NAOC's two major competitors for premium cigarette
paper sales, which, together with NAOC, generate approximately 95% of such
sales, are Republic Tobacco Company and Robert Burton Associates, a wholly-owned
subsidiary of Imperial Tobacco Group plc. Competitors in the MYO smoking tobacco
and related products area include Lane Ltd., a subsidiary of Brown & Williamson
Tobacco Corporation, and Republic Tobacco Company.

           Many of the Company's competitors are better capitalized than the
Company and have greater financial and other resources than those available to
the Company. The Company believes that its strong market positions in its
principal product lines are due to its high brand recognition and the perceived
quality of each of its products, its manufacturing and operating efficiencies,
and its sales, marketing and distribution efforts.

EMPLOYEES

           As of February 28, 2002, the Company employed a total of 234
full-time employees. With the exception of 89 manufacturing employees, all other
operations are non-union. The manufacturing employees are covered by three
collective bargaining agreements. One of these agreements, covering 84
employees, was extended in December 2001 and will expire in December 2004. The
other two agreements, covering five employees, are scheduled to expire during
2002 and the Company currently anticipates that they will be renewed.

REGULATION

           The tobacco industry, particularly with respect to cigarettes, has
been under public scrutiny for over thirty years. Industry critics include
special interest groups, the Surgeon General and many legislators at the state
and federal levels. Although the smokeless tobacco companies have recently come
under some scrutiny, much of the focus has been directed at the cigarette
industry due to its large size relative to the smokeless tobacco industry.

           Producers of tobacco products are subject to regulation in the United
States at federal, state and local levels. Together with changing public
attitudes towards tobacco consumption, the constant expansion of regulations,
including increases in various taxes, has been a major cause of the overall
decline in consumption of tobacco products since the early 1970's. Moreover, the
future trend is toward increasing regulation of the tobacco industry.


                                       9
<PAGE>
           Federal law has recently required states, in order to receive full
funding for federal substance abuse block grants, to establish the minimum age
of 18 years for the sale of tobacco products together with an appropriate
enforcement program. In recent years, a variety of bills relating to tobacco
issues has been introduced in the United States Congress, including bills that
would (i) prohibit the advertising and promotion of all tobacco products and/or
restrict or eliminate the deductibility of such advertising expenses; (ii)
increase labeling requirements on tobacco products to include, among other
things, additional warnings and lists of additives and toxins; (iii) modify
federal preemption of state laws to allow state courts to hold tobacco
manufacturers liable under common law or state statutes; (iv) shift regulatory
control of tobacco products and advertisements from the FTC to the Food and Drug
Administration ("FDA"); (v) increase tobacco excise taxes; and (vi) require
tobacco companies to pay for health care costs incurred by the federal
government in connection with tobacco related diseases. Hearings have been held
on certain of these proposals; however, to date, none of such proposals have
been enacted by Congress. Future enactment of such proposals or similar bills,
depending upon their content, could have a material adverse effect on the sales,
operations or financial condition of the Company.

           In 1996, Massachusetts enacted a statute, which requires all tobacco
companies to disclose information regarding the ingredients and nicotine content
of their products, which information will, subject to certain conditions, be
made publicly available. The ingredients of National Tobacco's products are
considered by the Company to be proprietary and such disclosure could result in
the manufacture and sale of imitations, which could have a material adverse
effect on its tobacco business. On December 10, 1997, U.S. District Judge
O'Toole (D. Mass.) entered a preliminary injunction on behalf of five smokeless
tobacco companies (including National Tobacco) against the Attorney General of
Massachusetts and the Commissioner of Public Health. The order bars the
officials from taking any steps to enforce the ingredient-reporting requirements
of the Massachusetts statute pending a trial on the merits. On November 6, 1998,
the United States Court of Appeals for the First Circuit affirmed the
injunction. The tobacco companies did not seek an injunction against the
nicotine reporting requirements of the Massachusetts statute. On September 7,
2000, upon motion, the District Court granted summary judgement in favor of the
tobacco plaintiffs, ruling that the Massachusetts disclosure statute violated
among other things, the Takings and Commerce Clauses of the U.S. Constitution.
In October 2001, the First Circuit Court of Appeals, through a different
three-judge panel, in a split opinion, reversed the District Court, thus
upholding the statute. The tobacco companies applied for a rehearing by all of
the active judges in the circuit. The full Court of Appeals agreed to rehear the
case and withdrew the October 2001 majority opinion. Arguments were held on
January 7, 2002, and a decision is pending.

           Regulations issued by the Massachusetts Attorney General affecting
point of sale and certain advertising issues with respect to tobacco products
which were to become effective August 1, 1999, were delayed until December 31,
1999 to allow for further review. The Attorney General made minor modifications
to the regulations. In January 2000, the Federal District Court in Massachusetts
upheld the advertising and point-of-sale regulations, rejecting the industry's
First Amendment challenge. On July 12, 2000, the First Circuit Court of Appeals
affirmed the District Court's opinion. The cigarette company plaintiffs
requested that the United States Supreme Court review the case, and a stay of
the regulations pending the disposition of that request was granted. On June 26,
2001, the United States Supreme Court reversed the decision, invalidating the
point-of-sale advertising regulations, but upholding the regulations requiring
tobacco products to be displayed behind the counter. The Massachusetts
regulations, among other things, restrict access to tobacco products.
Accordingly, there can be no assurance that prohibiting such direct access will
not have an adverse effect on sales.


                                       10
<PAGE>
           While there is no current regulation materially and adversely
affecting the sale of premium cigarette papers, there can be no assurance that
federal, state or local regulations will not be enacted which will seek to
regulate premium cigarette papers. In the event such regulations are enacted,
depending upon their parameters, they could have an adverse effect on the
business of NAOC and, consequently, the financial condition of the Company.

STATE ATTORNEY GENERAL SETTLEMENT AGREEMENTS

           In November 1998 most of the states, represented by their attorneys
general acting through the National Association of Attorneys General, signed two
contracts: the Master Settlement Agreement ("MSA") and the Smokeless Tobacco
Master Settlement Agreement ("STMSA"). To the best of the Company's knowledge,
the signatories to the MSA are 23 cigarette manufacturers and/or distributors
and the only signatory to the STMSA is USST, Inc. In the Company's opinion, the
fundamental basis for each agreement is the states' consents to withdraw all
claims for monetary, equitable and injunctive relief against certain tobacco
products manufacturers and others and, in return, the signatories have agreed to
certain marketing restrictions and regulations as well as certain payment
obligations.

           Pursuant to the MSA and subsequent states' statutes, a "cigarette
manufacturer" (which is defined to also include make-your-own cigarette tobacco)
has the option of either becoming a signatory to the MSA or opening, funding and
maintaining an escrow account, with subaccounts on behalf of each settling
state. The STMSA has no similar provisions. The MSA escrow accounts are governed
by states' statutes that expressly give the manufacturers the option of opening,
funding and maintaining an escrow account in lieu of becoming a signatory to the
MSA. The statutes require companies, who are not signatories to the MSA, to
deposit, on an annual basis, into qualified banks escrow funds based on the
number of cigarettes or cigarette equivalents, i.e., the pounds of MYO smoking
tobacco, sold. The purpose of these statutes is expressly stated to be to
eliminate the cost disadvantage the settling manufacturers have as a result of
settling. A company that establishes an escrow account is entitled to direct the
investment of the escrowed funds and withdraw any appreciation, but cannot
withdraw the principal for twenty-five years from the year of each annual
deposit, except to withdraw funds deposited pursuant to an individual state's
escrow statute to pay a final judgment to that state's plaintiffs in the event
of such a final judgment against the company. Either option - becoming a MSA
signatory or establishing an escrow account - is permissible.

           NAOC has chosen to open and fund an MSA escrow account and, as of
December 31, 2001, has funded a total of $510,392 into its account. Either
entering into one or both settlement agreements or establishing and maintaining
an escrow account, as NAOC has chosen, could have a material adverse effect on
the Company's financial position, results of operations or cash flows.

EXCISE TAXES

           Tobacco products and premium cigarette papers have long been subject
to federal, state and local excise taxes, and such taxes have frequently been
increased or proposed to be increased, in some cases significantly, to fund
various legislative initiatives. Since 1986, smokeless tobacco (including dry
and moist snuff and chewing tobacco) has been subject to federal excise tax.
Smokeless tobacco is taxed by weight (in pounds or fractional parts thereof)
manufactured or imported. Effective January 1, 2002, the tax on loose leaf
chewing tobacco was increased to $0.195 per pound from $0.17 per pound.
Effective January 1, 2002, the federal excise tax on premium cigarette paper was
increased to $0.0122 from $0.0106 per fifty papers, the tax on cigarette tubes
was increased to $0.0244 from $0.0213 per fifty tubes, and the tax on MYO
tobacco was increased to $1.0969 from $0.9567 per pound. These more recent


                                       11
<PAGE>
increases in the rate of excise taxes are not expected to have an adverse effect
on the Company's business, especially when compared to the tax increases of
manufactured cigarettes.

           Future enactment of increases in excise taxes could have a material
adverse effect on the Company. The Company is unable to predict the likelihood
of passage of future increases in excise taxes. Tobacco products and premium
cigarette papers are also subject to certain state and local taxes. The
imposition of state and local taxes can have a detrimental impact on sales in
that state or locality. Any enactment of new state excise taxes or an increase
in existing excise taxes is likely to have an adverse effect on sales in such
situations.

ENVIRONMENTAL REGULATIONS

           The Company believes that it is currently in substantial compliance
with all material environmental regulations and pollution control laws.

DISTRIBUTION AGREEMENTS

           NAOC is party to three long-term distribution and licensing
agreements with Bollore with respect to sales of premium cigarette papers in the
United States, Canada and Hong Kong, Singapore, Dubai, Qatar, Oman and Jordan
(respectively, the "U.S. Distribution Agreement," the "Canada Distribution
Agreement" and the "Other Countries Distribution Agreement," and, collectively,
the "Distribution Agreements"). Under the Distribution Agreements, Bollore
granted NAOC the exclusive right to purchase premium cigarette papers bearing
the ZIG-ZAG brand name from Bollore for resale in the countries noted above.
NAOC has the sole right to determine the price and other terms upon which NAOC
may resell any products purchased from Bollore, including the right to determine
the distributors of such products within the countries noted above.

           The Distribution Agreements establish the purchase price through
2004, subject to certain adjustments to reflect increases in the U.S. and
Canadian Consumer Price Indices and to account for material currency
fluctuations. The Distribution Agreements provide that, in order to assure each
of the parties commercially reasonable profits in light of inflationary trends
and currency translation factors, prior to December 31, 2004 and each fifth-year
anniversary of such date, the parties will enter into good faith negotiations to
agree on an index and currency adjustment formula to replace the index and
formula currently in effect. If the parties are unable to agree, the dispute is
to be submitted to binding arbitration.

           Pursuant to the Distribution Agreements, export duties, insurance and
shipping costs are the responsibility of Bollore and import duties and excise
taxes are the responsibility of NAOC. Bollore's terms of sale are 45 days after
the bill of lading date and its invoices are payable in Euros. The Distribution
Agreements reduce catastrophic foreign exchange risk by providing that Bollore
will bear certain exchange rate risks at levels fixed through 2004. The
catastrophic exchange rate risk allocations set forth in the Distribution
Agreements will be renegotiated in 2004 in a similar manner as set forth above,
also to be effective January 1, 2005.

           According to the Distribution Agreements, NAOC must purchase finished
premium cigarette paper products from Bollore, subject to Bollore fulfilling its
obligations under these agreements. Bollore is required by the agreements to
provide NAOC with the quantities and quality of the products that it desires.
The Distribution Agreements provide NAOC with certain safeguards to help ensure
that NAOC will be able to secure a steady supply of product. Such safeguards
include (i) granting NAOC the right to seek third party suppliers with continued
use of the ZIG-ZAG trademark if Bollore is unable to perform its obligations or
ceases its cigarette paper manufacturing operation, in each case as set forth in


                                       12
<PAGE>
the Distribution Agreements, and (ii) maintaining a two month supply of
emergency inventory in the United States at Bollore's expense.

           Under the Distribution Agreements, NAOC has agreed for the term of
the Distribution Agreements and for a period of five years after termination of
such Distribution Agreements not to engage, directly or indirectly, in the
manufacturing, selling, distributing, marketing or otherwise promoting in the
countries identified above premium cigarette paper or premium cigarette paper
booklets of a competitor without Bollore's consent, except for certain de
minimis acquisitions of debt or equity securities of such competitor and certain
activities with respect to an alternative supplier used by NAOC as permitted
under the Distribution Agreements.

           Each of the Distribution Agreements was entered into on November 30,
1992. Each of the U.S. Distribution Agreement and the Canada Distribution
Agreement was for an initial term of twenty years commencing on the date of such
agreement and will be renewed automatically for successive twenty year terms
unless sooner terminated in accordance with the provisions of such agreement.
The Other Countries Distribution Agreement was for an initial term of ten years
commencing on the date of such agreement and will be renewed automatically for
successive ten year terms unless sooner terminated in accordance with the
provisions of such agreement. Each of the Distribution Agreements permits
Bollore to terminate such agreement (i) if certain minimum purchases (which were
significantly exceeded in 2001) of premium cigarette paper booklets have not
been made by the Company for resale in the jurisdiction covered by such
agreement within a calendar year, (ii) if the Company assigns such agreement
without the consent of Bollore (other than certain permissible assignments to
wholly owned subsidiaries of the Company), (iii) upon a change of control of the
NAOC or any parent of NAOC without the consent of Bollore, (iv) upon certain
acquisitions of equity securities of NAOC or any parent of NAOC by a competitor
of NAOC or certain investments by significant stockholders of the Company in a
competitor of NAOC and (v) certain material breaches, including NAOC's agreement
not to promote, directly or indirectly, premium cigarette paper or premium
cigarette paper booklets of a competitor. Additionally, each of the Canada
Distribution Agreement and the Other Countries Distribution Agreement is
terminable by either NAOC or Bollore upon the termination of the U.S.
Distribution Agreement.

Item 2.      Properties

           As of December 31, 2001, the Company operated manufacturing,
distribution, office and warehouse space in the United States with a total floor
area of approximately 610,351 square feet. Of this footage, approximately 10,351
square feet are leased and approximately 600,000 square feet are owned.

           To provide a cost-efficient supply of products to its customers, the
Company maintains centralized management of manufacturing and nationwide
distribution facilities. National Tobacco has one manufacturing and distribution
facility located in Louisville, Kentucky and five other public warehouse
distribution facilities in locations throughout the United States. NAOC utilizes
the facility in Louisville as well as two public warehouse distribution
facilities that are located in Pittsburgh, Pennsylvania and Reno, Nevada.

           The following table describes the principal properties of the Company
(other than sales service centers, sales office space or warehouse space) as of
December 31, 2001.


                                       13
<PAGE>
                                                  Square        Owned or
Location                Principal Use              Feet          Leased
--------                -------------              ----          ------

New York, NY            Corporate                  10,351        Leased
                        headquarters

Louisville, KY          Loose leaf                600,000         Owned(1)
                        chewing tobacco
                        manufacturing,
                        R&D, warehousing
                        and distribution


Item 3.    Legal Proceedings

           Proposition 65. On March 30, 1998, an action was filed in California
State Court, in the City and County of San Francisco, against defendants United
States Tobacco Company, Inc., Conwood Company, L.P., Pinkerton Tobacco Company,
Inc., National Tobacco, Swisher International Group Inc., Brown & Williamson
Tobacco Corporation, Merrill Reese Inc., Lucky Stores Inc., Quick Stop Markets
Inc., Raley's, Inc., Save Mart Supermarkets Inc., Save-On Drug Stores Inc., The
Southland Corporation, Circle K Stores, Inc., Longs Drug Stores Corporation,
Walgreen Co., Safeway, Inc. and DOES 1-500. The plaintiff amended their claim on
June 10, 1998 and subsequently served the complaint on National Tobacco. The
complaint purported to be brought by the City and County of San Francisco on
behalf of the people of the State of California and by the Environmental Law
Foundation on behalf of the general public.

           Plaintiffs claimed that the defendants violated the California Safe
Drinking Water and Toxic Enforcement Act of 1986, Health and Safety Code 25249.6
("Proposition 65") by "knowingly and intentionally" exposing California
consumers to carcinogens and reproductive toxins in smokeless tobacco products
while failing to provide a "clear and reasonable" warning that smokeless tobacco
products contain substances that are "known to the state to cause cancer" and
"known to the state to cause reproductive toxicity." Plaintiffs further claimed
that the defendants violated California Unfair Competition Act, Business &
Professions Code 17200, et seq., by marketing smokeless tobacco to children, and
by fraudulently concealing from the public the alleged adverse consequences and
addiction allegedly associated with smokeless tobacco products.

           The complaint sought a preliminary and permanent injunction
preventing defendants from selling smokeless tobacco products without a "clear
and reasonable" warning, as well as an injunction ordering defendants to
undertake a court-approved public information campaign to instruct children that
the use of smokeless tobacco products results in exposure to substances known to
the State of California to cause cancer and reproductive harm. The plaintiffs
also sought an award of statutory penalties and damage for each violation of
Proposition 65 and the Unfair Competition Act, disgorgement of profits from the
sale of smokeless tobacco products, and attorney's fees and costs. On December
17, 2001 the case was settled. The terms of the settlement were immaterial to
National Tobacco's results.


-------------------
(1) Encumbered by a mortgage securing all obligations and liabilities under the
Senior Secured Facilities.

                                       14
<PAGE>
           Kentucky and Illinois Complaints. On July 15, 1998, NAOC and National
Tobacco filed a complaint against Republic Tobacco, Inc. and its affiliates
("Republic Tobacco") in Federal District Court for the Western District of
Kentucky. The complaint was subsequently amended on August 18, 1998
(collectively, the complaint and the amended complaint are referred to herein as
the "Kentucky Complaint"). Republic Tobacco imports and sells Roll-Your-Own
("RYO") cigarette papers under the 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.

           The Kentucky Complaint also alleges that Republic Tobacco has 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 the federal and state law.

           On June 30, 1998, Republic Tobacco filed a complaint against the
Company, NAOC and National Tobacco in the United States District Court of the
Northern District of Illinois. Republic Tobacco did not serve this complaint or
otherwise notify the Company of its existence until after the filing and service
of the Kentucky Complaint. The Company believes that this complaint was filed in
anticipation of the filing of the Kentucky Complaint. This complaint was amended
by Republic Tobacco on September 16, 1998 (collectively, the complaint and the
amended complaint are referred to herein as the "Illinois Complaint"). In the
Illinois Complaint, Republic Tobacco seeks declaratory relief that (a) Republic
Tobacco's action in defacing the Company's point of purchase display vendors do
not violate federal or state laws and (b) that Republic Tobacco's trade
practices do not violate federal or state antitrust or unfair competition laws.
In addition, the Illinois Complaint alleges that certain actions taken by the
Company 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 alleges that
the Company has unlawfully monopolized and attempted to monopolize the market
for premium cigarette papers.

           The Company has counterclaimed alleging that Republic Tobacco's trade
practices in the southeastern United States have unlawfully restricted North
Atlantic Operating Company's ability to expand the distribution of Zig-Zag
premium cigarette papers in the southeast, where sales have been historically
underdeveloped.

           The Company intends to vigorously pursue its claims set forth in the
Kentucky and Illinois Complaints and intends to vigorously defend against the
claims asserted in the Illinois Complaint. With respect to the claims set forth
in the Illinois Complaint, the Company filed a Motion to Dismiss concerning a
substantial portion of the claims against the Company, and believes that the
claims against the Company are without merit.

           On April 9, 1999, the Court in the Illinois case dismissed certain of
Republic's claims against the Company, including Republic's monopolization
claim. The Court also dismissed the Company's counterclaims with leave to
replead those claims. The Company has done so. On September 17, 1999, Republic
filed a Second Amended Complaint, which was substantially identical to the
original complaint, except that it alleged a series of purportedly monopolistic
practices on a regional market basis against the Company. The Company filed a


                                       15
<PAGE>
motion to dismiss the allegations for failure to state a claim on which relief
could be granted. On December 23, 1999, the Court dismissed the antitrust claims
in Republic's Second Amended Complaint.

           On October 20, 2000 Republic filed a motion to dismiss, stay, or
transfer the Kentucky proceeding to the Illinois Court. On December 19, 2000,
the Court denied Republic'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 may not be entitled to any preference on forum
selection, which would ordinarily be given because it was first to file.

           During 2001, expert discovery was completed. Subsequently, both
parties have moved for summary judgment on the others claims. These motions for
summary judgment are now pending before the Court.

           West Virginia Complaints. On October 6, 1998 National Tobacco was
served with a summons and complaint 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-2401). While National Tobacco was
served with a single service and complaint, the caption lists 65 separate
plaintiffs, each with an individual case number.

           On November 13, 1998, National Tobacco was served with a summons and
complaint 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). While National Tobacco was served with a
single summons and complaint, the caption of the complaint lists 18 separate
plaintiffs, each with an individual case number. This action was filed by the
same plaintiffs' attorney who filed the Allen action and the complaint is
identical in most material respects.

           These two actions were commenced by two separate plaintiffs,
"individually and/or as the representatives of the various descendants named
herein [who] are residents of the State of West Virginia and/or smoked
cigarettes or used other tobacco products, manufactured, promoted, advertised,
marked, sold and/or distributed by all defendants." The complaints contain no
specific allegations referring to any individual plaintiff. These two actions
were brought against major manufacturers of cigarettes, smokeless tobacco
products, and certain other organizations.

           The complaints allege that "plaintiffs and plaintiffs' descendents
suffer/had suffered from a form of cancer or vascular disease and other injuries
due wholly or in part to defendants' products and/or activities." The complaints
further allege that the actions "arise from decades of intentionally wrongful
conduct by the defendants who have manufactured, promoted, and sold cigarettes
and both smokeless and loose tobacco to the plaintiffs and plaintiffs
descendants and millions of Americans while knowing, but denying and concealing
that their products cause diseases, including but not limited to esophageal,
laryngeal, pharyngeal, mouth and throat cancers and Buerger's Disease." The
complaints do not identify which plaintiffs, if any, allege injury as a result
of the use of smokeless tobacco. The complaints seek unspecified compensatory
damages. The Company intends to vigorously defend against each such complaint.

           In the Allen case, the plaintiffs have specified the defendant
companies for each of the 65 cases. National Tobacco was named in only six of
the cases, five of which allege consumption, prior to the formation of National
Tobacco, of products bearing the trademarks currently owned by National Tobacco.
The remaining case alleges lung cancer as the injury. In subsequent discovery,
the remaining plaintiff testified that his only use of Beech-Nut chewing tobacco


                                       16
<PAGE>
predated National Tobacco's acquisition of the brand. National Tobacco has been
dismissed from the first five cases, and intends to vigorously defend the
remaining action.

           The Akers complaint asserts 24 unspecified counts and seeks referral
to the West Virginia Mass Litigation Panel, because the actions allegedly
"involve multiple plaintiffs pursuing related claims or actions involving one or
more common questions of act or law and the plaintiffs seek damages caused by
some "product."

           Discovery of all tobacco-related (cigarette, cigar and smokeless
products) actions in the State of West Virginia, including the Allen and Akers
cases, has been referred to a Mass Litigation Panel, and assigned to one judge.
On January 11, 2000, the judge assigned the cases issued an order concerning
discovery schedules and establishing a trial procedure for the purpose of trying
all issues of law and fact common to all defendants. On February 29, 2000, West
Virginia plaintiffs' counsel, pursuant to the court's order, identified all
individual plaintiffs and the defendants against whom they had claims. No
individual plaintiff in the Akers cases alleged use of a product manufactured by
National Tobacco, although National Tobacco remains a defendant in those
actions. In subsequent discovery, one Akers plaintiff alleged use of a National
Tobacco product. However, that plaintiff alleges that he has lung cancer.

           On September 14, 2000, National Tobacco was served with a Summons and
Consolidated Complaint 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). While National Tobacco was served with a single Summons
and Consolidated Complaint, the caption of the Consolidated Complaint lists 539
separate plaintiffs, each with an individual case number. Only one of these
plaintiffs alleged use of a product currently manufactured by National Tobacco.
The time period during which this plaintiff allegedly used the product has not
yet been specified. Thus, it is not yet known whether National Tobacco is a
proper defendant in this case.

           On September 19, 2000, National Tobacco was served with a Summons and
Consolidated Complaint 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). While National Tobacco was served with a single Summons
and Consolidated Complaint, the caption of the Consolidated Complaint lists 561
separate plaintiffs, each with an individual case number. A total of five of
these plaintiffs allege use of a product currently manufactured by National
Tobacco. One of these plaintiffs does not specify the time period during which
the product was allegedly used, and one alleges use that covers, in part, a
period when National Tobacco did not manufacture the product. Of the remaining
three, one alleges consumption of a competitor's chewing tobacco from 1966 to
2000 and National Tobacco'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 National Tobacco's
Durango Ice chewing tobacco from 1990 to 2000 (although Durango Ice did not come
onto the market until 1999).

           In November 2001, National Tobacco was served with four separate
summonses and complaints in actions filed in the Circuit Court of Ohio County,
West Virginia. The actions 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. 01-C-482). Allege that the
individual plaintiffs suffer from various diseases including emphysema, heart
disease, lung cancer, arterial blockage, and "addiction" to nicotine, allegedly
resulting from the use of various tobacco products, none of which is or has ever
been manufactured by National Tobacco. The Plaintiffs in these four actions also


                                       17
<PAGE>
allege a conspiracy among "the Tobacco Defendants...to mislead, deceive and
confuse the government, the public, and West Virginia Plaintiffs, concerning the
harmful effects of their products on the health of individuals, that nicotine is
the active addictive component in manufactured tobacco products, and that
defendants artificially, intentionally and scientifically manipulate nicotine
delivery in manufactured tobacco products to ensure that users remain addicted.
.. . ." These actions were brought against major manufacturers of cigarettes,
smokeless tobacco products (including National Tobacco) and other tobacco
products, and certain other organizations.

           The four complaints assert counts alleging negligence and negligent
misrepresentation, strict liability/failure to warn prior to 1970 and strict
liability/design defect of unreasonably dangerous product, false representation,
deceit, fraudulent concealment, civil conspiracy, breach of express and implied
warranty, punitive damages, violations of the West Virginia general consumer
protection and antitrust acts and loss of consortium. The complaints seek
unspecified compensatory and punitive damages. These four actions have also been
consolidated with the cases pending before the West Virginia Mass Litigation
Panel. National Tobacco intends to vigorously defend these actions.

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

           The trial of the smokeless tobacco cases has been postponed
indefinitely. 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, thus, the trial date on the
smokeless tobacco claims has now been postponed indefinitely.

           Minnesota Complaint. On September 24, 1999, National Tobacco 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 National
Tobacco's (and, prior to the formation of National Tobacco, 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. The case has been removed to federal
court. Motions to dismiss were filed on all counts except for negligence and, on
September 28, 2000, the Court granted all of National Tobacco's motions. The
sole cause of action remaining is for negligence. The Court, however, granted
leave to the plaintiff to replead within sixty days those alleged causes of
action based on alleged fraud. On December 18, 2000, the Plaintiff filed an
amended complaint reasserting fraud claims. On January 19, 2001, defendants
again moved to dismiss the fraud claims. On July 5, 2001, the Court dismissed
one of plaintiff's statutory fraud counts, but held that the remaining fraud
courts were adequately pleaded. Discovery is continuing as to the remaining
claims. The Court has ordered that the case be ready for trial in February 2003.

           Although the Company believes that it has good defenses to the above
actions in West Virginia and Minnesota and it intends to vigorously defend each
such action, no assurances can be given that it will prevail. If any of the
plaintiffs were to prevail, the results could have a materially adverse effect
on the Company's financial position, results of operations and cash flows.


                                       18
<PAGE>
           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 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 the Company have
negotiated settlements with one group of defendants, including Import Warehouse
Inc. and its owner/operator Ravi Bhatia. Those settlements included a consent
injunction against distribution of infringing or counterfeit goods. Management
believes that successful prosecution of this litigation, either by settlement or
otherwise, will have a favorable impact on its future premium cigarette paper
business.

           On May 18, 2001, the Company, in conjunction with Bollore, conducted
raids on the businesses and homes of certain defendants previously enjoined from
selling infringing or counterfeit Zig-Zag(R) 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 the counterfeit Zig-Zag(R) 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. On October 12, 2001, Bollore filed proposed findings of fact and
conclusions of law at the request of the Court. On November 16, 2001, the Court
issued its written Order of Contempt, inter alia, estimating a damage amount to
be in excess of $11 million, and referring the matter to the United States
Attorney with a recommendation that criminal charges for counterfeiting,
criminal contempt and perjury be brought. The Court later directed the parties
to submit specific damages evidence. On January 17, 2002, the Company filed its
damages submission, calculating damages to be approximately $14.5 million. That
application is currently pending.

           On December 5, 2001, the contemptuous defendants filed an appeal of
the Contempt Order, claiming that the 1999 injunction entered on the record was
technically invalid and that the factual record does not support the finding of
contempt. The Company and Bollore on February 22, 2002 filed a motion with the
appellate court urging that the Court dismiss the appeal as premature. That
motion is pending. If the Court denies that motion, the plaintiffs intend to
defend the Contempt Order vigorously.

           On February 5, 2002, the District Court in the Bollore case granted
Bollore's motion to amend the Complaint to add the Company and NAOC as
plaintiffs.

           Pursuant to the U.S. Distribution Agreement and a related agreement
between the parties, any collections on the judgments issued in the Bollore v.
Import Warehouse case are to be divided evenly between Bollore and the Company
after the payment of all expenses. A full trial on the merits has been scheduled
for April 1, 2002.

           On February 7, 2002, Bollore, NAOC and the Company 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. The Company
alleges that Mr. Bhatia and Import Warehouse sold counterfeit goods to at least
three different companies over an extended period of time. The hearing date for
that contempt order has not been set.

           California Infringing Products Litigation. On March 23, 2001, the
Company participated as co-plaintiff with Bollore, S.A. and North Atlantic
Operating Company, Inc. ("NAOC"), its subsidiary, in an action entitled Bollore,
S.A. v. A&A Smart Shopping (Case No. CV 01-02766 FMC (MANx)), filed in the
United States District Court for the Central District of California. The
plaintiffs alleged that nine distributors in California were selling counterfeit
Zig-Zag(R) brand cigarette papers. As part of that action, the plaintiffs sought


                                       19
<PAGE>
and obtained temporary restraining orders prohibiting the sale of such
counterfeit products on March 27, 2001. The plaintiffs also obtained a seizure
order and, on April 3, 2001, executed it against seven of the distributors. All
seven were found to be in possession of counterfeit products. On April 10, 2001,
the court granted a preliminary injunction against all of the defendants,
barring the sale of counterfeit or infringing Zig-Zag(R) brand products, and
requiring the defendants to effect a recall of counterfeit products from the
market. Trial is currently scheduled for June 18, 2002. Any collections of
judgments in this case are to be divided evenly between Bollore and NAOC.

           On May 22, 2001, the Company participated as co-plaintiff with
Bollore, S.A. and North Atlantic Operating Company, Inc. in an action entitled
Bollore, S.A. v. Buy-Rite Wholesale (Case No. CV 01-4570 FMC (MAN)), filed in
the United States District Court for the Central District of California. The
plaintiffs alleged that seven distributors and retailers in California were
selling counterfeit Zig-Zag(R) brand cigarette papers. As part of that action,
the plaintiffs sought and obtained temporary restraining orders prohibiting the
sale of such counterfeit products on May 22, 2001. The plaintiffs also obtained
a seizure order and, on May 31, 2001, executed it on six of the defendants. Of
the six, four were found to be in possession of counterfeit products, and a
fifth was in possession of infringing foreign products. Nonetheless, on June 7,
2001, the Court declined to issue a preliminary injunction against the
continuing sale of counterfeit or infringing goods. Plaintiffs applied to the
court for reconsideration as to all defendants. On August 3, 2001 the court
again declined to issue a preliminary injunction, without prejudice to filing a
more detailed motion. Trial of this matter is currently scheduled for July 23,
2002.

           Discovery is continuing in all of the above cases and the Company
intends to vigorously pursue the defendants for damages. Management believes
that the successful prosecution of this litigation, whether by settlement or
otherwise, would have a favorable impact on its premium cigarette paper
business, which has been adversely affected by this counterfeiting activity.

           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 consider any of these other proceedings to be material. For a
description of regulatory matters and related industry litigation in which the
Company is a party, see Part I, Item 1. "Business--Regulation."

Item 4.    Submission of Matters to a Vote of Security Holders

           None.

                                     PART II

Item 5.    Market for Registrant's Common Stock and Related Stockholder Matters

           There is no trading market for the Company's voting common stock, par
value $.01 per share (the "Common Stock"), and, as of February 28, 2001, such
stock was held by 43 stockholders of record, 35 of whom are affiliates or
employees of the Company.

           There have been no dividends declared on the Common Stock. The
current policy of the Company's Board of Directors is to retain any future
earnings to provide funds for the operation and expansion of the Company's
business; however, the Board of Directors will review the dividend policy
periodically to determine whether the declaration of dividends is appropriate.
In addition, the payment of dividends by the Company is subject to certain
restrictions contained in (i) the Company's senior secured credit facility and


                                       20
<PAGE>
(ii) the indenture and certificate of designation, respectively, with regard to
the Company's outstanding senior notes and preferred stock.

Item 6.    Selected Financial Data

           The following table sets forth the consolidated selected statements
of operations, balance sheet and other data for the Company for the periods
indicated. The selected data is derived from the audited consolidated financial
statements of the Company for such years. As described in the consolidated
financial statements, the Company completed an acquisition of NATC and a
recapitalization of the Company on June 25, 1997. As such, the selected data of
the Company is not comparable in certain respects due to the purchase accounting
effect of this acquisition and recapitalization. This selected data should be
read in conjunction with, and is qualified by reference to, the consolidated
financial statements of the Company, and the related notes thereto, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this Form 10-K.

                      CONSOLIDATED SELECTED FINANCIAL DATA

                (Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
                                                 ------------------------------------------------------------------------------
                                                      2001            2000            1999            1998           1997(1)
                                                 --------------- --------------- ---------------- -------------- --------------
<S>                                              <C>             <C>             <C>              <C>            <C>
STATEMENT OF OPERATIONS DATA:
  Net Sales..........................................  $ 93,748     $ 93,145        $ 94,461         $ 93,081       $ 84,430
  Income (loss) before extraordinary loss and
      cumulative effect of change in accounting
      principle (net of preferred stock dividends
      of $6,745 in 2001, $6,005 in 2000, $5,361 in
      1999, $4,751 in 1998 and $2,268 in 1997)
      applicable to common shares....................    (8,109)      (8,104)         (3,766)         (3,744)          5,146
  Net income (loss) applicable to common
      shares(2)......................................    (8,109)      (9,205)         (3,766)         (3,744)         (1,975)
  Basic earnings per common share:
      Income (loss)..................................   ($15.35)     ($15.35)         ($7.13)         ($7.09)          $9.75
      Extraordinary loss.............................       --         (1.61)            --              --           (13.48)
      Cumulative effect of change in accounting
       Principle.....................................       --          (.47)            --              --              --
                                                      ----------    ----------     -----------      ----------      ----------

    Net loss applicable to common shares                ($15.35)     ($17.43)         ($7.13)         ($7.09)         ($3.73)
                                                      ==========    ==========     ===========      ==========      ==========


  Diluted earnings per common share:
      Income (loss)..................................   ($15.35)     ($15.35)         ($7.13)         ($7.09)          $8.43

      Extraordinary loss.............................       --         (1.61)            --              --           (11.66)
      Cumulative effect of change in accounting
       principle.....................................       --          (.47)            --              --              --
                                                      ----------    ----------     -----------      ----------      ----------

      Net loss applicable to common shares...........   ($15.35)     ($17.43)         ($7.13)         ($7.09)         ($3.23)
                                                      ==========    ==========     ===========      ==========      ==========


BALANCE SHEET DATA (AT END OF PERIOD):
  Total assets.......................................  $214,734      $227,757       $243,603         $260,307        $273,083
                                                      ==========    ==========     ===========      ==========      ==========
  Total debt, including current
  maturities.........................................  $167,500      $180,000       $195,864         $215,586        $230,000
                                                      ==========    ==========     ===========      ==========      ==========
  Mandatorily redeemable preferred
  stock..............................................  $ 57,443      $ 50,698       $ 44,693         $ 39,332        $ 34,581
                                                      ==========    ==========     ===========      ==========      ==========
OTHER DATA:
  Adjusted EBITDA(3).................................  $ 33,033      $ 33,182       $ 37,688         $ 38,503        $ 32,668
                                                      ==========    ==========     ===========      ==========      ==========
</TABLE>

                                       21
<PAGE>
(1)   The selected data for the year ended December 31, 1997 includes the
      results of operations of NAOC since its acquisition on June 25, 1997.

(2)   Net income (loss) attributable to common shares for the year ended
      December 31, 2000 includes an extraordinary loss of $850 (net of income
      tax benefit of $521) related to the write-off of deferred financing costs
      upon the refinancing of the Company's term loan and a cumulative effect of
      change in accounting principle of $251 (net of income tax benefit of $153)
      as a result of the adoption of Staff Accounting Bulletin No. 101, "Revenue
      Recognition in Financial Statements".

      Net income (loss) attributable to common shares for the year ended
      December 31, 1997 includes an extraordinary loss of $7,121 (net of income
      tax benefit of $4,365) related to the write-off of debt discounts and
      deferred financing costs upon the occurrence of the recapitalization of
      the Company on June 25, 1997. Income (loss) from continuing operations and
      net income (loss) applicable to common shares for the periods prior to
      June 25, 1997 does not include income tax expense because the Company and
      the Predecessor were a limited liability company and a partnership,
      respectively, prior to June 25, 1997, and did not incur any federal or
      state income taxes for such periods.

(3)   Adjusted EBITDA represents net income plus interest, taxes, depreciation,
      amortization and certain non-cash charges and expenses. Adjusted EBITDA is
      presented because management believes that Adjusted EBITDA is useful as an
      indicator of the Company's historical cash flow available to service its
      debt. Adjusted EBITDA should not be considered as an alternative to, or
      more meaningful than, net income (loss) (as determined in accordance with
      generally accepted accounting principles (GAAP)) as a measure of the
      Company's operating results or cash flows (as determined in accordance
      with GAAP) as a measure of the Company's liquidity.



Following is a reconciliation of Net Income (Loss) to Adjusted EBITDA:


<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                              -----------------------------------------------------------------------------
                                                  2001           2000            1999            1998            1997
                                              -------------- -------------- ---------------- -------------- ---------------
<S>                                           <C>            <C>            <C>              <C>            <C>
Net income (loss) ......................       $   (1,364)    $   (3,200)      $   1,595          $ 1,007          $ 293
   Interest expense, net................           19,742         22,261          23,488           24,927         18,361
   Income tax expense...................            2,043          1,529           3,813            3,213            852
   Depreciation.........................              637          1,067           1,923            1,687          1,619
   Amortization.........................            5,490          5,490           5,490            5,490          3,213
   Other (income) expense...............            2,642          1,801             (16)             (46)           (34)
   Unfunded pension obligation..........              513            201             594               --             --
   LIFO adjustment......................            2,682          2,434             174              904           (129)
   Stock option compensation expense....               33             33              70              819            900
   Postretirement expense...............              615            465             557              502            472
   Cumulative effective of accounting
      change............................               --            251              --               --             --
   Extraordinary loss, net of income
      tax benefit.......................               --            850              --               --          7,121
                                              -----------    -----------        --------         --------       --------
Adjusted EBITDA.........................         $ 33,033       $ 33,182        $ 37,688         $ 38,503       $ 32,668
                                              ===========    ===========        ========         ========       ========

</TABLE>



                                       22
<PAGE>
Item 7.    Management's Discussion and Analysis of Financial Condition and
           Results of Operations

RESULTS OF OPERATIONS

           The table and discussion set forth below relates to the consolidated
results of operations and financial condition of the Company for the years ended
December 31, 2001, 2000 and 1999.

<TABLE>
<CAPTION>
                                                                       Year Ended December 31, (000's)
                                             ------------------------------------------------------------------------------------
                                                        2001                         2000                          1999
                                             ---------------------------   ------------------------   ---------------------------
<S>                                         <C>                            <C>                        <C>
Net Sales...............................       $  93,748         100.0%      $ 93,145       100.0%       $ 94,461         100.0%
Cost of sales...........................          33,734          36.0         33,689        36.2          32,151          34.0
                                             ------------  -------------   -----------  -----------   ------------  -------------
Gross Profit............................          60,014          64.0         59,456        63.8          62,310          66.0
Selling, general and
   administrative expenses..............          31,461          33.6         30,474        32.7          27,940          29.6
Amortization of goodwill................           5,490           5.8          5,490         5.9           5,490           5.8
                                             ------------  -------------   -----------  -----------   ------------  -------------
Operating income........................          23,063          24.6         23,492        25.2          28,880          30.6
Interest expense & financing costs, net.          19,742          21.1         22,261        23.9          23,488          24.9
Other expense (income)..................           2,642           2.8          1,801         1.9             (16)           --
                                             ------------  -------------   -----------  -----------   ------------  -------------
Income (loss) from operations before income
tax expense.............................             679           0.7           (570)       (0.6)          5,408           5.7
Income tax expense......................           2,043           2.8          1,529         1.6           3,813           4.0
                                             ------------  -------------   -----------  -----------   ------------  -------------

Income (loss) before extraordinary loss and
cumulative effect of change in accounting
principle...............................          (1,364)         (1.5)        (2,099)      (2.2)           1,595           1.7
Extraordinary loss......................              --            --           (850)      (0.9)              --            --
Cumulative effect of change in accounting
principle...............................              --            --           (251)      (0.3)              --            --
                                             ------------  -------------   -----------  -----------   ------------  -------------
Net income (loss).......................         ($1,364)        (1.5%)       ($3,200)      (3.4%)         $1,595           1.7%
                                             ============  =============   ===========  ===========   ============  =============
</TABLE>

COMPARISON OF YEAR ENDED DECEMBER 31, 2001 TO YEAR ENDED DECEMBER 31, 2000

           Net Sales. For the year ended December 31, 2001, net sales were $93.7
million, an increase of $0.6 million or 0.6% from the prior year. Sales of the
Smokeless Tobacco segment decreased $0.5 million or 1.3% from the prior year
reflecting, in part, a 4.8% volume decrease, which was partially offset by price
increases during 2001. Net sales continued to be adversely impacted by
competitive pressures, including increased discounting from other loose leaf
competitors, from the growth of the moist snuff value brands as well as
increased discounting activity from moist snuff manufacturers.

           Sales of the MYO segment increased $1.1 million or 2.1% from the
prior year. This was due primarily to an increase of $2.2 million in sales of
the expanded MYO smoking tobacco and related products line, which was partially
offset by a planned decrease of $1.0 million in sales to Canada in an effort to
balance inventory positions to projected sales levels. For the year, Zig-Zag's
Canadian volume at the consumer level increased 6.0%. The Company believes that
its U.S. sales of Zig-Zag(R) premium cigarette papers in the MYO segment were
materially and adversely affected by the counterfeiting activity that is the
subject of the Texas and California Infringing Products Litigations, described
above under "Legal Proceedings". The Company believes, based on information
submitted as part of the legal process, that net sales of its Zig-Zag(R) premium
cigarette papers were reduced by a minimum of $6.5 million. In Management's
opinion, this had a material and adverse effect on the Company's sales.

           Gross Profits. For the year ended December 31, 2001, gross profit
increased 0.8% to $60.0 million from $59.5 million for the prior year and the
gross profit percentage increased to 64.0% from 63.8%. Gross profit and gross
profit percentage of the Smokeless Tobacco segment decreased to $21.6 million or
55.0% of net sales in 2001 from $22.5 million or 56.7% of net sales for the
prior year. The increase in the non-cash LIFO inventory adjustment accounted for
$0.8 million or 88.9% of the decline. Gross profit of the MYO segment increased


                                       23
<PAGE>
4.1% to $38.5 million due to the continued growth in the smoking tobacco and
related products area of this segment, in spite of the adverse impact of the
counterfeiting activity described above. Gross profit percentage increased from
69.2% of net sales to 70.5% of net sales due to the benefit of a favorable
currency strategy and to a decrease in the non-cash LIFO inventory adjustment of
$0.6 million.

           Currency. Currency movements and price increases are the primary
adjustment factors for changes in costs of goods sold. Cigarette papers are
purchased from Bollore on terms of net 45 days and are payable in Euros. Thus,
NAOC bears certain foreign exchange risks for its inventory purchases. To
minimize this risk, NAOC utilizes short-term forward currency contracts, through
which NAOC secures Euros in order to provide payment for its monthly purchases
of inventory. For the year ended December 31, 2001, currency rates were
generally favorable due to the strength of the U.S. dollar versus the Euro.
Accordingly, the Company was able to benefit economically by utilizing
short-term forward currency contracts. In the event that the Euro were to
strengthen against the U.S. dollar, the Company will reassess its currency
strategy.

           Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended December 31, 2001 increased 3.3% to
$31.5 million from the prior year's $30.5 million. This increase was due
primarily to marketing and sales incentives to enhance distribution of the
expanded MYO product line.

           Amortization of Goodwill. Amortization of goodwill was unchanged at
$5.5 million from the prior year.

           Interest Expense and Financing Costs. Interest expense and financing
costs decreased to $19.7 million in 2001 from $22.3 million for the prior year.
This decrease was the result of a lower average term loan balance coupled with a
lower average interest rate environment.

           Other Expense (Income). Other expense increased to $2.6 million in
2001 from $1.8 million for the prior year. Other expense in 2001 represents
legal, investigative and related expenses with respect to the Texas and
California Infringing Products Litigations involving Zig-Zag(R) premium
cigarette papers which are described above under "Legal Proceedings."

           Income Tax Expense. Income tax expense increased to $2.0 million in
2001 from $1.5 million for the prior year as a result of the increase in taxable
income from the prior year.

           Extraordinary Loss. The Company recorded an extraordinary loss of
$0.9 million (net of income tax benefit of $0.5 million) for the year ended
December 31, 2000 related to the write-off of deferred financing costs
associated with the initial acquisition financing in June 1997 and the
subsequent refinancing of the Company's term loan on December 29, 2000.

           Cumulative Effect of Change in Accounting Principle. The Company
recorded a cumulative effect of change in accounting principle of $0.3 million
(net of income tax benefit of $0.1 million) for the year ended December 31,
2000, as a result of the adoption of Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements".

           Net Loss. Due to the factors described above, there was a net loss of
$1.4 million for 2001 compared to the prior year's net loss of $3.2 million.


                                       24
<PAGE>
COMPARISON OF YEAR ENDED DECEMBER 31, 2000 TO YEAR ENDED DECEMBER 31, 1999

           Net Sales. For the year ended December 31, 2000, net sales were $93.1
million, a decrease of $1.3 million or 1.4% from the prior year. Sales of the
Smokeless Tobacco segment decreased $6.1 million, or 13.3% from the prior year
reflecting, in part, a 16.0% volume decrease, which was partially offset by
manufacturers' price increases during 2000. Net sales in 2000 were adversely
impacted by a dispute with a substantial customer; an unsuccessful cost savings
attempt to change the Smokeless Tobacco segment's Buy 1/Get 1 Free packaging;
and reduced market coverage resulting from increased resignations of field sales
personnel during the period when certain assets of the Smokeless Tobacco segment
were under an agreement to be sold, which agreement was terminated in December
2000. In addition, net sales continues to be adversely impacted by Competitive
pressures, including increased discounting, from loose leaf and moist snuff
manufacturers. For the Smokeless Tobacco segment, these factors had an estimated
aggregate unfavorable impact on net sales of $4.4 million. Sales of the MYO
segment increased $4.8 million or 9.8% from the prior year. This increase was
due primarily to an increase of $3.4 million in sales of the expanded MYO
product line and an increase of $1.5 million in sales to Canada as a result of
an increase in sales and inventory levels to avoid out-of-stock situations.

           Gross Profits. For the year ended December 31, 2000, gross profit
decreased 4.6% to $59.5 million from $62.3 million from the prior year and the
gross profit percentage declined to 63.8% from 66.0%. Gross profit and gross
profit percentage of the Smokeless Tobacco segment decreased to $22.5 million or
56.7% of net sales in 2000 from $28.7 million or 62.6% of net sales for the
prior year. The non-cash LIFO inventory adjustment of $2.1 million in 2000
accounted for 34% of the $6.2 million decline. Management believes that the
factors discussed above, which adversely impacted net sales by $4.4 million, had
an estimated adverse impact on gross profits of $2.8 million. Gross profit and
gross profit percentage of the MYO segment increased to $37.0 million or 69.2%
of net sales in 2000 from $33.6 million or 69.1% of net sales for the prior year
due, in part, to the rapid growth in this segment resulting from increased
distribution and new product introductions and, in part, to the strong identity
of the Zig-Zag brand.

           Currency. Currency movements and price increases are the primary
adjustment factors for changes in costs of goods sold. Cigarette papers are
purchased from Bollore on terms of net 45 days in French francs. Thus, NAOC
bears certain foreign exchange risks for its inventory purchases. To hedge this
risk, NAOC utilizes short-term forward currency contracts, through which NAOC
secures French francs in order to provide payment for its monthly purchases of
inventory. In addition, Bollore provides a contractual hedge against significant
currency fluctuation in its agreement with NAOC. For the year ended December 31,
2000, currency rates were generally favorable for the Company due to the
strength of the U.S. dollar versus the French franc. The Company was able to
successfully hedge its currency risk by utilizing short-term forward currency
contracts. In the event that the trend of the French franc were to strengthen
against the U.S. dollar, the Company would reassess its currency strategy.

           Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended December 31, 2000 increased 9.1% to
$30.5 million from the prior year's $28.0 million. This increase was due
primarily to increased legal and litigation expenses and marketing and sales
incentives, the latter of which was to create enhanced distribution of the
expanded MYO product line.

           Amortization of Goodwill. Amortization of goodwill was unchanged at
$5.5 million from the prior year.

                                       25
<PAGE>
           Interest Expense and Financing Costs. Interest expense and financing
costs decreased to $22.3 million in 2000 from $23.5 million for the prior year.
This decrease was the result of a lower average term loan balance, despite a
higher average interest rate environment.

           Other Expense (Income). Other expense (income) increased to $1.8
million in 2000. This expense was for legal fees and other costs associated with
the proposed sale of the smokeless tobacco segment, which was terminated in
December 2000.

           Income Tax Expense. Income tax expense decreased to $1.5 million in
2000 from $3.8 million for the prior year as a result of the decrease in taxable
income from the prior year. Despite a loss from operations, the Company incurred
an income tax expense due to the non-deductibility of certain goodwill charges
associated with the 1997 acquisition and recapitalization.

           Extraordinary Loss. The Company recorded an extraordinary loss of
$0.9 million (net of income tax benefit of $0.5 million) for the year ended
December 31, 2000 related to the write-off of deferred financing costs
associated with the initial acquisition financing in June 1997 and the
subsequent refinancing of the Company's term loan on December 29, 2000.

           Cumulative Effect of Change in Accounting Principle. The Company
recorded a cumulative effect of change in accounting principle of $0.3 million
(net of income tax benefit of $0.1 million) for the year ended December 31,
2000, as a result of the adoption of Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements".

           Net Income (Loss). Due to the factors described above, there was a
net loss of $3.2 million for the year ended December 31, 2000 compared to net
income of $1.6 million for the prior year.

LIQUIDITY AND CAPITAL REQUIREMENTS

           Working capital was $24.8 million at December 31, 2001 compared to
$28.9 million at December 31, 2000. This decrease was primarily the result of a
reduction in inventory of $5.2 million due to the planned reduction of inventory
levels at National Tobacco and the non-cash LIFO inventory adjustment of $2.7
million; an increase in receivables of $1.5 million; and a decrease in Deferred
Income Taxes of $0.6 million. The Company funds its seasonal working capital
requirements through its operating cash flows, and, if needed, bank borrowings.
As of December 31, 2001, the Company had an undrawn availability of $9.0 million
under its committed $10.0 million revolving credit facility.

           The Company has a Loan Agreement (the "Loan Agreement") with Bank
One, Kentucky, N.A. as Agent (the "Agent"), and the banks named therein which
provides for a $25 million term loan and a $10 million revolving line of credit.
Borrowings under the Loan Agreement bear interest at variable rates based, at
the Company's option, on prime or LIBOR rates. The term loan is payable in eight
(8) quarterly installments of $3,125,000 each plus accrued interest, commencing
on March 31, 2001. Both the term loan and the revolver mature on December 31,
2002. As part of the revolving line of credit, the lenders agreed to issue up to
$10 million of standby letters of credit. The Company's obligations under the
Loan Agreement are guaranteed by National Tobacco, NAOC and NTFC. In addition,
the Company's obligations are secured by all of the Company's assets and the
Company's equity in its subsidiaries. The interest rate on borrowings under the
Loan Agreement ranged from 4.62% to 6.05% at December 31, 2001. In addition, the
Company must pay a quarterly commitment fee of 0.5% per annum of the unused
portion of the revolver.

                                       26
<PAGE>
           On June 25, 1997, the Company issued $155.0 million of 11% Senior
Notes due 2004 (the "Senior Notes"). The Senior Notes mature and are payable on
June 15, 2004. The Notes bear interests at 11% per annum, payable semiannually
on June 15 and December 15. At the present time, the Company projects that it
will not have sufficient funds to effect such repayment in the absence of a
refinancing. The Company intends to refinance this debt in advance of its
maturity date. The ability to do so will depend, among other things, on the
financial performance of the Company and the availability of funds from the
capital markets. Although the Company believes it will be able to effect such a
refinancing, there can be no assurance that such a refinancing will be obtained.

           The Loan Agreement and the Senior Notes include cross default
provisions and limit the incurrence of additional indebtedness, dividends,
transactions with affiliates, asset sales, acquisitions, mergers, prepayments of
indebtedness, liens and encumbrances, and other matters. The Loan Agreement also
requires the Company to meet a fixed charge coverage test. At December 31, 2001,
the Company was in compliance with all provisions of the Loan Agreement and
Senior Notes.

           Following June 15, 2002, dividends on the Company's 12% Senior
Payment-in-Kind Preferred Stock (the "Preferred Stock") are payable in cash. The
Company's ability to make such dividend payments in cash will depend upon the
availability of funds and whether the Company has satisfied the "restricted
payments" provision under the Indenture pursuant to which the Senior Notes were
issued. At the present time, the Company believes that it will be able to
satisfy all conditions with respect to the September 15, 2002 dividend payment,
as well as future dividend payments; however, there can be no assurance that the
Company's actual performance will satisfy the required conditions stated above.
If the Company is unable to satisfy the "restricted payments" provision with
respect to the September 15, 2002 dividend payment, or any subsequent dividend
payment, dividends on the Preferred Stock will accrue at the rate of 14% per
annum (instead of the current 12% per annum rate) until all accrued dividends
have been paid. In addition, the holders of the Preferred Stock will have the
right to elect two members to the Company's Board of Directors until all accrued
dividends have been paid.

           The tobacco for loose leaf chewing tobacco requires aging of up to
two years before being processed into finished products. The Company believes
that National Tobacco maintains sufficient tobacco inventories to ensure proper
aging as well as an adequate supply based on its historical and projected sales
activity. The Company also believes that NAOC maintains adequate inventories
based on its historical and projected sales activity and that the supply of such
inventory will remain stable for the foreseeable future.

           The Company believes that any effect of inflation at current levels
will be minimal. Historically, the Company has been able to increase prices at a
rate equal to or greater than that of inflation and believes that it will
continue to be able to do so for the foreseeable future. In addition, the
Company has been able to maintain a relatively stable variable cost structure
for its smokeless tobacco products due, in part, to its successful procurement
and reformulation activities.

           For 2001, the Company spent $603,000 in capital expenditures. Given
its current operation, the Company believes that its annual capital expenditure
requirements for 2002 will be in the range of $500,000 - $750,000.

           Pursuant to the U.S. Distribution Agreement (which is more fully
discussed in Item 1), the Company is committed to purchase a minimum of
23,000,000 booklets of premium cigarette papers annually. This level of
purchases has been significantly exceeded since the Acquisition and Management
believes that the Company will be able to significantly exceed this requirement
for the foreseeable future. The agreement has also established the purchase
price for Zig-Zag(R) premium cigarette papers through 2004, subject to certain


                                       27
<PAGE>
adjustments to reflect increases in the U.S. consumer price index and to account
for material currency fluctuations. The Distribution Agreements provide that, in
order to assure each of the parties commercially reasonable profits in light of
inflationary trends and currency translation factors, prior to December 31, 2004
and each fifth-year anniversary of such date, the parties will enter into good
faith negotiations to agree on an index and currency adjustment formula to
replace the index and formula currently in effect. If the parties are unable to
agree, the dispute is to be submitted to binding arbitration.

           The following schedule summarizes the Company's contractual cash
obligations at December 31, 2001 (in thousands). With regard to the Senior Notes
and the Loan Agreement, the schedule shows the principal amounts payable and
does not reflect interest payment obligations. With regard to the Preferred
Stock, the schedule shows the amount payable upon mandatory redemption and does
not reflect dividend payment obligations.


<TABLE>
<CAPTION>
                                                                       Payments Due By Period
                                                                       ----------------------
        Contractual Cash Obligations         Total      Less than 1 year     1-3 years         4-5 years      After 5 years
        ----------------------------         -----      ----------------     ---------         ---------      -------------
<S>                                     <C>             <C>                 <C>             <C>                <C>
Senior Notes                               $155,000     $            -          $155,000    $            -                -
Loan Agreement                               12,500             12,500                 -                 -                -
Preferred Stock                              58,051                  -                 -            58,051                -
Operating Leases                              1,512                817               695                 -                -
                                        -----------     --------------      ------------    ---------------    ------------
Total Contractual Cash Obligations         $227,063        $    13,317          $155,695        $   58,051      $         -
                                        ===========     ==============      ============   ================    ============
</TABLE>

           Except as described above with respect to the Senior Notes and
Preferred Stock, the Company believes that its operating cash flows, together
with its revolving credit facility, should be adequate to satisfy its reasonably
foreseeable operating capital requirements. This is based, among other things,
on the Company's belief that it has significantly reduced the distribution of
counterfeit cigarette papers. If such activity were to reoccur, the Company's
operating cash flows would likely be adversely and materially affected.
Additionally, the financing of any significant future products, business or
property acquisitions, and any refinancing of the Senior Notes or Preferred
Stock, will depend upon the Company's ability to access the capital markets.

CRITICAL ACCOUNTING POLICIES

           The Company recognizes revenues and the related costs upon the
transfer of title and risk of loss to the customer. The Company believes the
accounting policies below represent its critical accounting policies due to the
estimation process involved in each. See Note 2, in the Audited Consolidated
Financial Statements, for a detailed discussion of the Company's accounting
policies.

           Goodwill - The Company amortizes goodwill over the estimated useful
lives of its assets. To the extent that the estimated lives need to be
shortened, the annual amortization charge may be increased. Further, the
realization of the carrying value of the goodwill is dependent upon future
expected operating cost flows. If sufficient cash flows are not generated, a
write down of goodwill may be required.


                                       28
<PAGE>
           Taxes - The Company has not provided a valuation allowance to reduce
its net deferred income tax assets since the Company is "more likely than not"
to be able to realize these benefits before they expire. If the Company should
determine that it would not be able to realize all or part of its net deferred
income tax assets in the future, an adjustment to the deferred income tax assets
would be charged to earnings in the period such determination was made.

           Contingencies - Note 17 of the Audited Consolidated Financial
Statements discusses various litigation matters that impact the Company. No loss
or gain contingencies have been recorded for these matters since Management
believes that it is not probable that a loss has been incurred or an asset
realized. Future events may result in different conclusions, which could
materially impact, either positively or negatively, the Company's results of
operations or financial position.

RECENT ACCOUNTING PRONOUNCEMENTS

           In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS No. 141"). The Statement addresses financial accounting and reporting for
business combinations and supercedes Accounting Principles Board Opinion No. 16
"Business Combinations", and Statement of Financial Accounting Standards No. 38,
"Accounting for Pre-acquisition Contingencies of Purchased Enterprises". All
business combinations in the scope of SFAS No. 141 are to be accounted for using
one method - the purchase method. SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001.

           Also in July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which
establishes the accounting for goodwill and other intangible assets following
their recognition. SFAS 142 applies to all goodwill and other intangible assets
whether acquired singly, as part of a group, or in a business combination. SFAS
142 provides that goodwill and other intangible assets believed to have
indefinite lives should not be amortized but should be tested for impairment
annually using a fair-value based approach. In addition, SFAS 142 provides that
other intangible assets other than goodwill should be amortized over their
useful lives and reviewed for impairment in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 142 is
effective for the Company beginning on January 1, 2002. Upon adoption, the
Company will be required to perform a transitional impairment test under SFAS
142 for all goodwill recorded as of January 1, 2002. Any impairment loss
recorded as a result of completing the transitional impairment test will be
treated as a change in accounting principle. Management has not completed the
transitional impairment test and has not determined whether an impairment
adjustment will be required upon adoption. Additionally, Management has not yet
determined the impact of SFAS 142 on the Company's Amortization expense. The
adoption of SFAS 142 would not impact the Company's Adjusted EBITDA, which is
Management's performance standard.

           In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (FAS 144). The Statement addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. This Statement supercedes
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of (FAS
121), and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30, Reporting the Results of Operations, Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for the disposal of a segment of a business
(as previously defined in that Opinion). This Statement also amends Accounting
Research Bulletin No. 51, Consolidated Financial Statements, to eliminate the


                                       29
<PAGE>
exception to consolidation for a subsidiary for which control is likely to be
temporary. The objectives of FAS 144 are to address significant issues relating
to the implementation of FAS 121 and to develop a single accounting model, based
on the framework established in FAS 121, for long-lived assets to be disposed of
by sale, whether previously held and used or newly acquired. The Company will
adopt FAS 144 in the first quarter 2002. Management has not determined the
impact of FAS 144 but does not believe that the adoption will have a material
effect on the Company's results of operations or financial position.

           During 2001, the Emerging Issues Task Force issued: EITF No. 00-14,
"Accounting for Certain Sales Incentives" addressing the recognition,
measurement and statement of earnings classification of certain sales
incentives; and EITF No. 00-25, "Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor's Products" addressing the
statement of earnings classification of consideration from a vendor to an entity
that purchases the vendor's products for resale. The Company will adopt EITF
00-14 and 00-25 in the first quarter of 2002. Management is currently evaluating
the impact of EITF 00-14 and 00-25 and expects that their adoption will result
in a reclassification of certain expenses from selling, general and
administrative expenses to net sales with no impact on the operating income
(loss) or net income (loss) for 2002 and future years. Prior year amounts will
be reclassified to be consistent with the Company's 2002 presentation.

FORWARD-LOOKING STATEMENTS

           The Company cautions the reader that certain statements contained in
the Management's Discussion and Analysis of Financial Condition and Results of
Operations section as well as elsewhere in this Form 10-K 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 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, 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 7A.   Quantitative and Qualitative Disclosures about Market Risk

           Interest Rate Sensitivity. The Company has exposure to interest rate
volatility primarily relating to interest rate changes applicable to term and
revolving loans under its senior secured credit facility. The Company's credit
facility bears interest at rates which vary with changes in (i) LIBOR or (ii) a
rate of interest announced publicly by the Federal Reserve. The Company does not
speculate on the future direction of interest rates. As of December 31, 2001,
$12.5 million of the Company's debt bore interest at variable rates. The Company
believes that the effect, if any, of reasonably possible near-term changes in


                                       30
<PAGE>
interest rates on the Company's consolidated financial position, results of
operations or cash flows would not be significant.

           Foreign Currency Sensitivity. NAOC purchases inventory from Bollore
on terms of net 45 days which is payable in Euros. Accordingly, exposure exists
to potentially adverse movement in foreign currency rates. NAOC uses short-term
forward currency contracts to minimize the risk in foreign currency exchange
rates. In addition, Bollore provides a contractual hedge against catastrophic
currency fluctuation in its agreement with NAOC. NAOC does not use derivative
financial instruments for speculative trading purposes, nor does NAOC hedge its
foreign currency exposure in a manner that entirely offsets the effects of
changes in foreign exchange rates.

           NAOC regularly reviews its hedging programs and may as part of this
review determine at any time to change its hedging policy. As of December 31,
2001, NAOC had no outstanding forward currency contracts.

Item 8.    Financial Statements and Supplementary Data

           The Company's Consolidated Financial Statements and Notes to
Consolidated Financial Statements, and the report of PricewaterhouseCoopers LLP,
independent accountants, with respect thereto, referred to in the Index to
Consolidated Financial Statements and Financial Statement Schedules of the
Company contained in Item 14(a), appear on pages F-1 through F-35 of this Form
10-K and are incorporated herein by reference thereto. Information required by
schedules called for under Regulation S-X is either not applicable or is
included in the Consolidated Financial Statements or Notes thereto.

Item 9.    Changes in and Disagreements With Accountants on Accounting and
           Financial Disclosure

           None.

                                    PART III

Item 10.   Directors and Executive Officers of the Registrant

BOARD OF DIRECTORS AND EXECUTIVE OFFICERS

           The following table sets forth the name, position with the Company
and age of each member of the Board of Directors and each executive officer of
the Company as of the date of this filing. See "Election of Directors."

Name                            Age         Position
----                            ---         --------

Thomas F. Helms, Jr........     61          Chief Executive Officer, President
                                            and Chairman of the Board

David I. Brunson...........     51          Executive Vice President--Finance
                                            and Administration, Chief Financial
                                            Officer, Treasurer, Secretary and
                                            Director

Jack Africk................     73          Director

Marc S. Cooper.............     40          Director


           Thomas F. Helms, Jr. Thomas F. Helms, Jr. has been Chief Executive
Officer, Chairman of the Board and the sole member of the Administration
Committee of the Company since June 1997. On January 1, 1999, Mr. Helms assumed
the additional responsibilities of President of the Company. He had previously


                                       31
<PAGE>
held the position of President of the Company and its subsidiaries (other than
International Flavors and Technology, Inc. ("IFT")) prior to January 1998. He
currently serves as Chairman of the Board of each of the Company's corporate
subsidiaries. He has been Chief Executive Officer of National Tobacco and NTFC
since 1988 and has held the same office with NAOC and IFT since October 1997.
Mr. Helms also served as President and Chief Executive Officer of Culbro
Corporation's smokeless tobacco division from 1983 until shortly prior to its
sale to American Maize-Products Company in March 1986. From 1979 to 1982, Mr.
Helms was General Manager of the Etherea Cosmetics and Designer Fragrances
Division of Revlon, Inc. Prior to that time, Mr. Helms was employed in marketing
and sales positions in various divisions of Revlon Consumer Products
Corporation.

           David I. Brunson. David I. Brunson has been Executive Vice
President--Finance and Administration, Chief Financial Officer and a Director of
the Company since June 1997 and a member of the Company's Executive Committee
since December 1997. He has held the same offices with National Tobacco and NTFC
(since April 1997), NAOC (since October and June 1997, respectively) and IFT
(since October 1997). In December 1998, Mr. Brunson was also appointed to the
offices of Treasurer and Secretary of the Company and Secretary of IFT. In
addition, he currently holds the offices of Treasurer and Assistant Secretary
with each of the Company's subsidiaries (other than IFT). Mr. Brunson has also
served as a member of the Board of the Directors of each of the Company's
corporate subsidiaries since October 1997 (or, in the case of NAOC, since June
1997). Prior to joining the Company, from November 1992 until April 1997, he was
employed as a Managing Director at Societe Generale and established and was
President of Societe Generale Investment Corporation. From July 1979 until
November 1992, he was employed at The First National Bank of Chicago, lastly as
a Managing Director in the Investment Banking Division.

           Jack Africk. Jack Africk has been a Director since October 1997 and
has been serving as a consultant to the Company since January 1999. From January
through December 1998 he served as President and Chief Operating Officer of the
Company and each of its subsidiaries (other than IFT). From February to December
1998, Mr. Africk was also a Director of each of the Company's corporate
subsidiaries. Beginning in 1996 and until the consummation of the Acquisition,
he was Chief Executive Officer of NATC. Prior to that time, from 1993 to 1996,
Mr. Africk was a consultant and Director of NATC. Mr. Africk is a former Vice
Chairman of UST. From 1979 until 1993, Mr. Africk held various positions with
UST, including Vice Chairman and Executive Vice President, as well as positions
with subsidiary organizations including President of an international division,
and President and Chief Executive Officer of United States Tobacco Company. Mr.
Africk also currently serves as Managing Partner of Evolution Partners and as a
Director of Tanger Factory Outlets, a NYSE real estate investment trust that
owns and operates factory outlet centers, and Crown Central Petroleum, an
operator of refineries, gasoline stations and convenience stores.

           Marc S. Cooper. Marc Cooper has served as a Director of the Company
since May 2001. Since May 1999, he has served as a Managing Director of Peter J.
Solomon Company in its Mergers and Acquisitions Department. From March 1992
until May 1999, Mr. Cooper founded and served as Vice Chairman of Barington
Capital Group, an investment bank. Prior to his tenure with Barington Capital
Group, Mr. Cooper spent three years as a partner of Scharf Brothers, a private
merchant banking firm. Currently, Mr. Cooper serves as a director of Thinking
Tools, Inc. and Precache, Inc.

           No family relationships exist between any director and executive
officer of the Company.


                                       32
<PAGE>
ELECTION OF DIRECTORS

           Pursuant to the terms of an Exchange and Stockholders' Agreement,
dated as of June 25, 1997, among the Company and certain of the stockholders of
the Company (the "Stockholders' Agreement"), Mr. Helms has the right to vote a
number of shares of common stock in respect of the election of directors
sufficient to elect all of the directors of the Company unless dividends are not
paid in cash to the holders of the Company's Senior Preferred Stock when such
dividends are required to be paid in cash, in which event such holders have the
right to elect two directors. Each director is to serve until the next annual
meeting of shareholders (or written consent in lieu thereof) and until his
successor is elected and duly qualified.

Item 11.   Executive Compensation

           The following table summarizes the compensation paid by the Company
as well as certain other compensation paid or accrued, to the executives listed
below for the fiscal years ended December 31, 1999, 2000 and 2001 (each person
appearing in the table is referred to as a "Named Executive"):

<TABLE>
<CAPTION>
                           Summary Compensation Table
                                                                          Annual Compensation
                                                                          -------------------            All Other
NAME AND PRINCIPAL POSITION                                  Year       Salary ($)     Bonus ($)      Compensation ($)
---------------------------                                  ----       ----------     ---------      ----------------
<S>                                                         <C>        <C>            <C>              <C>
Thomas F. Helms, Jr. .................................       2001         $525,000     $400,000        $106,797 (1)
      Chief Executive Officer and President                  2000          525,000      400,000         102,758 (2)
                                                             1999          525,000      236,500          48,320 (3)
David I. Brunson......................................       2001          425,000      300,000          78,712 (4)
      Executive Vice President--Finance and                  2000          406,538      200,000          37,174 (5)
      Administration and Chief Financial Officer             1999          354,231      200,000          18,793 (6)
James W. Dobbins......................................       2001          197,596       25,000           9,242 (7)
      Senior Vice President--General Counsel                 2000          179,327       20,000           6,101 (8)
                                                             1999          103,654       25,500          30,670 (9)
James M. Murray.......................................       2001          183,481       35,000         10,745 (10)
      Senior Vice President--Sales & Marketing               2000          164,289       30,000         40,388 (11)
                                                             1999           45,769       40,000         24,516 (12)
Christopher N. Kounnas................................       2001          156,000            -         10,826 (13)
      Senior Vice President--R & D and                       2000          156,000        5,000          8,402 (14)
       Regulatory Compliance..........................       1999          153,692            -          4,230 (15)

</TABLE>

-------------------------------
(1)   Includes insurance premiums of $41,917 paid by the Company with respect to
      term life and disability insurance, contributions by the Company of $6,803
      to a defined contribution plan, $50,000 as compensation for estate and tax
      planning activities and $8,077 for miscellaneous payments.

(2)   Includes insurance premiums of $41,917 paid by the Company with respect to
      term life and disability insurance, contributions by the Company of $6,803
      to a defined contribution plan, $50,000 as compensation for estate and tax
      planning activities and $4,038 for miscellaneous payments.


                                       33
<PAGE>
(3)   Includes insurance premiums of $41,917 paid by the Company with respect to
      term life and disability insurance, and contributions by the Company of
      $6,403 to a defined contribution plan.

(4)   Includes insurance premiums of $12,390 paid by the Company with respect to
      term life and disability insurance, contributions by the Company of $6,803
      to a defined contribution plan, $35,000 as compensation for estate and tax
      planning activities and $24,519 for miscellaneous payments.

(5)   Includes insurance premiums of $12,390 paid by the Company with respect to
      term life and disability insurance, contributions by the Company of $6,803
      to a defined contribution plan and $17,981 for miscellaneous payments.

(6)   Includes insurance premiums of $12,390 paid by the Company with respect to
      term life and disability insurance and contributions by the Company of
      $6,403 to a defined contribution plan.

(7)   Includes contributions by the Company of $6,550 to a defined contribution
      plan and $2,692 for miscellaneous payments.

(8)   Includes contributions by the Company of $5,380 to a defined contribution
      plan and $721 for miscellaneous payments.

(9)   Includes contributions by the Company of $1,616 to a defined contribution
      plan and $29,054 for relocation expenses.

(10)  Includes contributions by the Company of $6,803 to a defined contribution
      plan and $3,942 for miscellaneous payments.

(11)  Includes contributions by the Company of $6,803 to a defined contribution
      plan, $687 for miscellaneous payments and $32,898 for relocation expenses.

(12)  Includes $24,516 for relocation expenses.

(13)  Includes contributions by the Company of $6,026 to a defined contribution
      plan and $4,800 for miscellaneous payments.

(14)  Includes contributions by the Company of $4,802 to a defined contribution
      plan and $3,600 for miscellaneous payments.

(15)  Includes contributions by the Company of $4,230 to a defined contribution
      plan.


STOCK OPTIONS

           The Company did not award any stock options to any of the Named
Executives during the last fiscal year.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

           Thomas F. Helms, Jr., Chief Executive Officer and President of the
Company, is the sole member of the Company's Administration Committee. In March
2002, a Compensation Committee, consisting of Jack Africk and Marc S. Cooper,
was established by the Board of Directors to consider matters relating to the
compensation of the Company's executive officers, including bonuses for the year
ended December 31, 2001. For information concerning related-party transactions
involving Mr. Helms or the members of the Compensation Committee, see Item 13,
"Certain Relationship Transactions."

COMPENSATION OF DIRECTORS

           Generally, directors who do not receive compensation as officers or
employees of the Company or any of its affiliates will be paid an annual
retainer fee of $25,000, plus reasonable out-of-pocket expenses, for their
services on the Board and its committees.

EMPLOYMENT AGREEMENTS

THOMAS F. HELMS JR.

           Thomas F. Helms, Jr., Chief Executive Officer of the Company, is
party to an employment agreement with the Company, dated May 17, 1996 (the
"Helms Employment Agreement"), pursuant to which Mr. Helms is currently
receiving an annual base salary of $525,000, which is reviewed annually, plus a


                                       34
<PAGE>
bonus in accordance with the Company's Executive Plan (as defined). The Helms
Employment Agreement provides for a three-year term, renewable annually, and is
terminable at will except with respect to severance. In addition, Mr. Helms
receives various other benefits, including life insurance and health,
hospitalization, disability and pension benefits and other perquisites. The
Helms Employment Agreement includes a non-compete provision for a minimum of
twelve months following the termination of Mr. Helms's employment as well as for
any period during which severance is paid to Mr. Helms. Mr. Helms is entitled to
twelve months' severance and a continuation of benefits following a termination
of his employment by the Company without cause, except that the bonus received
shall be only for the year in which the termination occurred and shall be
prorated.

DAVID I. BRUNSON

           David I. Brunson, Executive Vice President--Finance and
Administration, Chief Financial Officer, Treasurer and Secretary of the Company,
entered into an amended and restated employment agreement with the Company on
April 30, 1998 (as so amended and restated, the "Brunson Employment Agreement").
Pursuant to the Brunson Employment Agreement, Mr. Brunson is currently receiving
an annual base salary of $425,000, which is reviewed annually, plus a bonus in
accordance with the Company's Executive Plan. The Brunson Employment Agreement
provides for a term ending on the later of April 30, 2002 or the second
anniversary of the date notice of termination is first given, and is terminable
at will except with respect to severance. Mr. Brunson received signing and stay
bonuses, each in the amount of $300,000, upon the execution of the Brunson
Employment Agreement and on February 28, 1999, respectively. In addition, Mr.
Brunson receives various other benefits, including life insurance and medical,
disability, pension benefits, club memberships, stock options and reimbursements
of certain expenses. The Brunson Employment Agreement includes a non-compete
provision for a minimum of twelve months following the termination of Mr.
Brunson's employment and for any subsequent period during which severance is
paid to Mr. Brunson.

           In the event Mr. Brunson resigns for good reason or is terminated
without cause, he is entitled to receive his annual base salary, and a pro rated
bonus (based on the highest bonus paid to Mr. Brunson during the preceding two
years) for the remainder of the term of employment. Any options or shares of
restricted stock granted to Mr. Brunson vest in full as of the date of such
termination. In addition, Mr. Brunson would also have the option to require the
Company to repurchase at fair market value all or a portion of his shares of the
Company's common stock. In the event of his termination within twelve months
following the occurrence of a change of control of the Company, Mr. Brunson will
receive a lump sum cash payment equal to three times the sum of (a) his current
annual base salary and (b) the highest bonus paid to Mr. Brunson pursuant to the
Executive Plan during the preceding two years. If Mr. Brunson's employment is
terminated for any other reason, he will receive his accrued and unpaid salary
and bonus to the date of termination.

           Pursuant to a non-qualified stock option agreement, Mr. Brunson was
granted options to purchase 30,928 shares of Common Stock of the Company.
One-third of these options were vested as of the closing of the Acquisition and
one-third of these options were vested on each of the first two anniversaries of
the date of his employment, April 23, 1997. In connection with the exercise of
such options and subject to certain limitations, including a requirement that
Mr. Brunson shall not leave, resign or be terminated for cause, the Company has
agreed to pay Mr. Brunson an amount equal to the sum of (i) the difference
between ordinary income and long-term capital gain tax liability for reportable
income resulting from any exercise of the options, plus (ii) a "gross-up" to
compensate for the additional ordinary income tax liability resulting from the
payment of such amount.

                                       35
<PAGE>
RETIREMENT PLAN

           The table below illustrates the approximate amounts of annual normal
retirement benefits payable under the Company's Retirement Plan (as defined
herein).
















                                       36
<PAGE>
                       Annual Benefits at Retirement with
                          Years of Credited Service(1)
<TABLE>
<CAPTION>
  Average
Compensation         10              15                20                25                 30                35
------------     ----------      ----------        ----------        ----------         ----------        ----------
<S>              <C>             <C>               <C>               <C>                <C>               <C>
  $125,000        $ 15,000        $ 22,500          $ 30,000          $ 37,500           $ 45,000          $ 52,500
   150,000          18,000          27,000            36,000            45,000             54,000            63,000
   175,000          21,000          31,500            42,000            52,500             63,000            73,500
   200,000          24,000          36,000            48,000            60,000             72,000            84,000
   225,000          27,000          40,500            54,000            67,500             81,000            94,500
   250,000          30,000          45,000            60,000            75,000             90,000           105,000
   300,000          36,000          54,000            72,000            90,000            108,000           126,000
   400,000          48,000          72,000            96,000           120,000            144,000           168,000
   450,000          54,000          81,000           108,000           135,000            162,000           189,000
   500,000          60,000          90,000           120,000           150,000            180,000           210,000

</TABLE>

----------------
(1)   Actual amounts paid under the Retirement Plan may be less than the amounts
      set forth on the table due to IRC limitations.


           The Company has a noncontributory, defined benefit retirement plan
(the "Retirement Plan"), which covers all full-time employees, including
officers, upon completing one year of service.

           A participant in the Retirement Plan becomes fully vested prior to
normal retirement at age 65 upon the completion of five years of service.
Benefits are also provided under the Retirement Plan in the event of early
retirement at or after age 55 and the completion of at least ten years of
service (or special early retirement after completion of 30 years of service)
and in the event of retirement for disability after completion of five years of
service. The amount of the contribution, payment, or accrual with respect to a
specified person is not and cannot readily be separately or individually
calculated by the actuaries for the Retirement Plan. Benefits under the
Retirement Plan are based upon application of a formula to the specified average
compensation and years of credited service at normal retirement age.
Compensation covered by the Retirement Plan consists of the average annual
salary during any five consecutive calendar years in the last ten years of an
employee's service, which affords the highest salary, or, if employed for less
than five years, the average annual salary for the years employed. The benefits
are not subject to any deduction for social security payments. Estimated
credited years of service under the Retirement Plan for the Named Executives are
as follows: Thomas F. Helms, Jr., 14 years; David I. Brunson, 4 years; James W.
Dobbins, 2 years; James M. Murray, 2 years; and Christopher N. Kounnas, 14
years.

BONUS PLANS

           In March 1999, the Compensation Committee of the Company's Board of
Directors adopted the 1999 Executive Incentive Plan (the "Executive Plan"), the
1999 Management Bonus Plan (the "Management Plan") and the 1999 Discretionary
Bonus Plan (the "Discretionary Plan"). The Executive Plan provides executive
members of the Company with the opportunity to receive bonus pay based on the
Company's annual EBITDA performance, subject to approval of the Board of
Directors. In addition, the Board of Directors can make discretionary bonus
payments to one or more participants in the Executive Plan. The Management Plan
provides certain members of senior management of the Operating Companies with
the opportunity to receive bonus pay based on the Company's annual EBITDA


                                       37
<PAGE>
performance as well as the individual performance of participants, subject to
approval of Executive Management. If the Company's annual EBITDA performance is
not achieved, Executive Management, subject to approval of the Board of
Directors, can make discretionary bonus payments. Under the Discretionary Bonus
Plan, Executive Management, subject to approval of the Board of Directors, may
provide discretionary bonus payments to employees who are not participants in
any other bonus plan established by the Company based on individual levels of
performance. In addition, the Board of Directors may, from time to time, pay
discretionary bonuses outside of the above mentioned plans.

1997 SHARE INCENTIVE PLAN

           The Board of Directors of the Company has adopted, and the Company's
stockholders have approved, the North Atlantic Trading Company, Inc. 1997 Share
Incentive Plan (the "Incentive Plan").

           The Incentive Plan is intended to provide incentives, which will
attract and retain highly competent persons as key employees of the Company and
its subsidiaries by providing them opportunities to acquire shares of stock or
to receive monetary payments based on the value of such shares pursuant to the
Benefits (as defined).

Shares Available

           The Incentive Plan makes available for Benefits an aggregate amount
of 61,856 shares of Common Stock (61,760 of which have been granted), subject to
certain adjustments. Any shares of Common Stock subject to a stock option or
stock appreciation right which for any reason is cancelled or terminated without
having been exercised, and subject to limited exceptions, any shares subject to
stock awards, performance awards or stock units which are forfeited, any shares
subject to performance awards settled in cash or any shares delivered to the
Company as part of full payment for the exercise of a stock option or stock
appreciation right shall again be available for Benefits under the Incentive
Plan.

Administration

           The Incentive Plan provides for administration by a committee (the
"Administration Committee") appointed by the Board of Directors from among its
members. Currently, the sole member of the Administration Committee is Thomas F.
Helms, Jr. The Administration Committee is authorized, subject to the provisions
of the Incentive Plan, to establish such rules and regulations as it deems
necessary for the proper administration of the Incentive Plan and to make such
determinations and interpretations and to take such action in connection with
the Incentive Plan and any Benefits granted as it deems necessary or advisable.
Thus, among the Administration Committee's powers are the authority to select
officers and other key employees of the Company and its subsidiaries to receive
Benefits, and determine the form, amount and other terms and conditions of
Benefits. The Administration Committee also has the power to modify or waive
restrictions on Benefits, to amend Benefits and to grant extensions and
accelerations of Benefits.

Eligibility for Participation

           Key employees of the Company or any of its subsidiaries are eligible
to participate in the Incentive Plan. The selection of participants from
eligible key employees is within the discretion of the Administration Committee.
All employees are currently eligible to participate in the Incentive Plan. The
Incentive Plan provides for the grant of any or all of the following types of
benefits: (1) stock options, including incentive stock options and non-qualified
stock options; (2) stock appreciation rights; (3) stock awards, including


                                       38
<PAGE>
restricted stock; (4) performance awards; and (5) stock units (collectively, the
"Benefits"). Benefits may be granted singly, in combination, or in tandem as
determined by the Administration Committee. Stock awards, performance awards and
stock units may, as determined by the Administration Committee in its
discretion, constitute Performance-Based Awards, as described below.

Stock Options

           Under the Incentive Plan, the Administration Committee may grant
awards in the form of options to purchase shares of Common Stock. Options may be
either incentive stock options, qualifying for special tax treatment, or
non-qualified stock options. The exercise price may be paid in cash or, in the
discretion of the Administration Committee, by the delivery of shares of Common
Stock of the Company then owned by the participant, by the withholding of shares
of Common Stock for which a stock option is exercisable, or by a combination of
these methods. In the discretion of the Administration Committee, payment may
also be made by delivering a properly executed exercise notice to the Company
together with a copy of irrevocable instructions to a broker to deliver promptly
to the Company the amount of sale or loan proceeds to pay the exercise price.
The Administration Committee may prescribe any other method of paying the
exercise price that it determines to be consistent with applicable law and the
purpose of the Incentive Plan. In determining which methods a participant may
utilize to pay the exercise price, the Administration Committee may consider
such factors as it determines are appropriate.

Stock Appreciation Rights (SARs)

           The Incentive Plan authorizes the Administration Committee to grant a
SAR either in tandem with a stock option or independent of a stock option. An
SAR is a right to receive a payment, in cash or Common Stock, equal to the
excess of (x) the fair market value, or other specified valuation (which shall
not be greater than the fair market value), of a specified number of shares of
Common Stock on the date the right is exercised over (y) the fair market value,
or other specified valuation (which shall not be less than fair market value),
of such shares of Common Stock on the date the right is granted, all as
determined by the Administration Committee. Each SAR shall be subject to such
terms and conditions, as the Administration Committee shall impose from time to
time.

Stock Awards

           The Incentive Plan authorizes the Administration Committee to grant
awards in the form of restricted or unrestricted shares of Common Stock ("Stock
Awards"), which includes mandatory stock bonus incentive compensation and which
may constitute Performance-Based Awards. Such awards will be subject to such
terms, conditions, restrictions, and/or limitations, if any, as the
Administration Committee deems appropriate including, but not by way of
limitation, restrictions on transferability, continued employment and
performance goals established by the Administration Committee over a designated
period of time.

Performance Awards

           The Incentive Plan allows for the grant of performance awards, which
may take the form of shares of Common Stock or stock units, or any combination
thereof and which may constitute Performance-Based Awards. Such awards will be
contingent upon the attainment over a period to be determined by the
Administration Committee of certain performance goals. The length of the
performance period, the performance goals to be achieved and the measure of
whether and to what degree such goals have been achieved will be determined by
the Administration Committee. Payment of earned performance awards will be made
in accordance with terms and conditions prescribed or authorized by the


                                       39
<PAGE>
Administration Committee. The participant may elect to defer, or the
Administration Committee may require the deferral of, the receipt of performance
awards upon such terms, as the Administration Committee deems appropriate.

Stock Units

           The Administration Committee may, in its discretion, grant Stock
Units to participants, which may constitute Performance-Based Awards. A "Stock
Unit" means a notational account representing one share of Common Stock. The
Administration Committee determines the criteria for the vesting of Stock Units
and whether a participant granted a Stock Unit should be entitled to Dividend
Equivalent rights (as defined in the Incentive Plan). Upon vesting of a Stock
Unit, unless the Administration Committee has determined to defer payment with
respect to such unit or a participant has elected to defer payment, shares of
Common Stock representing the Stock Units will be distributed to the participant
unless the Administration Committee, with the consent of the participant,
provides for the payment of the Stock Units in cash, or partly in cash and
partly in shares of Common Stock, equal to the value of the shares of Common
Stock which would otherwise be distributed to the participant.

Other Terms of Benefits

           The Incentive Plan provides that Benefits shall not be transferable
other than by will or the laws of descent and distribution. The Administration
Committee shall determine the treatment to be afforded to a participant in the
event of termination of employment for any reason including death, disability,
or retirement. Notwithstanding the foregoing, other than with respect to
incentive stock options, the Administration Committee may permit the
transferability of an award by a participant to members of the participant's
immediate family or trusts for the benefit of such person or family
partnerships. Upon the grant of any Benefit under the Incentive Plan, the
Administration Committee may, by way of an agreement with the participant,
establish such other terms, conditions, restrictions and/or limitations covering
the grant of the Benefit as are not inconsistent with the Incentive Plan. No
Benefit shall be granted under the Incentive Plan after June 25, 2007. The Board
of Directors reserves the right to amend, suspend or terminate the Incentive
Plan at any time, subject to the rights of participants with respect to any
outstanding Benefits.

           The Incentive Plan contains provisions for equitable adjustment of
Benefits in the event of a merger, consolidation, reorganization,
recapitalization, stock dividend, stock split, reverse stock split, split up,
spin-off, combination of shares, exchange of shares, dividend in kind or other
like change in capital structure or distribution (other than normal cash
dividends) to stockholders of the Company.

2001 Share Incentive Plan

           In October 2001, the Board of Directors of the Company approved the
North Atlantic Trading Company, Inc. 2001 Share Incentive Plan (the "2001
Plan"). The 2001 Plan has terms that are substantially identical to the terms of
the Share Incentive Plan. The Company has reserved 50,000 shares of Common Stock
for benefits under the 2001 Plan. No awards have yet been granted under the 2001
Plan.

Item 12.   Security Ownership of Certain Beneficial Owners and Management

           The table below sets forth certain information regarding the
beneficial ownership of Common Stock as of March 1, 2002 by (i) each person or
entity who beneficially owns five percent or more of the Common Stock, (ii) each
Director and Named Executive of the Company and (iii) all Directors and


                                       40
<PAGE>
executive officers of the Company as a group. Unless otherwise indicated, each
beneficial owner's address is c/o North Atlantic Trading Company, Inc., 257 Park
Avenue South, 7th Floor, New York, New York 10010-7304.

<TABLE>
<CAPTION>
                                                                                 Percent Owned(a)
                                                                      -----------------------------------------
                                                                        Before Exercise        After Exercise
 Beneficial Owner                                Number of Shares         of Warrants           of Warrants
 ----------------                                ----------------        -------------         -------------
<S>                                              <C>                    <C>                   <C>
 Thomas F. Helms, Jr. (b).........................   477,693                 90.4%                   80.9%
     Helms Management Corp.
 David I. Brunson(c)..............................   279,714                 53.0                    47.3
 Herbert Morris(d)................................    37,990                  7.2                     6.4
     Flowing Velvet Productions, Inc.
     3 Points of View
     Warwick, New York 10990
 Maurice R. Langston(d)...........................    37,038                  7.0                     6.3
     Langston Enterprises, Inc.
 Alan R. Minsterketter(d).........................    27,613                  5.2                     4.7
     Alan M. Inc.
 Jack Africk(e)...................................    21,212                  3.9                     3.5
 DIRECTORS AND EXECUTIVE OFFICERS
     AS A GROUP (7 PERSONS).......................   478,911                 90.7%                   80.9%

</TABLE>

----------------------------
(a)   The percentages assume, in the column entitled "Before Exercise of
      Warrants," that none of the outstanding warrants to purchase an aggregate
      of 63,490 shares at an exercise price of $.01 per share is exercised and,
      in the column entitled "After Exercise of Warrants," that all of such
      warrants will be exercised.

(b)   Helms Management Corp., all of the voting capital stock of which is owned
      by Mr. Helms and all of the non-voting capital stock of which is owned by
      a trust established by Mr. Helms for the benefit of his children, owns
      271,300 shares of Common Stock, which represents approximately 51.4% of
      the outstanding shares assuming that none of the outstanding warrants are
      exercised, or 45.8% of the outstanding shares assuming that all such
      warrants are exercised. 240,000 shares owned by Helms Management Corp. are
      subject to a voting trust agreement pursuant to which Mr. Helms and David
      I. Brunson exercise certain voting powers and which may result in each of
      them being deemed a beneficial owner of such shares. See "Voting Trust
      Agreement." Because of Mr. Helms' ability to vote an additional 148,346
      shares of Common Stock held by members of the Company's management in
      respect of the election of the Company's directors pursuant to the
      Stockholders' Agreement, he may be deemed to be the beneficial owner of
      such additional shares. See "Stockholders' Agreement." In connection with
      the transfer of 20,057 shares of Common Stock held by certain
      stockholders, the transferees of such shares granted Mr. Helms the right
      to vote such shares with respect to any and all matters submitted to a
      vote of the stockholders of the Company and, consequently, Mr. Helms may
      be deemed to be the beneficial owner of such shares. In addition, Mr.
      Helms may be deemed the beneficial owner of 37,990 shares that are subject
      to a voting agreement between Helms Management Corp. and Flowing Velvet
      Productions, Inc. See "Voting Agreement."

(c)   Includes (i) 2,250 shares of Common Stock owned by Mr. Brunson, (ii)
      30,928 shares subject to currently exercisable stock options held by Mr.
      Brunson and (iii) 240,000 shares owned by Helms Management Corp. that are
      subject to a voting trust agreement pursuant to which Mr. Brunson
      exercises certain voting powers and which may result in his being deemed a
      beneficial owner of such additional shares. See "Voting Trust Agreement."
      In addition, Mr. Brunson has the right to acquire 6,536 shares currently
      owned by Helms Management Corp.

(d)   Reflects shares held by the corporation listed below the name of such
      natural person. Such natural person owns all of the issued and outstanding
      shares of capital stock of the corporation listed below the name of such
      natural person.

(e)   Includes 6,250 shares of Common Stock held by the Africk Family
      Foundation, Inc., of which Mr. Africk is the trustee and which may result
      in his being deemed a beneficial owner of such shares. In addition, 14,962
      shares are subject to currently exercisable stock options.


                                       41
<PAGE>
STOCKHOLDERS' AGREEMENT

           The Company and certain stockholders of the Company are parties to
the Stockholders' Agreement, setting forth among other things, the manner in
which directors of the Company are to be selected. See "Management--Election of
Directors." The Stockholders' Agreement also sets forth certain restrictions on
the transfer of shares of Common Stock by existing stockholders and on the
acquisition by existing stockholders of investments in competitors of Bollore.
In addition, the Stockholders' Agreement provides the existing stockholders with
certain "tag-along" rights to participate ratably in sales of Common Stock to
third parties and requires existing stockholders to participate ratably in
certain sales of Common Stock to third parties. Subject to the terms of all
applicable debt agreements of the Company and its subsidiaries and to the rights
of holders of the Company's preferred stock, the Stockholders' Agreement
provides that the Company may maintain insurance on the lives of the members of
its management officers and, in the event of the death of any such person, for
the mandatory repurchase by the Company of all of such person's Common Stock at
the fair market value thereof (which will be determined by an independent
investment banking firm if the parties cannot otherwise agree upon such value)
to the extent of available insurance proceeds, and the optional repurchase of
additional shares of such person's Common Stock at such fair market value to the
extent of available cash. Subject to the terms of all applicable debt agreements
of the Company and its subsidiaries, and to the rights of holders of the
Company's preferred stock, the Company also has the right to repurchase the
shares of Common Stock held by members of management if their employment
terminates, in the event of certain bankruptcy proceedings relating to such
persons or upon an involuntary transfer of their shares by court order or
otherwise in each case at the fair market value of such shares.

           In addition, in connection with the transfer of 20,057 shares of
Common Stock pursuant to the Stockholders' Agreement, the transferees of such
shares granted Mr. Helms the right to vote such shares with respect to any and
all matters submitted to a vote of the stockholders of the Company.

VOTING TRUST AGREEMENT

           Thomas F. Helms, Jr. and David I. Brunson are voting trustees under a
Voting Trust Agreement with Helms Management Corp. Helms Management Corp. owns
271,300 shares of Common Stock in the Company, 240,000 of which are subject to
the Voting Trust Agreement. Pursuant to the Voting Trust Agreement, the voting
trustees have the power to vote the shares subject to the Voting Trust Agreement
in connection with the election of directors and any other matters. The holder
of the voting trust certificate may remove at any time any of the voting
trustees and replace any of them with a successor. As voting trustees under the
Voting Trust Agreement, Messrs. Helms and Brunson are entitled to three votes
and one vote, respectively. Unless terminated by the certificate holder, the
Voting Trust Agreement will terminate on December 17, 2012.

VOTING AGREEMENT

           Helms Management Corp. and Flowing Velvet Products, Inc. ("Flowing
Velvet") are parties to a voting agreement, setting forth among other things the
agreement by Flowing Velvet to vote in all matters submitted to a vote of
Stockholders in such manner as Flowing Velvet may be directed by Thomas F.
Helms, Jr., the President of Helms Management Corp.


                                       42
<PAGE>
Item 13.   Certain Relationships and Related Transactions

           On March 24, 1998, David I. Brunson, Executive Vice President-Finance
and Administration, Chief Financial Officer, Treasurer and Secretary of the
Company, purchased 2,250 shares of Common Stock from the Company at a price of
$40 per share. As part of the purchase price, Mr. Brunson issued a note to the
Company in the aggregate principal amount of $60,000. The note bears interest at
6.5% per annum and has a final maturity on March 31, 2003.

           On April 26, 1988 and on December 15, 1988, Mr. Thomas F. Helms, Jr.,
Chief Executive Officer and President of the Company, borrowed $75,000 and
$45,000, respectively, in connection with the purchase of a portion of his
partnership interest in National Tobacco and executed two separate notes,
payable to the Company. On April 14, 1998, Helms Management Corp., a corporation
in which Mr. Helms owns all of the voting capital stock and a trust established
by Mr.. Helms for the benefit of his children owns all of the non-voting capital
stock, issued a promissory note to the Company in the aggregate principal amount
of $886,686.30, representing the principal on the notes discussed above, plus an
additional loan by the Company in the amount of $766,686.30 to cover certain
income tax liabilities of Helms Management Corp. resulting from the conversion
of LLC to a "C" corporation in connection with the Acquisition. Upon execution
of the $886,686.30 note, the prior notes issued by Mr. Helms were cancelled. The
current note bears interest at the rate of 6.5% per annum and has a final
maturity on March 31, 2003. On January 4, 1999, Mr. Helms issued a promissory
note to the Company, in the principal amount of $150,000, for an additional loan
by the Company to cover certain tax liabilities of Helms Management Corp.
resulting from the above-mentioned conversion of LLC. This note bears interest
at the rate of 6.5% per annum and has a final maturity on December 31, 2003. On
April 20, 2001 and on November 12, 2001, additional loans, each in the amount of
$150,000, were made to Mr. Helms on the same terms as the existing loans. As of
February 28, 2002, the aggregate amount outstanding, including accrued interest,
under the above notes was approximately $1,413,000.

           Kent Helms and Thomas F. Helms, III, sons of Thomas F. Helms, Jr.,
are employed by the Company as Director eBusiness Development and as Associate
Manager-Marketing, respectively. During 2001, Kent Helms received aggregate
compensation of $65,000 and Thomas F. Helms, III received aggregate compensation
of $66,000 for services in such capacities. Pursuant to a policy adopted by the
Board of Directors, their compensation is subject to the approval of, and was
approved by, the directors who are not members of Management.

           Jack Africk, the former President and Chief Operating Officer of the
Company, terminated his employment agreement with the Company effective December
31, 1998, but continues to serve as a member of the Company's Board of
Directors. In connection with Mr. Africk's resignation from employment, he and
the Company entered into a consulting agreement (the "Africk Consulting
Agreement") pursuant to which, Mr. Africk provides consulting services to the
Company on an as needed basis at the rate of $75,000 per annum. The Africk
Consulting Agreement is subject to annual renewals and has been renewed through
2002. For 2001, Mr. Africk received $75,000 pursuant to the terms of the Africk
Employment Agreement, and an additional $50,000 for consulting services that
exceeded the extent of services contemplated by the Africk Consulting Agreement.

           Marc S. Cooper is a Managing Director of Peter J. Solomon Company
Limited ("PJSC"), an investment banking and financial advisory firm. In June
2001, the Company engaged PJSC to render general financial and strategic
advisory services through May 1, 2004. As compensation therefore, the Company
agreed to pay PJSC a one time retainer fee consisting of warrants to purchase
3,000 shares of Common Stock at an exercise price of $40.00 per share, which
warrants have not yet been issued, and to reimburse PJSC for out-of-pocket
expenses incurred in connection with its provision of services.


                                       43
<PAGE>
           On March 8, 2002, the Board of Directors voted to allow certain
employees with outstanding loans from the Company to replace their existing loan
obligations, which mature on March 31, 2003, for new loan obligations, to be
effective March 31, 2002, with the following terms: 1) an interest rate of 5.0%
per annum and 2) a maturity of March 31, 2008. The Named Executives offered this
opportunity and the amounts of their loans were: Thomas F. Helms, Jr.,
$1,413,000; David I. Brunson, $60,000; and Christopher N. Kounnas, $35,000. The
substitution has not yet taken place.


                                     PART IV

Item 14.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)        1.  Financial Statements:

           The following consolidated financial statements of North Atlantic
Trading Company, Inc. and subsidiaries are filed as part of this Form 10-K and
are incorporated by reference in Item 8:


                          INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NORTH ATLANTIC TRADING COMPANY, INC.                                                                               PAGE
------------------------------------                                                                               ----
<S>                                                                                                                <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants.............................................................................      F-1
Consolidated Balance Sheets as of December 31, 2001 and 2000..................................................      F-2
Consolidated Statements of Operations and Other Comprehensive Income (Loss) for the years ended December 31,
      2001, 2000, and 1999....................................................................................      F-3
Consolidated Statements of Cash Flows for the
      years ended December 31, 2001, 2000, and 1999...........................................................      F-4
Consolidated Statements of Changes in Stockholders' Deficit for the
      years ended December 31, 2001, 2000, and 1999...........................................................      F-5
Notes to Consolidated Financial Statements....................................................................      F-6

</TABLE>

           2.  Financial Statement Schedules:

           All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and, therefore, have been
omitted.

           3.  See the accompanying Index to Exhibits, which precedes the
Exhibits filed with this Form 10-K.





                                       44
<PAGE>
                                INDEX TO EXHIBITS

EXHIBIT
NUMBER            DESCRIPTION
------            -----------

3.1(a)     --     Restated Certificate of Incorporation of North Atlantic
                  Trading Company, Inc., filed February 19, 1998 (incorporated
                  herein by reference to Exhibit 3.1(a)(i) the Registrant's
                  Annual Report on Form 10-K for the fiscal year ended December
                  31, 1997).

3.1(b)     --     Certificate of Incorporation of North Atlantic Operating
                  Company, Inc., filed June 9 1997 (incorporated herein by
                  reference to Exhibit 3.1(b)(i) to the Registrant's Annual
                  Report on Form 10-K for the fiscal year ended December 31,
                  1997).

3.1(c)     --     Certificate of Amendment of Certificate of Incorporation of
                  North Atlantic Operating Company, Inc., filed June 17, 1997
                  (incorporated herein by reference to Exhibit 3.1(b)(ii) to
                  Amendment No. 1 to Registration Statement (Reg. No. 333-31931)
                  on Form S-4 filed with the Commission on September 3, 1997).

3.1(d)     --     Restated Certificate of Incorporation of National Tobacco
                  Finance Corporation, filed April 24, 1996 (incorporated herein
                  by reference to Exhibit 3.1(c) to Amendment No. 1 to
                  Registration Statement (Reg. No. 333-31931) on Form S-4 filed
                  with the Commission on September 3, 1997).

3.1(e)     --     Amended and Restated Certificate of Limited Partnership of
                  National Tobacco Company, L.P., filed May 17, 1996
                  (incorporated herein by reference to Exhibit 3.1(d) to
                  Amendment No. 1 to Registration Statement (Reg. No. 333-31931)
                  on Form S-4 filed with the Commission on September 3, 1997).

3.1(f)     --     Certificate of Incorporation of International Flavors and
                  Technology, Inc., filed August 7, 1997 (incorporated herein by
                  reference to Exhibit 3.1(e)(i) to the Registrant's Annual
                  Report on Form 10-K for the fiscal year ended December 31,
                  1997).

3.1(g)     --     Certificate of Amendment of Certificate of Incorporation of
                  International Flavors and Technology, Inc., filed February 19,
                  1998 (incorporated herein by reference to Exhibit 3.1(e)(ii)
                  to the Registrant's Annual Report on Form 10-K for the fiscal
                  year ended December 31, 1997).

3.2(a)     --     Amended and Restated Bylaws of North Atlantic Trading Company,
                  Inc. (incorporated herein by reference to Exhibit 3.2(a) to
                  the Registrant's Quarterly Report on Form 10-Q for the fiscal
                  quarter ended March 31, 1998).

3.2(b)     --     Bylaws of North Atlantic Operating Company, Inc. (incorporated
                  herein by reference to Exhibit 3.2(b) to Registration
                  Statement (Reg. No. 333-31931) on Form S-4 filed with the
                  Commission on September 3, 1997).


                                       45
<PAGE>
3.2(c)     --     Bylaws of National Tobacco Finance Corporation (incorporated
                  herein by reference to Exhibit 3.2(c) to Registration
                  Statement (Reg. No. 333-31931) on Form S-4 filed with the
                  Commission on September 3, 1997).

3.2(d)     --     Third Amended and Restated Agreement of Limited Partnership of
                  National Tobacco Company, L.P., effective May 17, 1996
                  (incorporated herein by reference to Exhibit 3.2(d)(i) to
                  Amendment No. 1 to Registration Statement (Reg. No. 333-31931)
                  on Form S-4 filed with the Commission on September 3, 1997).

3.2 (e)    --     Amendment No. 1 to Third Amended and Restated Agreement of
                  Limited Partnership of National Tobacco Company, L.P.,
                  effective June 25, 1997 (incorporated herein by reference to
                  Exhibit 3.2(d)(ii) to Amendment No. 1 to Registration
                  Statement (Reg. No. 333-31931) on Form S-4 filed with the
                  Commission on September 3, 1997).

3.2(f)     --     Bylaws of International Flavors and Technology, Inc.
                  (incorporated herein by reference to Exhibit 3.2(e) to the
                  Registrant's Annual Report on Form 10-K for the fiscal year
                  ended December 31, 1997).

3.2(g)     --     Amendment No. 2 to the Third Amended and Restated Agreement of
                  Limited Partnership of National Tobacco Company, L.P.,
                  effective February 10, 2000 (incorporated by reference to
                  Exhibit 3.2 (g) to the Registrant's Annual Report on Form 10-K
                  for the fiscal year ended December 31, 2000).

3.3        --     Certificate of Designation of 12% Senior Exchange
                  Payment-In-Kind Preferred Stock of North Atlantic Trading
                  Company, Inc., filed July 22, 1997 (incorporated herein by
                  reference to Exhibit 3.3(b) to Amendment No. 1 to Registration
                  Statement (Reg. No. 333-31931) on Form S-4 filed with the
                  Commission on September 3, 1997).

4.1        --     Indenture, dated as of June 25, 1997, among North Atlantic
                  Trading Company, Inc., as issuer, National Tobacco Company,
                  L.P., North Atlantic Operating Company, Inc. and National
                  Tobacco Finance Corporation, as guarantors, and United States
                  Trust Company of New York, as trustee (incorporated herein by
                  reference to Exhibit 4.1 to Amendment No. 1 to Registration
                  Statement (Reg. No. 333-31931) on Form S-4 filed with the
                  Commission on September 3, 1997).

4.2        --     First Supplemental Indenture, dated as of February 26, 1998,
                  among North Atlantic Trading Company, Inc., National Tobacco
                  Company, L.P., National Tobacco Finance Corporation,
                  International Flavors and Technology, Inc. and The United
                  States Trust Company of New York (incorporated herein by
                  reference to Exhibit 4.3 to the Registrant's Annual Report on
                  Form 10-K for the fiscal year ended December 31, 1997).


                                       46
<PAGE>
9.1        --     Exchange and Stockholders' Agreement, dated as of June 25,
                  1997, by and between North Atlantic Trading Company, Inc. and
                  those stockholders signatory thereto (incorporated herein by
                  reference to Exhibit 9 to Amendment No. 1 to Registration
                  Statement (Reg. No. 333-31931) on Form S-4 filed with the
                  Commission on September 3, 1997).

9.2        --     Voting Trust Agreement, dated as of December 17, 1997, among
                  Thomas F. Helms, Jr., David I. Brunson and Jeffrey S. Hay, as
                  voting trustees, and Helms Management Corp. (incorporated
                  herein by reference to Exhibit 9.2 to the Registrant's Annual
                  Report on Form 10-K for the fiscal year ended December 31,
                  1997).

9.3        --     Amendment No. 1 to Voting Trust Agreement, dated as of August
                  2, 1999, among Thomas F. Helms, Jr. and David I. Brunson, as
                  voting trustees, and Helms Management Corp. (incorporated by
                  reference to Exhibit 9.3 to the Registrant's Annual Report on
                  Form 10-K for the fiscal year ended December 31, 2000).

10.1       --     Third Amended and Restated Purchasing and Processing
                  Agreement, dated as of June 25, 1997, between National Tobacco
                  Company, L.P. and Lancaster Leaf Tobacco Company of
                  Pennsylvania (incorporated herein by reference to Exhibit 10.1
                  to Amendment No. 1 to Registration Statement (Reg. No.
                  333-31931) on Form S-4 filed with the Commission on September
                  3, 1997).

10.2+      --     Amended and Restated Distribution and License Agreement, dated
                  as of November 30, 1992, between Bollore Technologies, S.A.
                  and North Atlantic Trading Company, Inc., a Delaware
                  corporation and predecessor to North Atlantic Operating
                  Company, Inc. [United States] (incorporated herein by
                  reference to Exhibit 10.2 to Amendment No. 2 to Registration
                  Statement (Reg. No. 333-31931) on Form S-4 filed with the
                  Commission on September 3, 1997).

10.3+      --     Amended and Restated Distribution and License Agreement, dated
                  as of November 30, 1992, between Bollore Technologies, S.A.
                  and North Atlantic Trading Company, Inc., a Delaware
                  corporation and predecessor to North Atlantic Operating
                  Company, Inc. [Asia] (incorporated herein by reference to
                  Exhibit 10.3 to Amendment No. 2 to Registration Statement
                  (Reg. No. 333-31931) on Form S-4 filed with the Commission on
                  September 3, 1997).

10.4+      --     Amended and Restated Distribution and License Agreement, dated
                  as of November 30, 1992, between Bollore Technologies, S.A.
                  and North Atlantic Trading Company, Inc., a Delaware
                  corporation and predecessor to North Atlantic Operating
                  Company, Inc. [Canada] (incorporated herein by reference to
                  Exhibit 10.4 to Amendment No. 2 to Registration Statement
                  (Reg. No. 333-31931) on Form S-4 filed with the Commission on
                  September 3, 1997).


                                       47
<PAGE>
10.5+      --     Restated Amendment, dated as of June 25, 1997, between Bollore
                  Technologies, S.A. and North Atlantic Operating Company, Inc.
                  (incorporated herein by reference to Exhibit 10.5 to Amendment
                  No. 2 to Registration Statement (Reg. No. 333-31931) on Form
                  S-4 filed with the Commission on September 3, 1997).

10.6       --     Warrant Agreement, dated as of June 25, 1997, between North
                  Atlantic Trading Company, Inc. and United States Trust Company
                  of New York, as warrant agent (incorporated herein by
                  reference to Exhibit 10.12 to Amendment No. 1 to Registration
                  Statement (Reg. No. 333-31931) on Form S-4 filed with the
                  Commission on September 3, 1997).

10.7++     --     1997 Share Incentive Plan of North Atlantic Trading Company,
                  Inc. (incorporated herein by reference to Exhibit 10.12 to
                  Amendment No. 1 to Registration Statement (Reg. No. 333-31931)
                  on Form S-4 filed with the Commission on September 3, 1997).

10.8++     --     Employment Agreement, dated May 17, 1996, between North
                  Atlantic Trading Company, Inc. and Thomas F. Helms, Jr.
                  (incorporated herein by reference to Exhibit 10.17 to
                  Amendment No. 1 to Registration Statement (Reg. No. 333-31931)
                  on Form S-4 filed with the Commission on September 3, 1997).

10.9 ++    --     Employment Agreement, dated April 14, 1997, between National
                  Tobacco Company, Inc. and David I. Brunson (incorporated
                  herein by reference to Exhibit 10.18(a) to Amendment No. 1 to
                  Registration Statement (Reg. No. 333-31931) on Form S-4 filed
                  with the Commission on September 3, 1997).

10.10++    --     Letter Agreement, dated April 23, 1997, between Thomas F.
                  Helms, Jr. and David I. Brunson (incorporated herein by
                  reference to Exhibit 10.18(b) to Amendment No. 1 to
                  Registration Statement (Reg. No. 333-31931) on Form S-4 filed
                  with the Commission on September 3, 1997).

10.11++    --     Nonqualified Stock Option Agreement, dated as of June 25,
                  1997, between North Atlantic Trading Company, Inc. and David
                  I. Brunson (incorporated herein by reference to Exhibit
                  10.18(c) to Amendment No. 1 to Registration Statement (Reg.
                  No. 333-31931) on Form S-4 filed with the Commission on
                  September 3, 1997).

10.12++    --     Amendment No. 1, dated and effective September 2, 1997, to the
                  Nonqualified Stock Option Agreement, dated as of June 25,
                  1997, between North Atlantic Trading Company, Inc. and David
                  I. Brunson (incorporated herein by reference to Exhibit
                  10.18(d) to Amendment No. 1 to Registration Statement (Reg.
                  No. 333-31931) on Form S-4 filed with the Commission on
                  September 3, 1997).

10.13++    --     Amendment No. 2, dated as of December 31, 1997, to the
                  Nonqualified Stock Option Agreement, dated as of June 25,
                  1997, between North Atlantic Trading Company, Inc. and David
                  I. Brunson (incorporated herein by reference to Exhibit
                  10.18(e) to the Registrant's Annual Report on Form 10-K for
                  the fiscal year ended December 31, 1997).


                                       48
<PAGE>
10.14++    --     Consulting Agreement, dated as of June 25, 1997, between North
                  Atlantic Trading Company, Inc. and Jack Africk (incorporated
                  herein by reference to Exhibit 10.20 to Amendment No. 1 to
                  Registration Statement (Reg. No. 333-31931) on Form S-4 filed
                  with the Commission on September 3, 1997).

10.15++    --     National Tobacco Company Management Bonus Program
                  (incorporated herein by reference to Exhibit 10.25 to
                  Amendment No. 1 to Registration Statement (Reg. No. 333-31931)
                  on Form S-4 filed with the Commission on September 3, 1997).

10.16++    --     Amended and Restated Nonqualified Stock Option Agreement dated
                  as of January 12, 1998, between North Atlantic Trading
                  Company, Inc. And Jack Africk (incorporated herein by
                  reference to Exhibit 10.28 to the Registrant's Annual Report
                  on Form 10-K for the fiscal year ended December 31, 1997).

10.17++    --     Assignment and Assumption, dated as of January 1, 1998,
                  between National Tobacco Company, L.P. and North Atlantic
                  Trading Company, Inc. (incorporated herein by reference to
                  Exhibit 10.30 to the Registrant's Annual Report on Form 10-K
                  for the fiscal year ended December 31, 1997).

10.18+     --     Amendment, dated October 27, 1997, to Amended and Restated
                  Distribution and License Agreements, between Bollore and North
                  Atlantic Operating Company, Inc. (incorporated herein by
                  reference to Exhibit 10.31 to the Registrant's Annual Report
                  on Form 10-K for the fiscal year ended December 31, 1997).

10.19      --     Sales Representative Agreement, effective as of January 1,
                  1998, between National Tobacco Company, L.P. and North
                  Atlantic Operating Company, Inc. (incorporated herein by
                  reference to Exhibit 10.32 to the Registrant's Annual Report
                  on Form 10-K for the fiscal year ended December 31, 1997).

10.20      --     Amendment to Credit Agreement, dated as of June 5, 1998, among
                  North Atlantic Trading Company, Inc., the various lending
                  institutions referenced therein, and National Westminster Bank
                  plc, as Administrative Agent (incorporated herein by reference
                  to Exhibit 10.1 to the Registrant's Quarterly Report on 10-Q
                  for the fiscal quarter ended June 30, 1998).


                                       49
<PAGE>
10.21++    --     Amended and Restated Employment Agreement dated as of April
                  30, 1998, between North Atlantic Trading Company, Inc. and
                  David I. Brunson (incorporated herein by reference to Exhibit
                  10.2 to the Registrant's Report on 10-Q for the fiscal quarter
                  ended June 30, 1998).

10.22      --     Option Grant Letter, dated April 30, 1998, from Helms
                  Management Corp. to David I. Brunson (incorporated herein by
                  reference to Exhibit 10.5 to the Registrant's Quarterly Report
                  on 10-Q for the fiscal quarter ended June 30, 1998).

10.23      --     Promissory Note, dated April 14, 1998, issued by Helms
                  Management Corp. in favor of North Atlantic Trading Company,
                  Inc. (incorporated herein by reference to Exhibit 10.7 to the
                  Registrant's Quarterly Report on 10-Q for the fiscal quarter
                  ended June 30, 1998).

10.24      --     Amendment, dated as of February 1, 1998, among North Atlantic
                  Trading Company, Inc., the various lending institutions
                  referenced therein and National Westminster Bank plc, as
                  administrative agent (incorporated herein by reference to
                  Exhibit 10.39 to the Registrant's Quarterly Report on 10-Q for
                  the fiscal quarter ended March 31, 1998).

10.25      --     Consent, dated as of March 12, 1998, among North Atlantic
                  Trading Company, Inc., the various lending institutions
                  referenced therein and National Westminster Bank plc, as
                  administrative agent (incorporated herein by reference to
                  Exhibit 10.40 to the Registrant's Quarterly Report on 10-Q for
                  the fiscal quarter ended March 31, 1998).

10.26      --     Subscription Agreement, dated as of March 24, 1998, between
                  North Atlantic Trading Company, Inc. and David I. Brunson
                  (incorporated herein by reference to Exhibit--10.42 to the
                  Registrant's Quarterly Report on 10-Q for the fiscal quarter
                  ended March 31, 1998).

10.27      --     Promissory Note, dated March 24, 1998, issued by David I.
                  Brunson in favor of North Atlantic Trading Company, Inc.
                  (incorporated herein by reference to Exhibit 10.44 to the
                  Registrant's Quarterly Report on 10-Q for the fiscal quarter
                  ended March 31, 1998).

10.28      --     Promissory Note, dated April 14, 1998, issued by Helms
                  Management Corp. in favor of North Atlantic Trading Company,
                  Inc. (incorporated herein by reference to Exhibit 10.7 to the
                  Registrant's Quarterly Report on 10-Q for the fiscal quarter
                  ended June 30, 1998).

10.29++    --     Letter Agreement, dated September 24, 1999, between North
                  Atlantic Trading Company, Inc. and Jack Africk (incorporated
                  by reference to Exhibit 10.34 to the Registrant's Annual
                  Report on Form 10-K for the fiscal year ended December 31,
                  2000).

10.30++    --     North Atlantic Trading Company, Inc. 1999 Executive Incentive
                  Plan (incorporated by reference to Exhibit 10.35 to the
                  Registrant's Annual Report on Form 10-K for the fiscal year
                  ended December 31, 2000).

10.31++    --     North Atlantic Trading Company, Inc. 1999 Management Bonus
                  Plan (incorporated by reference to Exhibit 10.36 to the
                  Registrant's Annual Report on Form 10-K for the fiscal year
                  ended December 31, 2000).


                                       50
<PAGE>
10.32      --     Loan Agreement, dated as of December 29, 2000, by and among
                  North Atlantic Trading Company, Inc., National Tobacco
                  Company, L.P., North Atlantic Operating Company, Inc.,
                  National Tobacco Finance Corporation and Bank One, Kentucky
                  N.A., as agent bank and the various lending institutions named
                  therein (incorporated by reference to Exhibit 10.32 to the
                  Registrant's Annual Report on Form 10-K for the fiscal year
                  ended December 31, 2001).

10.33      --     Security Agreement, dated as of December 29, 2000, among North
                  Atlantic Trading Company, Inc., National Tobacco Company,
                  L.P., North Atlantic Operating Company, Inc., National Tobacco
                  Finance Corporation and Bank One Kentucky, N.A., as agent for
                  certain lending institutions (incorporated by reference to
                  Exhibit 10.33 to the Registrant's Annual Report on Form 10-K
                  for the fiscal year ended December 31, 2000).

10.34      --     Guaranty Agreement, dated as of December 29, 2000, among
                  National Tobacco Company, L.P., North Atlantic Operating
                  Company, Inc., National Tobacco Finance Corporation and Bank
                  One, Kentucky, N.A., as agent for certain lending institutions
                  (incorporated by reference to Exhibit 10.34 to the
                  Registrant's Annual Report on Form 10-K for the fiscal year
                  ended December 31, 2000).

10.35      --     Pledge Agreement, dated as of December 29, 2000 among and
                  North Atlantic Trading Company, Inc., National Tobacco
                  Company, L.P., North Atlantic Operating Company, Inc.,
                  National Tobacco Finance Corporation and Bank One Kentucky,
                  N.A., as agent for certain lending institutions (incorporated
                  by reference to Exhibit 10.35 to the Registrant's Annual
                  Report on Form 10-K for the fiscal year ended December 31,
                  2000).

10.36*++   --     2001 Share Incentive Plan of North Atlantic Trading Company,
                  Inc.

21         --     Subsidiaries of North Atlantic Trading Company, Inc.
                  (incorporated herein by reference to Exhibit 21 to the
                  Registrant's Annual Report on Form 10-K for the fiscal year
                  ended December 31, 1998).


           * Filed herewith.

           + Portions of this agreement have been omitted pursuant to Rule 406
under the Securities Act of 1933, as amended, and have been filed confidentially
with the Securities and Exchange Commission.

           ++ Management contracts or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 14(c) of the rules governing the
preparation of this Report.


                                       51
<PAGE>
                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.


Date: March 29, 2002
                                     NORTH ATLANTIC TRADING COMPANY, INC.

                                     By: /s/ Thomas F. Helms, Jr.
                                         -------------------------------------
                                         Thomas F. Helms, Jr.
                                         Chairman and Chief Executive Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE                                              TITLE                                   DATE
---------                                              -----                                   ----
<S>                                  <C>                                                   <C>
/s/ Thomas F. Helms, Jr.             Chairman of the Board                                 March 29, 2002
--------------------------------     and Chief Executive Officer
Thomas F. Helms, Jr.                 (Principal Executive Officer)


/s/ David I. Brunson                 Director, Executive Vice President                    March 29, 2002
--------------------------------     Finance and Administration, Chief Financial Officer
David I. Brunson                     (Principal Financial and Accounting Officer)


/s/ Jack Africk                      Director                                              March 26, 2002
--------------------------------
Jack Africk


/s/ Marc S. Cooper                   Director                                              March 26, 2002
--------------------------------
Marc S. Cooper

</TABLE>






                                       52
<PAGE>

NORTH ATLANTIC TRADING COMPANY, INC.
AND SUBSIDIARIES


REPORT ON AUDITS OF CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2000 AND THE RELATED CONSOLIDATED STATEMENTS OF
OPERATIONS, OTHER COMPREHENSIVE INCOME (LOSS), CASH FLOWS AND CHANGES IN
STOCKHOLDERS' DEFICIT FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999












<PAGE>
                                 C O N T E N T S

<TABLE>
<CAPTION>
                                                                                       PAGES
                                                                                       -----
<S>                                                                                    <C>
Report of Independent Accountants                                                       F-1


Financial Statements:

   Consolidated Balance Sheets as of December 31,
         2001 and 2000                                                                  F-2

   Consolidated Statements of Operations and Other Comprehensive Income (Loss)
         for the years ended December 31, 2001, 2000 and 1999                           F-3

   Consolidated Statements of Cash Flows for the years ended
         December 31, 2001, 2000 and 1999                                               F-4

   Consolidated Statements of Changes in Stockholders' Deficit for
         the years ended December 31, 2001, 2000 and 1999                               F-5

   Notes to Consolidated  Financial Statements                                          F-6


</TABLE>


<PAGE>
                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors
North Atlantic Trading Company, Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, other comprehensive income (loss), cash
flows, and changes in stockholders' deficit present fairly, in all material
respects, the financial position of North Atlantic Trading Company, Inc. and
Subsidiaries (the Company) at December 31, 2001 and 2000 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 of the Notes to the Consolidated Financial Statements,
the Company changed its method of accounting for revenue recognition as a result
of the adoption of Staff Accounting Bulletin No. 101, "Revenue Recognition".




/s/ PricewaterhouseCoopers LLP

New York, New York



February 18, 2002



                                      F-1
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
(dollars in thousands except share data)


<TABLE>
<CAPTION>
                                            ASSETS                                         2001                  2000
                                                                                   ---------------------  --------------------
<S>                                                                                <C>                    <C>
Current assets:
   Cash                                                                                     $     1,130           $     1,453
   Accounts receivable                                                                            5,672                 4,182
   Inventories                                                                                   43,967                49,172
   Income taxes receivable                                                                          233                   233
   Other current assets                                                                           1,702                 2,070
                                                                                   ---------------------  --------------------
            Total current assets                                                                 52,704                57,110
Property, plant and equipment, net                                                                5,233                 5,267
Deferred income taxes                                                                            26,644                29,294
Deferred financing costs                                                                          4,028                 5,360
Goodwill, net                                                                                   123,557               129,047
Other assets                                                                                      2,718                 1,679
                                                                                   ---------------------  --------------------
            Total assets                                                                   $    214,884          $    227,757
                                                                                   =====================  ====================

                             LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
   Accounts payable                                                                         $     2,614           $     2,454
   Accrued expenses                                                                               3,403                 3,124
   Deferred income taxes                                                                          9,542                10,149
   Current portion of notes payable and long-term debt                                           12,500                12,500
                                                                                   ---------------------  --------------------
            Total current liabilities                                                            28,059                28,227
Notes payable and long-term debt                                                                155,000               167,500
Other long-term liabilities                                                                      10,994                 9,517
                                                                                   ---------------------  --------------------
            Total liabilities                                                                   194,053               205,244
                                                                                   ---------------------  --------------------
Preferred stock, net of unamortized discount of $918 in 2001 and $1,089 in 2000;
     mandatory redemption value of $58,051 in 2001 and $51,500
     in 2000                                                                                     57,443                50,698
                                                                                   ---------------------  --------------------
Stockholders' deficit:
   Common stock, voting, $.01 par value; authorized shares, 750,000;
       issued and outstanding shares, 528,241                                                         5                     5
   Common stock, nonvoting, $.01 par value; authorized shares, 750,000;
       issued and outstanding shares, -0-
   Additional paid-in capital                                                                     9,144                 9,111
   Loans to stockholders for stock purchases                                                      (187)                 (184)
   Accumulated other comprehensive loss                                                           (348)                     -
   Accumulated deficit                                                                         (45,226)              (37,117)
                                                                                   ---------------------  --------------------
            Total stockholders' deficit                                                        (36,612)              (28,185)
                                                                                   ---------------------  --------------------
                 Total liabilities and stockholders' deficit                               $    214,884          $    227,757
                                                                                   =====================  ====================

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

                                      F-2
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS for the years ended December 31, 2001,
2000 and 1999 (dollars in thousands except share data)

<TABLE>
<CAPTION>
                                                                         2001                2000                 1999
                                                                  -------------------  ------------------  -------------------
<S>                                                               <C>                  <C>                 <C>
Net sales                                                                 $   93,748         $    93,145           $   94,461
Cost of sales                                                                 33,734              33,689               32,151
                                                                  -------------------  ------------------  -------------------
     Gross profit                                                             60,014              59,456               62,310
Selling, general and administrative expenses                                  31,461              30,474               27,940
Amortization of Goodwill                                                       5,490               5,490                5,490
                                                                  -------------------  ------------------  -------------------
     Operating income                                                         23,063              23,492               28,880
Interest expense and financing costs                                          19,742              22,261               23,488
Other income (expense)                                                       (2,642)             (1,801)                   16
                                                                  -------------------  ------------------  -------------------
     Income (loss) before income tax                                             679               (570)                5,408
Income tax expense                                                             2,043               1,529                3,813
                                                                  -------------------  ------------------  -------------------
     Income (loss) before extraordinary loss & cumulative
     effect of change in accounting principle                                (1,364)             (2,099)                1,595
Extraordinary loss, net of income tax benefit of $521                              -               (850)                    -
                                                                  -------------------  ------------------  -------------------
     Income (loss) before cumulative effect of change in
     accounting principle                                                    (1,364)             (2,949)                1,595
Cumulative effect of change in accounting principle,
           net of income tax benefit of $153                                       -               (251)                    -
                                                                  -------------------  ------------------  -------------------
     Net income (loss)                                                       (1,364)             (3,200)                1,595
Preferred stock dividends                                                      6,745               6,005                5,361
                                                                  -------------------  ------------------  -------------------
     Net loss applicable to common shares                               $    (8,109)        $    (9,205)         $    (3,766)
                                                                  ===================  ==================  ===================
Basic and Diluted earnings per common share:
Income (loss) before extraordinary loss &
   cumulative effect of change in accounting principle                   $    (2.58)         $    (3.98)           $     3.02
   Extraordinary loss, net of income tax benefit                                   -              (1.61)                    -
   Cumulative effect of change in accounting principle,

      net of income tax benefit                                                    -              (0.47)                    -
   Preferred stock dividends                                                 (12.77)             (11.37)              (10.15)
                                                                  -------------------  ------------------  -------------------
   Net loss                                                             $    (15.35)        $    (17.43)          $    (7.13)
                                                                  ===================  ==================  ===================
Weighted average common shares outstanding:
   Basic and Diluted                                                         528,241             528,241              528,241


             CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
                                 (in thousands)

Net income (loss)                                                       $    (1,364)        $    (3,200)          $     1,595

Other comprehensive income, net of tax benefit:
Net change related to cash flow hedges:
   Cumulative effect of accounting change                                         28                  -                     -
   Reclassification to net income                                               (28)                  -                     -
Minimum pension liability                                                      (348)                  -                     -
                                                                  -------------------  ------------------  -------------------
Comprehensive income (loss)                                             $    (1,712)        $    (3,200)          $     1,595
                                                                  ===================  ==================  ===================

</TABLE>

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

                                      F-3
<PAGE>

NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended December 31, 2001,
2000 and 1999 (dollars in thousands except share data)

<TABLE>
<CAPTION>
                                                                    2001                 2000                1999
                                                             ------------------  ------------------- -------------------
<S>                                                          <C>                 <C>                 <C>
Cash flows from operating activities:
   Net income (loss)                                              $    (1,364)         $    (3,200)          $    1,595
   Adjustments to reconcile net income (loss) to net
       cash provided by operating activities:
     Extraordinary loss                                                      -                1,371                   -
     Depreciation                                                          637                1,067               1,923
     Amortization of goodwill                                            5,490                5,490               5,490
     Amortization of deferred financing costs                            1,332                2,275               2,276
     Deferred income taxes                                               2,043                  855               4,034
     Change in accrued pension liabilities                                 513                  201                 594
     Change in accrued postretirement liabilities                          615                  465                 557
     Compensation expense                                                   33                   33                  70
     Changes in operating assets and liabilities:
       Accounts receivable                                             (1,490)                  802                 502
       Inventories                                                       5,205                4,327               4,988
       Income tax receivable                                                 -                 (58)               (175)
       Other current assets                                                368                (382)               (414)
       Other assets                                                    (1,039)                (396)               (267)
       Accounts payable                                                    160                2,140               (144)
       Accrued expenses and other                                          280                (102)               (533)
                                                             ------------------  ------------------- -------------------
            Net cash provided by operating activities                   12,783               14,888              20,496
                                                             ------------------  ------------------- -------------------
Cash flows from investing activities:
   Capital expenditures, net                                             (603)                (456)               (770)
                                                             ------------------  ------------------- -------------------
            Net cash used in investing activities                        (603)                (456)               (770)
                                                             ------------------  ------------------- -------------------
Cash flows from financing activities:
   Payments on senior term loans                                      (12,500)             (15,864)            (19,721)
   Net loans to stockholders for stock purchases                           (3)                    -                  63
                                                             ------------------  ------------------- -------------------
            Net cash used in financing activities                     (12,503)             (15,864)            (19,658)
                                                             ------------------  ------------------- -------------------
Net increase (decrease) in cash                                          (323)              (1,432)                  68
Cash, beginning of period                                                1,453                2,885               2,817
                                                             ------------------  ------------------- -------------------
Cash, end of period                                                 $    1,130           $    1,453          $    2,885
                                                             ==================  =================== ===================
Supplemental disclosures of cash flow information:
   Cash paid during the period for interest                         $   18,466           $   20,737          $   21,563
                                                             ==================  =================== ===================
   Cash paid during the period for income taxes                              -                    -                   -
                                                             ==================  =================== ===================

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

                                      F-4
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
for the years ended December 31, 2001, 2000 and 1999
(dollars in thousands)
<TABLE>
<CAPTION>
                                                                            LOANS TO     ACCUMULATED
                                                 COMMON      ADDITIONAL   STOCKHOLDERS      OTHER                        TOTAL
                                                 STOCK,       PAID-IN      FOR STOCK    COMPREHENSIVE   ACCUMULATED   STOCKHOLDERS'
                                                 VOTING       CAPITAL      PURCHASES         LOSS         DEFICIT        DEFICIT
                                              ------------ ------------- ------------  -------------- -----------------------------
<S>                                           <C>          <C>           <C>           <C>            <C>          <C>
Beginning balance, January 1, 1999            $         5  $       9,020 $      (247)  $           -  $   (24,146) $      (15,368)

Compensation expense                                    -             58           -               -            -              58
Net loans to stockholders for stock purchases           -             -           63               -            -              63
Preferred stock dividend                                -             -            -               -      (5,361)          (5,361)
Net income                                              -             -            -               -       1,595            1,595
                                              ------------ ------------- ------------  -------------- -----------------------------

Ending balance, December 31, 1999                       5         9,078        (184)               -     (27,912)         (19,013)

Compensation expense                                    -            33            -               -            -               33
Preferred stock dividend                                -             -                            -      (6,005)          (5,361)
Net loss                                                -             -            -               -      (3,200)          (3,200)
                                              ------------ ------------- ------------  -------------- -----------------------------

Ending balance, December 31, 2000                       5         9,111        (184)               -     (37,117)         (28,185)

Compensation expense                                    -            33            -               -            -               33
Net loans to stockholders for stock purchases           -             -          (3)               -            -              (3)
Amount related to minimum pension liability             -             -            -           (348)            -            (348)
Preferred stock dividend                                -             -            -               -      (6,745)          (6,745)
Net loss                                                -             -            -               -      (1,364)          (1,364)
                                              ------------ ------------- ------------  -------------- -----------------------------
Ending balance, December 31, 2001             $         5  $      9,144  $      (187)  $       (348)  $  (45,226)  $      (36,612)
                                              ------------ ------------- ------------  -------------- -----------------------------
</TABLE>

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


                                      F-5
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.      BASIS OF PRESENTATION:

        North Atlantic Trading Company, Inc. and Subsidiaries (the Company)
        manufactures and distributes tobacco and related products through its
        smokeless tobacco and make-your-own operating segments. The smokeless
        tobacco segment manufactures and distributes smokeless tobacco products
        under the Beech-Nut, Durango, Trophy and Havana Blossom brand names. The
        make-your-own segment imports and distributes premium cigarette papers,
        smoking tobaccos and related products under the Zig-Zag brand name.

        National Tobacco Company, L.P. (a limited partnership) was formed and
        acquired the smokeless tobacco division of Lorillard, Inc. in 1988. On
        April 14, 1992, the general partner and majority owner and certain
        limited partners sold their partnership interest to a new general
        partner. Accordingly, the April 1992 transaction was accounted for as
        the formation of a new entity, National Tobacco Company, L.P. (the
        Partnership). Certain members of management of the Partnership formed
        NTC Holding, LLC (the Holding Company), a limited liability company with
        a finite life expiring December 31, 2100, and caused the Holding Company
        to form National Tobacco Finance Corporation (the Finance Corporation),
        a wholly-owned subsidiary of the Holding Company.

        On May 17, 1996, the Partnership was recapitalized and the Holding
        Company acquired a 99% limited partnership interest in the Partnership
        and the Finance Corporation became the sole general partner and owner of
        the remaining 1% interest of the Partnership. Accordingly, this
        transaction was accounted for as the formation of a new entity under the
        purchase method of accounting.

        On May 19, 1997, certain members of management and holders of membership
        interests in the Holding Company formed a corporation named North
        Atlantic Trading Company, Inc. (the Corporation). On June 25, 1997, the
        Corporation acquired the membership interests in the Holding Company and
        the Holding Company transferred all of its assets, including its limited
        partnership interest in the Partnership, all of the capital stock of the
        Finance Corporation, and its rights to acquire NATC Holdings USA, Inc.
        (NATC). The Corporation then formed North Atlantic Operating Company,
        Inc. (NAOC), a Delaware corporation and wholly-owned subsidiary of the
        Corporation. NAOC then exercised its rights to acquire all of the
        outstanding capital stock of NATC. NATC and its wholly-owned subsidiary
        were then merged into NAOC.



                                      F-6
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


 1.     BASIS OF PRESENTATION, CONTINUED:

        On February 11, 2000, the Company entered into a definitive Asset
        Purchase Agreement with Swedish Match North American, Inc. ("Swedish
        Match"), under which the Company agreed to sell certain smokeless
        tobacco assets, including its chewing tobacco brands and related
        formulation, technology and inventory. The transaction was challenged by
        the Federal Trade Commission ("FTC") as anti-competitive under the
        antitrust laws. As a result of actions taken by the FTC, on December 22,
        2000, the Company and Swedish Match mutually agreed to terminate the
        Asset Purchase Agreement. Costs related to the sale of $1.8 million,
        which had previously been deferred, have been recognized in other
        expenses for the year ended December 31, 2000.


 2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

        CONSOLIDATION: The consolidated financial statements include the
        consolidated accounts of the Corporation, the Finance Corporation, the
        Partnership and NAOC. All inter-company 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.

        In December 1999, the Securities and Exchange Commission ("SEC") issued
        Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
        Statements" ("SAB 101"). The Company adopted SAB 101 effective January
        1, 2000, resulting in a cumulative effect adjustment of $251,000 (net of
        tax benefit of $153,000) as of the date of adoption and a decrease in
        December 31, 2000 net income of $91,000 (net of tax benefit of $57,000).
        The change in accounting method would not have had a material effect on
        the statement of operations for the year ended 1999 if adopted in that
        year.

        SHIPPING COSTS: The Company records shipping costs incurred as a
        component of selling, general and administrative expenses. Shipping
        costs incurred were $2,560,000, $2,443,000 and $2,561,000 in 2001, 2000,
        and 1999, respectively.

        INVENTORIES: Inventories are stated at the lower of cost or market. Cost
        is determined on the last-in, first-out (LIFO) method. 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.



                                      F-7
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


 2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

        FIXED ASSETS: Fixed assets are stated at cost less accumulated
        depreciation. Depreciation is provided using the straight-line method
        over the estimated useful lives of the related assets (4 to 7 years for
        machinery, equipment and furniture, and 25 years for buildings).
        Expenditures for repairs and maintenance are charged to expense as
        incurred. The costs of major renewals and betterments are capitalized
        and depreciated over their estimated useful lives. Upon disposition of
        fixed assets, the costs and related accumulated depreciation amounts are
        relieved and any resulting gain or loss is reflected in operations
        during the period of disposition.

        GOODWILL: The excess of purchase price over fair value of net assets
        acquired is amortized using the straight-line method over 40 years and
        25 years for the Partnership and NAOC, respectively.

        The Company periodically reviews the appropriateness of the remaining
        life of its intangible assets considering whether any event has occurred
        or condition has developed which may indicate that the remaining life or
        the amortization method requires adjustment. After reviewing the
        appropriateness of the remaining life and the pattern of usage of the
        intangible assets, the Company then assesses the overall recoverability
        of intangible assets by determining if the unamortized balance can be
        recovered through undiscounted future operating cash flows.

        DEFERRED FINANCING COSTS: Deferred financing costs are amortized over
        the terms of the related debt obligations using the interest method.

        INCOME TAXES: The Company records the effects of income taxes under the
        liability method in which deferred income tax assets and liabilities are
        recognized based on the difference between the financial and tax basis
        of assets and liabilities using the enacted tax rates in effect for the
        years in which the differences are expected to reverse.

        ADVERTISING AND PROMOTION: Advertising and promotion costs are expensed
        as incurred.

        FINANCIAL INSTRUMENTS: The Company enters into foreign currency forward
        contracts to hedge its exposure to changes in foreign currency exchange
        rates primarily on inventory purchase commitments. The Company adopted
        Statement of Financial Accounting Standards No. 133 (SFAS 133),
        "Accounting for Derivative Instruments and Hedging Activities" on
        January 1, 2001, resulting in a cumulative effect adjustment to increase
        other comprehensive income by $28,000. Forward contracts that qualify as
        hedges are adjusted to their fair value through other comprehensive
        income as determined by market prices on the measurement date. Gains and
        losses on these contracts are transferred from other comprehensive
        income into net income as the related inventories are sold.

        STOCK-BASED COMPENSATION: The Company measures stock compensation costs
        related to the stock options described in Note 12 on the fair value
        based method which is the preferred method under the provisions of
        Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
        for Stock-Based Compensation." The fair value based method requires


                                      F-8
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


 2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

        compensation cost for stock options to be recognized based on the fair
        value of stock options granted.

        COMPUTATION OF NET LOSS PER COMMON SHARE: Basic net loss per common
        share has been computed by dividing the net loss applicable to common
        shares by the weighted average number of common shares outstanding
        during the period.

        Diluted net loss per share has been computed by dividing the net loss
        applicable to common shares by the weighted average number of common and
        common equivalent shares (warrants and stock options), where dilutive,
        outstanding during the period.

        RISKS AND UNCERTAINTIES: Smokeless and make-your-own tobacco companies,
        like other manufacturers and sellers of tobacco products, are subject to
        regulation at the federal, state and local levels. Such regulations
        include, among others, labeling requirements, limitations on
        advertising, and prohibition of sales to minors. The trend in recent
        years has been toward increased regulation of the tobacco industry.
        There can be no assurance as to the ultimate content, timing or effect
        of any regulation of tobacco products by any federal, state or local
        legislative or regulatory body, nor can there be any assurance that any
        such legislation or regulation would not have a material adverse effect
        on the Company's financial position, results of operations or cash
        flows.

        The tobacco industry has experienced and is experiencing significant
        product liability litigation. Most tobacco liability lawsuits have been
        brought against manufacturers and sellers of cigarettes for injuries
        allegedly caused by smoking or by exposure to smoke. However, several
        lawsuits have been brought against manufacturers and sellers of
        smokeless tobacco for injuries to health allegedly caused by use of
        smokeless tobacco. Typically, such claims assert that use of smokeless
        tobacco is addictive and causes oral cancer. As discussed in Note 16,
        the Partnership was named as a defendant in such a lawsuit. There can be
        no assurance that the Company will not sustain losses in connection with
        such lawsuits and that such losses will not have a material adverse
        effect on the Company's financial position, results of operations or
        cash flows or that additional lawsuits will not be brought against the
        Company.

        Further, in November 1998 most of the states, represented by their
        attorneys general acting through the National Association of Attorneys
        General (NAAG), signed two contracts: the Master Settlement Agreement
        (MSA) and the Smokeless Tobacco Master Settlement Agreement (STMSA). To
        the best of the Company's knowledge, the signatories to the MSA are 23
        cigarette manufacturers and/or distributors and the only signatory to
        the STMSA is USST, Inc. In the Company's opinion, the fundamental basis
        for each agreement is the states' consents to withdraw all claims for
        monetary, equitable and injunctive relief against certain tobacco
        products manufacturers and others and, in return, the signatories have
        agreed to certain marketing restrictions and regulations as well as
        certain payment obligations.


                                      F-9
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


 2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

        RISKS AND UNCERTAINTIES, CONTINUED: Pursuant to the MSA and subsequent
        states' statutes, a "cigarette manufacturer" (which is defined to also
        include make-your-own cigarette tobacco) has the option of either
        becoming a signatory to the MSA or opening, funding and maintaining an
        escrow account, with subaccounts on behalf of each settling state. The
        STMSA has no similar provisions. The MSA escrow accounts are governed by
        states' statutes that expressly give the manufacturers the option of
        opening, funding and maintaining an escrow account in lieu of becoming a
        signatory to the MSA. The statutes require companies, who are not
        signatories to the MSA, to deposit, on an annual basis, into qualified
        banks escrow funds based on the number of cigarettes or cigarette
        equivalents, i.e., the pounds of MYO tobacco, sold. The purpose of these
        statutes is expressly stated to be to eliminate the cost disadvantage
        the settling manufacturers have as a result of settling. Such companies
        are entitled to direct the investment of the escrowed funds and withdraw
        any appreciation, but cannot withdraw the principal for twenty-five
        years from the year of each annual deposit, except to withdraw funds
        deposited pursuant to an individual state's escrow statute to pay a
        final judgment to that state's plaintiffs in the event of such a final
        judgment against the Company. Either option - becoming a MSA signatory
        or establishing an escrow account - is permissible.

        NAOC has chosen to open and fund an escrow account. There can be no
        assurance as to whether entering into one or both settlement agreements
        or choosing not to do so or establishing and maintaining an escrow
        account pursuant to the above would have a material adverse effect on
        the Company's financial position, results of operations or cash flows.

        Pursuant to the MSA escrow account statutes, the Company is required to
        deposit such funds for each calendar year into a qualifying escrow
        account by April 15 of the following year. As of December 31, 2001, the
        Company has recorded approximately $1,219,000 as an other non-current
        asset. During 2001, $401,772 was deposited into a qualifying escrow
        account bringing the total deposit balance to $510,392. As of December
        31, 2001 the escrow balance is $527,740 which represents the total
        deposit balance plus $17,348 interest earned thereon. The remaining
        amount of approximately $691,000 relates to 2001 and will be deposited
        by April 15, 2002. The Company is entitled to direct the investment of
        the escrow funds and is allowed to withdraw any appreciation, but cannot
        withdraw the principal for twenty-five years from the year of each
        annual deposit, except to withdraw funds deposited pursuant to an
        individual state's escrow statute to pay a final judgment to that
        state's plaintiffs in the event of such a judgment against the Company.

        USE OF ESTIMATES: The preparation of financial statements in conformity
        with generally accepted accounting principles requires management to
        make estimates and assumptions that affect the reported amounts of
        assets and liabilities, disclosure of contingent assets and liabilities
        as of the dates of the financial statements and the reported amounts of
        revenues and expenses during the reporting periods. Actual results could
        differ from those estimates. The


                                      F-10
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

        Company's significant estimates include those affecting the valuation
        and useful lives of property, plant and equipment and goodwill,
        assumptions used in determining pension and postretirement benefit
        obligations, accrued and deferred income taxes and litigation
        contingencies.

        CONCENTRATION OF CREDIT RISK: At December 31, 2001 and 2000, the Company
        had bank deposits in excess of federally insured limits of approximately
        $2.6 million and $1.8 million, respectively.

        The Company sells its products to distributors and retail establishments
        throughout the United States. A single customer accounted for 10.1% and
        10.2% of the Company's smokeless tobacco and make-your-own revenues in
        2001 and 2000, respectively. The Company performs periodic credit
        evaluations of its customers and generally does not require collateral
        on trade receivables. Historically, the Company has not experienced
        significant credit losses.

        OTHER INCOME (EXPENSE): Other expense of $2.6 million in 2001 represents
        legal, investigative and related expenses with respect to the
        infringement activities involving Zig-Zag premium cigarette papers.
        Other expense of $1.8 million in 2000 represents legal fees and other
        costs associated with the proposed sale of the smokeless tobacco
        segment, which was terminated in December 2000.

 3.     FAIR VALUE OF FINANCIAL INSTRUMENTS:

        The following disclosure of the estimated fair value of financial
        instruments is made in accordance with the requirements of SFAS No. 107,
        "Disclosure About Fair Value of Financial Instruments," as amended by
        SFAS No. 126. The estimated fair value amounts have been determined by
        the Company using the methods and assumptions described below. However,
        considerable judgment is required to interpret market data to develop
        estimates of fair value. Accordingly, the estimates presented herein are
        not necessarily indicative of the amounts the Company could realize in a
        current market exchange. The use of different market assumptions and/or
        estimation methodologies may have a material effect on the estimated
        fair value amounts.

                CASH AND CASH EQUIVALENTS: Cash and cash equivalents are by
                definition short-term and the carrying amount is a reasonable
                estimate of fair value.

                ACCOUNTS RECEIVABLE: The fair value of accounts receivable
                approximates their carrying value.

                NOTES PAYABLE AND LONG-TERM DEBT: The fair value of the notes
                payable and long-term debt approximates their carrying value.



                                      F-11
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

 4.     INVENTORIES:

        The reduction of LIFO inventory quantities decreased net income of the
        Company by approximately $1.7 million and $1.5 million for the years
        ended December 31, 2001 and 2000, respectively.

        The components of inventories at December 31 are as follows (in
        thousands):

<TABLE>
<CAPTION>
                                                                                              2001                 2000
                                                                                      --------------------- --------------------
<S>                                                                                   <C>                   <C>
           Raw materials and work in process                                                   $     2,125          $     2,354
           Leaf tobacco                                                                             12,404               14,378
           Finished goods - loose leaf tobacco                                                       2,431                3,397
           Finished goods - MYO products                                                             4,694                4,288
           Other                                                                                       681                  441
                                                                                      --------------------- --------------------
                                                                                                    22,335               24,858
           LIFO reserve                                                                             21,632               24,314
                                                                                      --------------------- --------------------
                                                                                               $    43,967          $    49,172
                                                                                      ===================== ====================


        The LIFO inventory value is in excess of its current estimated
        replacement cost by the amount of the LIFO reserve.


 5.     PROPERTY, PLANT AND EQUIPMENT:

        Property, plant and equipment at December 31 consists of (in thousands):

                                                                                              2001                 2000
                                                                                      --------------------- --------------------

           Land                                                                                 $      654           $      654
           Buildings and improvements                                                                3,745                3,633
           Machinery and equipment                                                                   6,652                6,246
           Furniture and fixtures                                                                    2,149                2,064
                                                                                      --------------------- --------------------
                                                                                                    13,200               12,597
           Accumulated depreciation                                                                (7,967)              (7,330)
                                                                                      --------------------- --------------------
                                                                                               $     5,233          $     5,267
                                                                                      ===================== ====================
</TABLE>


                                      F-12
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

 6.     GOODWILL:

        Goodwill at December 31 consists of (in thousands):
<TABLE>
<CAPTION>
                                                                                             2001                  2000
                                                                                    ---------------------  --------------------
<S>                                                                                 <C>                    <C>
          Partnership goodwill, net of accumulated amortization of $4,500
                and $3,701 at December 31, 2001 and 2000, respectively              $             27,450   $             28,249

          NAOC goodwill, net of accumulated amortization of $21,175
                and $16,484 at December 31, 2001 and 2000, respectively                           96,107                100,798
                                                                                    ---------------------  --------------------

                                                                                    $            123,557   $            129,047
                                                                                    =====================  ====================



7.      OTHER ASSETS:

        Other assets at December 31, 2001 and 2000 includes loans and accrued
        interest to the principal shareholder of $1,413 and $1,037,
        respectively, and amounts related to the MSA escrow account of $1,219
        and $487, respectively, as described in Note 2.



 8.     DEFERRED FINANCING COSTS:

        Deferred financing costs at December 31 consist of (in thousands):

                                                                                             2001                  2000
                                                                                    ---------------------  --------------------

          Deferred financing costs, net of accumulated amortization of
                $6,146 and $4,761 at December 31, 2001 and 2000,
                Respectively                                                        $               4,028  $              5,360
                                                                                    =====================  ====================



 9.     NOTES PAYABLE AND LONG-TERM DEBT:

        Notes payable and long-term debt at December 31 consists of (in
        thousands):

                                                                                               2001                  2000
                                                                                     ---------------------  --------------------

          Senior notes                                                               $            155,000   $            155,000
          Term borrowings under loan agreement                                                     12,500                 25,000
                                                                                     ---------------------  --------------------

                                                                                                  167,500                180,000
          Less current portion                                                                     12,500                 12,500
                                                                                     ---------------------  --------------------

                                                                                     $            155,000   $            167,500
                                                                                     =====================  ====================
</TABLE>


                                      F-13
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


9.      NOTES PAYABLE AND LONG-TERM DEBT, CONTINUED:

        On June 25, 1997, the Company issued $155.0 million of 11% Senior Notes
        due 2004 (the Notes). The Notes are unsecured senior obligations of the
        Company which mature on June 15, 2004. The Notes bear interest at 11%
        per annum, payable semiannually on June 15 and December 15, to holders
        of record at the close of business on the June 1 or December 1
        immediately preceding the interest payment date.

        The Notes have no mandatory redemption requirements; however, they are
        redeemable at the option of the Company at a redemption price of
        102.75%, plus accrued interest, on or after June 15, 2002 or 100.0%,
        plus accrued interest, on or after June 15, 2003 and thereafter. In
        addition, in the event of a change in control of the Company, as
        defined, the holders have the right to require the Company to repurchase
        the Notes at a purchase price of 101.0% plus accrued interest.

        The Company has a loan agreement (the Loan Agreement) with a bank which
        provided borrowings of $25.0 million under a term facility and a
        revolver with available credit of up to $10.0 million. The borrowings
        under the term facility require quarterly principal payments over the
        two-year period through the maturity date of December 31, 2002, while
        the revolver may be repaid and reborrowed as necessary, with any unpaid
        amounts due and payable upon its termination date of December 31, 2002.
        Borrowings under the term facility and revolver bear interest per annum
        at variable rates based on prime or LIBOR rates at the Company's option.
        The interest rate on borrowings under the term facility ranged from
        4.62% to 6.05% at December 31, 2001. In addition, the Company must pay a
        quarterly commitment fee of 0.5% per annum of the unused portion of the
        revolver.

        The Notes and the Loan Agreement include cross default provisions and
        limit the incurrence of additional indebtedness, dividends, transactions
        with affiliates, asset sales, acquisitions, mergers, prepayments of
        indebtedness, liens and encumbrances, and other matters. The Loan
        Agreement also requires the Company to meet a fixed charge coverage
        test. At December 31, 2001, the Company was in compliance with all
        provisions of the Notes and the Loan Agreement.

        Scheduled maturities (exclusive of future mandatory prepayments, if any)
        of the Company's notes payable and long-term debt are as follows (in
        thousands):


             Through December 31, 2002              $             12,500
             Through December 31, 2003                                 -
             Through December 31, 2004                           155,000
                                                    ---------------------
                                                    $            167,500
                                                    =====================


                                      F-14
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


10.     INCOME TAXES:

        The income tax provision for the years ended December 31, 2001, 2000 and
        1999 consists of the following components (in thousands):

<TABLE>
<CAPTION>
                                              2001                   2000                   1999
                                      ---------------------- ---------------------- ---------------------
<S>                                   <C>                    <C>                    <C>
           Deferred:
              Federal                           $     1,828             $      839           $     3,609
              State and local                           215                     16                   204
                                      ---------------------- ---------------------- ---------------------

                                                $     2,043             $      855           $     3,813
                                      ====================== ====================== =====================
</TABLE>

        Deferred tax assets and liabilities at December 31, 2001 and 2000
        consist of (in thousands):

<TABLE>
<CAPTION>
                                                                      2001                               2000
                                                        ---------------------------------  ---------------------------------
                                                             ASSETS        LIABILITIES          ASSETS       LIABILITIES
                                                        ---------------------------------  ---------------------------------
<S>                                                     <C>                                <C>
           Inventory                                                        $     9,542                       $    10,149
           Property, plant and equipment                        $    821                           $    703
           Goodwill                                               13,992                             17,031
           Accrued pension and postretirement costs                3,839                              3,166
           NOL carryforward                                        6,802                              7,336
           Other                                                   1,190                              1,058
                                                        ---------------------------------  ---------------------------------

           Deferred income taxes                               $  26,644    $     9,542            $ 29,294   $    10,149
                                                        =================================  =================================

</TABLE>

        At December 31, 2001, the Company had NOL carryforwards for income tax
        purposes of $17.9 million which expire in the years beginning in 2012.

        The Company has determined that at December 31, 2001 its ability to
        realize future benefits of net deferred tax assets meets the "more
        likely than not" criteria in SFAS No. 109, "Accounting for Income
        Taxes"; therefore, no valuation allowance has been recorded.


                                      F-15
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


10.     INCOME TAXES, CONTINUED:

        Reconciliation of the federal statutory rate and the effective income
        tax rate for the years ended December 31, 2001, 2000 and 1999 is as
        follows:

<TABLE>
<CAPTION>
                                                     2001                2000                1999
                                              ------------------  ------------------  ------------------
<S>                                           <C>                 <C>                 <C>
          Federal statutory rate                       35.0%              (35.0)%             35.0%
           tate taxes
          S                                            24.3                 3.2                5.7
          Goodwill amortization                       241.8                70.0               30.4
          Other                                       (0.7)                (1.8)              (0.6)
                                              ------------------  ------------------  ------------------

          Effective income tax rate                   300.4%               36.4%              70.5%
                                              ==================  ==================  ==================
</TABLE>


11.     PENSION AND POSTRETIREMENT BENEFIT PLANS:

        The Company has defined benefit pension plans covering substantially all
        of its 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. Benefits for salaried employees are based on years of
        service and the employees' final compensation.

        The Company sponsors two defined benefit postretirement plans that cover
        both salaried and hourly employees. One plan provides medical and dental
        benefits, and the other provides life insurance benefits. The
        post-retirement health care plan is contributory, with retiree
        contributions adjusted annually; the life insurance plan is
        noncontributory.



                                      F-16
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


11.     PENSION AND POSTRETIREMENT BENEFIT PLANS, CONTINUED:

        The following tables provide a reconciliation of the changes in the
        plans' benefit obligations and fair value of assets over the two-year
        period ended December 31, 2001, and a statement of the funded status as
        of December 31 (in thousands):

<TABLE>
<CAPTION>
                                                                  PENSION BENEFITS                 POSTRETIREMENT BENEFITS
                                                         -----------------------------------  -----------------------------------
                                                                2001              2000               2001             2000
                                                         -----------------------------------  -----------------------------------
<S>                                                      <C>                                  <C>
            Reconciliation of benefit obligation:
               Benefit obligation at January 1           $          10,163 $         10,110   $          5,887 $           5,044
               Service cost                                            558              515                379               320
               Interest cost                                           738              682                435               396
               Actuarial loss (gain)                                   257            (758)                175               314
               Benefit  paid                                         (436)            (386)              (181)             (187)
                                                         -----------------------------------  -----------------------------------

            Benefit obligation at December 31            $         11,280  $         10,163   $          6,695 $           5,887
                                                         ===================================  ===================================

            Reconciliation of fair value of plan assets:
               Fair value of plan assets at January 1    $           8,640 $          8,648
               Actual return on plan assets                          (510)              270
               Employer contributions                                   35              109   $            181               187
               Benefit  paid                                         (436)            (387)              (181)             (187)
                                                         -----------------------------------  -----------------------------------

            Fair value of plan assets at December 31     $           7,729 $          8,640   $              - $               -
                                                         ===================================  ===================================

            Funded status:
               Funded status at December 31              $         (3,551) $        (1,523)   $        (6,695) $         (5,887)
               Unrecognized prior service cost                           8                8
               Unrecognized net (gain) loss                            194          (1,320)              (571)             (764)
                                                         -----------------------------------  -----------------------------------

            Net amount recognized                        $         (3,349) $        (2,835)   $         (7,266) $        (6,651)
                                                         ===================================  ===================================


        The following table provides the amounts recognized in the balance
        sheets as of December 31 (in thousands):

                                                                     PENSION BENEFITS                POSTRETIREMENT BENEFITS
                                                            ----------------------------------- ----------------------------------
                                                                  2001             2000               2001             2000
                                                            ----------------------------------- ----------------------------------

    Accrued benefit cost                                    $         (3,349)$         (2,835)  $         (7,266) $       (6,651)
    Minimum pension liability                                           (348)                -                  -               -
    Accumulated other comprehensive income                                348                -                  -               -
                                                            ----------------------------------- ----------------------------------

    Net amount recognized                                   $         (3,349)$         (2,835)  $         (7,266) $       (6,651)
                                                            =================================== ==================================
</TABLE>

                                      F-17
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


11.     PENSION AND POSTRETIREMENT BENEFIT PLANS, CONTINUED:

        The following table provides the components of net periodic pension and
        postretirement benefit costs for the plans for the years ended December
        31 (in thousands):

<TABLE>
<CAPTION>
                                                       PENSION BENEFITS                      POSTRETIREMENT BENEFITS
                                           ----------------------------------------- -----------------------------------------
                                               2001          2000         1999           2001          2000         1999
                                           ----------------------------------------- -----------------------------------------
<S>                                        <C>                                       <C>
      Service cost                                $  558       $  515        $  651         $  379       $  320        $  335
      Interest cost                                  738          682           631            435          396           348
      Expected return on plan assets               (716)        (738)         (676)              -            -             -
      Amortization of gains and losses              (31)        (149)          (12)           (18)         (64)           (5)
                                           ----------------------------------------- -----------------------------------------

      Net periodic benefit cost                   $  549       $  310        $  594         $  796       $  652        $  678
                                           ========================================= =========================================


        The weighted average assumptions used in the measurement of the
        Company's benefit obligation are as follows:

                                                       PENSION BENEFITS                      POSTRETIREMENT BENEFITS
                                           ----------------------------------------- -----------------------------------------
                                               2001          2000          1999          2001          2000          1999
                                           --------------------------- ------------- --------------------------- -------------

       Discount rate                               7.25%        7.50%         8.00%          7.25%        7.50%         8.00%
       Expected return on plan assets              8.50%        8.50%         8.50%              -            -             -
       Rate of compensation increase               4.00%        4.00%         4.00%              -            -             -

</TABLE>

        For measurement purposes, the assumed health care cost trend rate for
        participants under age 65 as of December 31, 2001 and 2000 was 7.5% and
        8.0%, respectively, and for participants age 65 and over the rate was
        6.5% and 7.0%, respectively. The health care cost trend rate was assumed
        to decline gradually to 5% for pre-age 65 and for post-age 65 costs over
        27 years.

        Assumed health care cost trend rates have a significant effect on the
        amounts reported for the postretirement benefit plans. A 1% change in
        assumed health care cost trend rates would have the following effects
        (in thousands):

<TABLE>
<CAPTION>
                                                                         2001               2000                1999
                                                                  ------------------ ------------------  -----------------
<S>                                                               <C>                <C>                 <C>
           Effect on total of service and interest cost
                 components of net periodic postretirement
                 Cost                                                         $   3              $   2              $   2

           Effect on the health care component of
                 the accumulated postretirement benefit
                 Obligation                                                      35                 32                 27
</TABLE>


                                      F-18
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


11.     PENSION AND POSTRETIREMENT BENEFIT PLANS, CONTINUED:

        The Company also sponsors a voluntary retirement savings plan (401(k)).
        Eligible employees may elect to contribute up to 15% of their annual
        earnings subject to certain limitations. Through December 31, 1998, the
        Company matched 50% of each eligible participant's contribution up to 5%
        of the participant's compensation for the plan year. Beginning January
        1, 1999, the Company changed its matching contribution policy. The
        Company match for the Hourly employee was increased to 66.7% of each
        eligible participant's contribution up to 6% of compensation for the
        plan year. The Company match for the Salaried employees was increased to
        the greater of (1) 66.7% of each eligible participant's contribution up
        to 6% of compensation, or (2) 100% of the first 3% plus 50% of the next
        2% of each eligible participant's contribution. Company matching is
        subject to a vesting schedule. Additional discretionary matching
        contributions by the Company are determined annually by the Board of
        Directors. Company matching contributions to this plan were
        approximately $0.3 million for each of the years ended December 31,
        2001, 2000 and 1999.

12.     MANDATORILY REDEEMABLE PREFERRED STOCK:

        On December 31, 2001 and 2000, the Company had authorized 12 million
        shares of 12% Senior Payment-In-Kind Preferred Stock (the Preferred
        Stock) of which 2.32 million shares and 2.06 million shares,
        respectively, were issued and outstanding. Each share of Preferred Stock
        has a par value of $0.01 and a liquidation preference of $25, for total
        liquidation values of approximately $58.1 million and $51.5 million at
        December 31, 2001 and 2000, respectively. Prior to June 15, 2002,
        holders of the Preferred Stock are entitled to receive dividends at an
        annual rate of 12% of the liquidation preference, payable quarterly in
        cash or by the issuance of additional shares of Preferred Stock having
        an aggregate liquidation preference equal to the amount of the
        dividends, at the Company's option. Following June 15, 2002, dividends
        shall be payable in cash. Such quarterly dividend payments are subject
        to being able to access and to the availability of the Restricted
        Payments provision, as defined in the documentation governing the Notes
        and the Preferred Stock. Preferred stock dividends, including the
        interest accretion described below, for the years ended December 31,
        2001, 2000 and 1999 were $6.7 million, $6.0 million, and $5.4 million,
        respectively, which were recorded as an increase in the carrying value
        of the Preferred Stock.

        On June 25, 1997, the holders of the Preferred Stock were issued
        warrants, with an original fair value of $1.7 million, to purchase
        44,440 shares of common stock of the Company for $0.01 per share,
        exercisable immediately. The original fair value of these warrants has
        been recorded in equity, with a corresponding amount recorded as a
        discount on the carrying value of the Preferred Stock. This discount is
        being amortized under the interest method over the 10-year term of the
        Preferred Stock as a part of the annual preferred stock dividend
        requirement. Amortization of the discount was $0.2 million for each of
        the years ended December 31, 2001, 2000 and 1999.


                                      F-19
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


12.     MANDATORILY REDEEMABLE PREFERRED STOCK, CONTINUED:

        Prior to June 15, 2000, the Company had the option, subject to certain
        restrictions, to redeem up to 35% of the Preferred Stock from the net
        cash proceeds from any one or more public equity offerings of the
        Company, for 112% of the Liquidation preference plus all accumulated and
        unpaid dividends. The Preferred Stock is not redeemable from June 16,
        2000 to June 15, 2002. The Preferred Stock is then redeemable, at the
        Company's option, on or after the following dates at the indicated
        redemption prices (expressed as a percentage of the liquidation
        preference) plus all accumulated and unpaid dividends: June 15, 2002 -
        106%; June 15, 2003 - 104%; June 15, 2004 - 102%; and June 15, 2005 -
        100%. The Preferred Stock is mandatorily redeemable on June 15, 2007 at
        a price equal to the liquidation preference plus all accumulated and
        unpaid dividends. The Preferred Stock is also redeemable, at the option
        of the holders, upon a change in control of the Company, as defined, at
        a price equal to 101% of the liquidation preference plus all accumulated
        and unpaid dividends.

        Persons affiliated with the initial purchases of the Preferred Stock
        were also issued warrants, with an original fair value of $0.7 million,
        to purchase 19,050 shares of common stock of the Company for $0.01 per
        share, exercisable immediately. The original fair value of these
        warrants has been recorded in equity, with a corresponding amount
        capitalized and included in deferred financing costs.


13.     SHARE INCENTIVE PLAN:

        The Company has a share incentive plan covering certain key employees
        which provides for the grant of options to purchase common stock of the
        Company and other stock related benefits. As of December 31, 2001, no
        benefits other than the stock options described below had been granted.
        The total number of shares available for granting under the plan is
        61,856. Stock option activity is summarized below:

<TABLE>
<CAPTION>
                                                                        WEIGHTED            WEIGHTED
                                                                         AVERAGE            AVERAGE
                                                     INCENTIVE          EXERCISE           GRANT DATE
                                                      SHARES              PRICE            FAIR VALUE
                                                 ------------------ ------------------  -----------------
<S>                                              <C>                <C>                 <C>
            Outstanding, December 31, 1999                  59,760          $   18.19          $   26.51

            Granted                                          2,000              18.19              26.51
            Exercised                                            -                  -                  -
            Forfeited                                            -                  -                  -
                                                 ------------------ ------------------  -----------------
            Outstanding, December 31, 2000                  61,760              18.19              26.51
                                                 ------------------ ------------------  -----------------

            Granted                                              -                  -                  -
            Exercised                                            -                  -                  -
            Forfeited                                            -                  -                  -
                                                 ------------------ ------------------  -----------------
            Outstanding, December 31, 2001                  61,760          $   18.19          $   26.51
                                                 ================== ==================  =================
</TABLE>



                                      F-20
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


13.     SHARE INCENTIVE PLAN, CONTINUED:

        Of the stock options outstanding on December 31, 2001, 57,760 were
        exercisable, with an additional 4,000 becoming exercisable in 2002
        through 2004. All stock options expire 15 years from the grant date. The
        Company estimates that all of the stock options granted will be
        exercised and that the expected life of all stock options is five years
        from the date of grant. The weighted average fair value of the options
        was determined as the difference between the fair value of the common
        stock on the grant date and the present value of the exercise price over
        the expected life of five years at a risk free interest rate of 6%, with
        no assumed dividend yield.

        A significant percentage of the stock options described above includes a
        provision under which the Company will reimburse the employee for the
        difference between their ordinary income tax liability and the liability
        computed using the capital gains rate in effect upon exercise of the
        options. The effect of this provision is accounted for as a variable
        portion of the option plan.

        The Company has recorded compensation expense related to the options
        based on the provisions of SFAS No. 123 under which the fixed portion of
        such expense is determined as the fair value of the options on the date
        of grant and amortized over the vesting period. The variable portion of
        the compensation expense is remeasured on each reporting date with the
        expense amount adjusted for changes in the fair value of the company
        stock on that date. Compensation expense of $33,000, $33,000 and $70,000
        ($20,000, $20,000 and $43,000 net of deferred income tax benefit) has
        been recognized in the statements of operations for the years ended
        December 31, 2001, 2000 and 1999, respectively.







                                      F-21
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


14.     INCOME (LOSS) PER COMMON SHARE RECONCILIATION (DOLLARS IN THOUSANDS,
        EXCEPT PER SHARE AMOUNTS):

<TABLE>
<CAPTION>
                                                                               FOR THE YEAR ENDED DECEMBER 31, 2001
                                                                 --------------------------------------------------------------
                                                                       INCOME               SHARES              PER SHARE
                                                                     (NUMERATOR)         (DENOMIMATOR)           AMOUNT
                                                                 --------------------------------------------------------------
<S>                                                              <C>
            Net loss                                             $        (1,364)
            Less: Preferred stock dividends                               (6,745)
                                                                 -----------------

            Basic and diluted:
               Net loss available to common stockholders         $        (8,109)            528,241          $    (15.35)
                                                                 ==============================================================


                                                                               FOR THE YEAR ENDED DECEMBER 31, 2000
                                                                 --------------------------------------------------------------
                                                                       INCOME               SHARES              PER SHARE
                                                                     (NUMERATOR)         (DENOMIMATOR)           AMOUNT
                                                                 --------------------------------------------------------------

            Net loss before extraordinary loss and cumulative
               effect of change in accounting principle          $        (2,099)
            Extraordinary loss, net of income tax benefit                   (850)
            Cumulative effect of change in accounting
               principle, net of income tax benefit                         (251)
            Less: Preferred stock dividends                               (6,005)
                                                                 -----------------

            Basic and diluted:
               Net loss available to common stockholders         $        (9,205)            528,241          $    (17.43)
                                                                 ==============================================================



                                                                               FOR THE YEAR ENDED DECEMBER 31, 1999
                                                                 --------------------------------------------------------------
                                                                       INCOME               SHARES              PER SHARE
                                                                     (NUMERATOR)         (DENOMIMATOR)           AMOUNT
                                                                 --------------------------------------------------------------

            Net income                                           $         1,595
            Less: Preferred stock dividends                               (5,361)
                                                                 -----------------

            Basic and diluted:
               Net loss available to common stockholders         $        (3,766)            528,241          $     (7.13)
                                                                 ==============================================================
</TABLE>

        The calculations above are based on the weighted average number of
        shares of common stock outstanding during the year. Common equivalent
        shares from stock options of 61,760 and warrants of 63,490 are excluded
        from the computations as their effect is antidilutive.


                                      F-22
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


15.     EXTRAORDINARY LOSS:

        Upon the refinancing of the Company's term loan on December 29, 2000 as
        described in Note 8, the Company recorded an extraordinary loss of $0.9
        million (net of tax benefit of $0.5 million) for the write-off of
        related deferred financing costs.


16.     FOURTH QUARTER ADJUSTMENT:

        The fourth quarters of 2001 and 2000 include adjustments to increase the
        income tax provision by approximately $1,490,000 and $1,140,000,
        respectively, as a result of the year-end income tax computations. The
        fourth quarter 2000 also included an adjustment to increase the LIFO
        expense by approximately $1.5 million, net of income tax of
        approximately $0.9 million.


17.     CONTINGENCIES:

        PROPOSITION 65. On March 30, 1998, an action was filed in California
        State Court, in the City and County of San Francisco, against defendants
        United States Tobacco Company, Inc., Conwood Company, L.P., Pinkerton
        Tobacco Company, Inc., National Tobacco, Swisher International Group
        Inc., Brown & Williamson Tobacco Corporation, Merrill Reese Inc., Lucky
        Stores Inc., Quick Stop Markets Inc., Raley's, Inc., Save Mart
        Supermarkets Inc., Save-On Drug Stores Inc., The Southland Corporation,
        Circle K Stores, Inc., Longs Drug Stores Corporation, Walgreen Co.,
        Safeway, Inc. and DOES 1-500. The plaintiff amended their claim on June
        10, 1998 and subsequently served the complaint on National Tobacco. The
        complaint purported to be brought by the City and County of San
        Francisco on behalf of the people of the State of California and by the
        Environmental Law Foundation on behalf of the general public.

        Plaintiffs claimed that the defendants violated the California Safe
        Drinking Water and Toxic Enforcement Act of 1986, Health and Safety Code
        25249.6 ("Proposition 65") by "knowingly and intentionally" exposing
        California consumers to carcinogens and reproductive toxins in smokeless
        tobacco products while failing to provide a "clear and reasonable"
        warning that smokeless tobacco products contain substances that are
        "known to the state to cause cancer" and "known to the state to cause
        reproductive toxicity." Plaintiffs further claimed that the defendants
        violated California Unfair Competition Act, Business & Professions Code
        17200, et seq., by marketing smokeless tobacco to children, and by
        fraudulently concealing from the public the alleged adverse consequences
        and addiction allegedly associated with smokeless tobacco products.

        The complaint sought a preliminary and permanent injunction preventing
        defendants from selling smokeless tobacco products without a "clear and
        reasonable" warning, as well as an injunction ordering defendants to
        undertake a court-approved public information campaign to instruct
        children that the use of smokeless tobacco products results in exposure
        to substances


                                      F-23
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


17.     CONTINGENCIES, CONTINUED:

        known to the State of California to cause cancer and reproductive harm.
        The plaintiffs also sought an award of statutory penalties and damage
        for each violation of Proposition 65 and the Unfair Competition Act,
        disgorgement of profits from the sale of smokeless tobacco products, and
        attorney's fees and costs. On December 17, 2001 the case was settled.
        The terms of the settlement were immaterial to National Tobacco's
        results.

        KENTUCKY AND ILLINOIS COMPLAINTS. On July 15, 1998, NAOC and National
        Tobacco filed a complaint against Republic Tobacco, Inc. and its
        affiliates ("Republic Tobacco") in Federal District Court for the
        Western District of Kentucky. The complaint was subsequently amended on
        August 18, 1998 (collectively, the complaint and the amended complaint
        are referred to herein as the "Kentucky Complaint"). Republic Tobacco
        imports and sells Roll-Your-Own ("RYO") cigarette papers under the 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.

        The Kentucky Complaint also alleges that Republic Tobacco has 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 the federal and state
        law.

        On June 30, 1998, Republic Tobacco filed a complaint against the
        Company, NAOC and National Tobacco in the United States District Court
        of the Northern District of Illinois. Republic Tobacco did not serve
        this complaint or otherwise notify the Company of its existence until
        after the filing and service of the Kentucky Complaint. The Company
        believes that this complaint was filed in anticipation of the filing of
        the Kentucky Complaint. This complaint was amended by Republic Tobacco
        on September 16, 1998 (collectively, the complaint and the amended
        complaint are referred to herein as the "Illinois Complaint"). In the
        Illinois Complaint, Republic Tobacco seeks declaratory relief that (a)
        Republic Tobacco's action in defacing the Company's point of purchase
        display vendors do not violate federal or state laws and (b) that
        Republic Tobacco's trade practices do not violate federal or state
        antitrust or unfair competition laws. In addition, the Illinois
        Complaint alleges that certain actions taken by the Company 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
        alleges that the Company has unlawfully monopolized and attempted to
        monopolize the market for premium cigarette papers.


                                      F-24
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


17.     CONTINGENCIES, CONTINUED:

        The Company has counterclaimed alleging that Republic Tobacco's trade
        practices in the southeastern United States have unlawfully restricted
        North Atlantic Operating Company's ability to expand the distribution of
        Zig-Zag premium cigarette papers in the southeast, where sales have been
        historically underdeveloped.

        The Company intends to vigorously pursue its claims set forth in the
        Kentucky and Illinois Complaints and intends to vigorously defend
        against the claims asserted in the Illinois Complaint. With respect to
        the claims set forth in the Illinois Complaint, the Company filed a
        Motion to Dismiss concerning a substantial portion of the claims against
        the Company, and believes that the claims against the Company are
        without merit.

        On April 9, 1999, the Court in the Illinois case dismissed certain of
        Republic's claims against the Company, including Republic's
        monopolization claim. The Court also dismissed the Company's
        counterclaims with leave to replead those claims. The Company has done
        so. On September 17, 1999, Republic filed a Second Amended Complaint,
        which was substantially identical to the original complaint, except that
        it alleged a series of purportedly monopolistic practices on a regional
        market basis against the Company. The Company filed a motion to dismiss
        the allegations for failure to state a claim on which relief could be
        granted. On December 23, 1999, the Court dismissed the antitrust claims
        in Republic's Second Amended Complaint.

        On October 20, 2000 Republic filed a motion to dismiss, stay, or
        transfer the Kentucky proceeding to the Illinois Court. On December 19,
        2000, the Court denied Republic'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 may not be entitled to any
        preference on forum selection which would ordinarily be given because it
        was first to file.

        During 2001, expert discovery was completed. Subsequently, both parties
        have moved for summary judgment on the others claims. These motions for
        summary judgment are now pending before the Court.

        WEST VIRGINIA COMPLAINTS. On October 6, 1998 National Tobacco was served
        with a summons and complaint 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-2401). While
        National Tobacco was served with a single service and complaint, the
        caption lists 65 separate plaintiffs, each with an individual case
        number.

        On November 13, 1998, National Tobacco was served with a summons and
        complaint 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). While National
        Tobacco was served with a single summons and complaint, the caption of
        the complaint lists 18 separate plaintiffs, each with an individual case
        number. This action was filed by the same


                                      F-25
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


17.     CONTINGENCIES, CONTINUED:

        plaintiffs' attorney who filed the Allen action and the complaint is
        identical in most material respects.

        These two actions were commenced by two separate plaintiffs,
        "individually and/or as the representatives of the various descendants
        named herein [who] are residents of the State of West Virginia and/or
        smoked cigarettes or used other tobacco products, manufactured,
        promoted, advertised, marked, sold and/or distributed by all
        defendants." The complaints contain no specific allegations referring to
        any individual plaintiff. These two actions were brought against major
        manufacturers of cigarettes, smokeless tobacco products, and certain
        other organizations.

        The complaints allege that "plaintiffs and plaintiffs' descendents
        suffer/had suffered from a form of cancer or vascular disease and other
        injuries due wholly or in part to defendants' products and/or
        activities." The complaints further allege that the actions "arise from
        decades of intentionally wrongful conduct by the defendants who have
        manufactured, promoted, and sold cigarettes and both smokeless and loose
        tobacco to the plaintiffs and plaintiffs descendants and millions of
        Americans while knowing, but denying and concealing that their products
        cause diseases, including but not limited to esophageal, laryngeal,
        pharyngeal, mouth and throat cancers and Buerger's Disease." The
        complaints do not identify which plaintiffs, if any, allege injury as a
        result of the use of smokeless tobacco. The complaints seek unspecified
        compensatory damages. The Company intends to vigorously defend against
        each such complaint.

        In the Allen case, the plaintiffs have specified the defendant companies
        for each of the 65 cases. National Tobacco was named in only six of the
        cases, five of which allege consumption, prior to the formation of
        National Tobacco, of products bearing the trademarks currently owned by
        National Tobacco. The remaining case alleges lung cancer as the injury.
        In subsequent discovery, the remaining plaintiff testified that his only
        use of Beech-Nut chewing tobacco predated National Tobacco's acquisition
        of the brand. National Tobacco has been dismissed from the first five
        cases, and intends to vigorously defend the remaining action.

        The Akers complaint asserts 24 unspecified counts and seeks referral to
        the West Virginia Mass Litigation Panel, because the actions allegedly
        "involve multiple plaintiffs pursuing related claims or actions
        involving one or more common questions of act or law and the plaintiffs
        seek damages caused by some "product."

        Discovery of all tobacco-related (cigarette, cigar and smokeless
        products) actions in the State of West Virginia, including the Allen and
        Akers cases, has been referred to a Mass Litigation Panel, and assigned
        to one judge. On January 11, 2000, the judge assigned the cases issued
        an order concerning discovery schedules and establishing a trial
        procedure for the purpose of trying all issues of law and fact common to
        all defendants. On February 29, 2000, West


                                      F-26
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


17.     CONTINGENCIES, CONTINUED:

        Virginia plaintiffs' counsel, pursuant to the court's order, identified
        all individual plaintiffs and the defendants against whom they had
        claims. No individual plaintiff in the Akers cases alleged use of a
        product manufactured by National Tobacco, although National Tobacco
        remains a defendant in those actions. In subsequent discovery, one Akers
        plaintiff alleged use of a National Tobacco product. However, that
        plaintiff alleges that he has lung cancer.

        On September 14, 2000, National Tobacco was served with a Summons and
        Consolidated Complaint 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). While National Tobacco was
        served with a single Summons and Consolidated Complaint, the caption of
        the Consolidated Complaint lists 539 separate plaintiffs, each with an
        individual case number. Only one of these plaintiffs alleged use of a
        product currently manufactured by National Tobacco. The time period
        during which this plaintiff allegedly used the product has not yet been
        specified. Thus, it is not yet known whether National Tobacco is a
        proper defendant in this case.

        On September 19, 2000, National Tobacco was served with a Summons and
        Consolidated Complaint 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). While National Tobacco was
        served with a single Summons and Consolidated Complaint, the caption of
        the Consolidated Complaint lists 561 separate plaintiffs, each with an
        individual case number. A total of five of these plaintiffs allege use
        of a product currently manufactured by National Tobacco. One of these
        plaintiffs does not specify the time period during which the product was
        allegedly used, and one alleges use that covers, in part, a period when
        National Tobacco did not manufacture the product. Of the remaining
        three, one alleges consumption of a competitor's chewing tobacco from
        1966 to 2000 and National Tobacco'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 National Tobacco's Durango Ice chewing tobacco from 1990
        to 2000 (although Durango Ice did not come onto the market until 1999).

        In November 2001, National Tobacco was served with four separate
        summonses and complaints in actions filed in the Circuit Court of Ohio
        County, West Virginia. The actions 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. 01-C-482). Allege that the individual plaintiffs
        suffer from various diseases including emphysema, heart disease, lung
        cancer, arterial blockage, and "addiction" to nicotine, allegedly
        resulting from the use of various tobacco


                                      F-27
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


17.     CONTINGENCIES, CONTINUED:

        products, none of which is or has ever been manufactured by National
        Tobacco. The Plaintiffs in these four actions also allege a conspiracy
        among "the Tobacco Defendants ...to mislead, deceive and confuse the
        government, the public, and West Virginia Plaintiffs, concerning the
        harmful effects of their products on the health of individuals, that
        nicotine is the active addictive component in manufactured tobacco
        products, and that defendants artificially, intentionally and
        scientifically manipulate nicotine delivery in manufactured tobacco
        products to ensure that users remain addicted. . . ." These actions were
        brought against major manufacturers of cigarettes, smokeless tobacco
        products (including National Tobacco) and other tobacco products, and
        certain other organizations.

        The four complaints assert counts alleging negligence and negligent
        misrepresentation, strict liability/failure to warn prior to 1970 and
        strict liability/design defect of unreasonably dangerous product, false
        representation, deceit, fraudulent concealment, civil conspiracy, breach
        of express and implied warranty, punitive damages, violations of the
        West Virginia general consumer protection and antitrust acts and loss of
        consortium. The complaints seek unspecified compensatory and punitive
        damages. These four actions have also been consolidated with the cases
        pending before the West Virginia Mass Litigation Panel. National Tobacco
        intends to vigorously defend these actions.

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

        The trial of the smokeless tobacco cases has been postponed
        indefinitely. 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, thus,
        the trial date on the smokeless tobacco claims has now been postponed
        indefinitely.

        MINNESOTA COMPLAINT. On September 24, 1999, National Tobacco 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 National Tobacco's (and, prior to the formation of
        National Tobacco, 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. The case has been removed to federal court. Motions
        to dismiss were filed


                                      F-28
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


17.     CONTINGENCIES, CONTINUED:

        on all counts except for negligence and, on September 28, 2000, the
        Court granted all of National Tobacco's motions. The sole cause of
        action remaining is for negligence. The Court, however, granted leave to
        the plaintiff to replead within sixty days those alleged causes of
        action based on alleged fraud. On December 18, 2000, the Plaintiff filed
        an amended complaint reasserting fraud claims. On January 19, 2001,
        defendants again moved to dismiss the fraud claims. On July 5, 2001, the
        Court dismissed one of plaintiff's statutory fraud counts, but held that
        the remaining fraud courts were adequately pleaded. Discovery is
        continuing as to the remaining claims. The Court has ordered that the
        case be ready for trial in February 2003.

        Although the Company believes that it has good defenses to the above
        actions in West Virginia and Minnesota and it intends to vigorously
        defend each such action, no assurances can be given that it will
        prevail. If any of the plaintiffs were to prevail, the results could
        have a materially adverse effect on the Company's financial position,
        results of operations and cash flows.

        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 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 the Company have negotiated settlements
        with one group of defendants, including Import Warehouse Inc. and its
        owner/operator Ravi Bhatia. Those settlements included a consent
        injunction against distribution of infringing or counterfeit goods.
        Management believes that successful prosecution of this litigation,
        either by settlement or otherwise, will have a favorable impact on its
        future premium cigarette paper business.

        On May 18, 2001, the Company, in conjunction with Bollore, conducted
        raids on the businesses and homes of certain defendants previously
        enjoined from selling infringing or counterfeit Zig-Zag(R) 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 the
        counterfeit Zig-Zag(R) 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.
        On October 12, 2001, Bollore filed proposed findings of fact and
        conclusions of law at the request of the Court. On November 16, 2001,
        the Court issued its written Order of Contempt, inter alia, estimating a
        damage amount to be in excess of $11 million, and referring the matter
        to the United States Attorney with a recommendation that criminal
        charges for counterfeiting, criminal contempt and perjury be brought.
        The Court later directed the parties to submit specific damages
        evidence. On January 17, 2002, the Company filed its damages submission,
        calculating damages to be approximately $14.5 million. That application
        is currently pending.


                                      F-29
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


17.     CONTINGENCIES, CONTINUED:

        On December 5, 2001, the contemptuous defendants filed an appeal of the
        Contempt Order, claiming that the 1999 injunction entered on the record
        was technically invalid and that the factual record does not support the
        finding of contempt. The Company and Bollore on February 22, 2002 filed
        a motion with the appellate court urging that the Court dismiss the
        appeal as premature. That motion is pending. If the Court denies that
        motion, the plaintiffs intend to defend the Contempt Order vigorously.

        On February 5, 2002, the District Court in the Bollore case granted
        Bollore's motion to amend the Complaint to add the Company and NAOC as
        plaintiffs.

        Pursuant to a separate agreement between the parties, any collections on
        the judgments issued in the Bollore v. Import Warehouse case are to be
        divided evenly between Bollore and the Company after the payment of all
        expenses. A full trial on the merits has been scheduled for April 1,
        2002.

        On February 7, 2002, Bollore, NAOC and the Company 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. The
        Company alleges that Mr. Bhatia and Import Warehouse sold counterfeit
        goods to at least three different companies over an extended period of
        time. The hearing date for that contempt order has not been set.

        CALIFORNIA INFRINGING PRODUCTS LITIGATION. On March 23, 2001, the
        Company participated as co-plaintiff with Bollore, S.A. and North
        Atlantic Operating Company, Inc. ("NAOC"), its subsidiary, in an action
        entitled Bollore, S.A. v. A&A Smart Shopping (Case No. CV 01-02766 FMC
        (MANx)), filed in the United States District Court for the Central
        District of California. The plaintiffs alleged that nine distributors in
        California were selling counterfeit Zig-Zag(R) brand cigarette papers.
        As part of that action, the plaintiffs sought and obtained temporary
        restraining orders prohibiting the sale of such counterfeit products on
        March 27, 2001. The plaintiffs also obtained a seizure order and, on
        April 3, 2001, executed it against seven of the distributors. All seven
        were found to be in possession of counterfeit products. On April 10,
        2001, the court granted a preliminary injunction against all of the
        defendants, barring the sale of counterfeit or infringing Zig-Zag(R)
        brand products, and requiring the defendants to effect a recall of
        counterfeit products from the market. Trial is currently scheduled for
        June 18, 2002. Any collections of judgments in this case are to be
        divided evenly between Bollore and NAOC.

        On May 22, 2001, the Company participated as co-plaintiff with Bollore,
        S.A. and North Atlantic Operating Company, Inc. in an action entitled
        Bollore, S.A. v. Buy-Rite Wholesale (Case No. CV 01-4570 FMC (MAN)),
        filed in the United States District Court for the Central District of
        California. The plaintiffs alleged that seven distributors and retailers
        in California were selling counterfeit Zig-Zag(R)brand cigarette papers.
        As part of that action, the plaintiffs


                                      F-30
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


17.     CONTINGENCIES, CONTINUED:

        sought and obtained temporary restraining orders prohibiting the sale of
        such counterfeit products on May 22, 2001. The plaintiffs also obtained
        a seizure order and, on May 31, 2001, executed it on six of the
        defendants. Of the six, four were found to be in possession of
        counterfeit products, and a fifth was in possession of infringing
        foreign products. Nonetheless, on June 7, 2001, the Court declined to
        issue a preliminary injunction against the continuing sale of
        counterfeit or infringing goods. Plaintiffs applied to the court for
        reconsideration as to all defendants. On August 3, 2001 the court again
        declined to issue a preliminary injunction, without prejudice to filing
        a more detailed motion. Trial of this matter is currently scheduled for
        July 23, 2002.

        Discovery is continuing in all of the above cases and the Company
        intends to vigorously pursue the defendants for damages. Management
        believes that the successful prosecution of this litigation, whether by
        settlement or otherwise, would have a favorable impact on its premium
        cigarette paper business, which has been adversely affected by this
        counterfeiting activity. No gain contingencies have been recorded for
        these matters.

        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 consider any of these other proceedings to be material.
        For a description of regulatory matters and related industry litigation
        in which the Company is a party, see Part I, Item 1.
        "Business--Regulation."

18.     PARENT-ONLY FINANCIAL INFORMATION:

        The Corporation is a holding company with no operations and no assets
        other than its investments in its subsidiaries, income tax receivables,
        deferred income tax assets related to the differences between the book
        and tax basis of its investment in the Partnership, and deferred
        financing costs related to its debt.

        All of the Corporation's subsidiaries are wholly-owned and guarantee the
        debt of the Corporation on a full, unconditional, and joint and several
        basis. In management's opinion, separate financial statements of the
        subsidiaries are not meaningful to investors and have not been included
        in these financial statements.




                                      F-31
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


18.     PARENT-ONLY FINANCIAL INFORMATION, CONTINUED:

        Following is unaudited parent-only summarized financial information of
        the Corporation (in thousands):

<TABLE>
<CAPTION>
                                                                                           2001                 2000
                                                                                  --------------------- --------------------
<S>                                                                               <C>                   <C>
          Noncurrent assets                                                       $            195,462  $            210,207
          Current liabilities                                                                   20,164                20,468
          Noncurrent liabilities                                                               155,000               167,500
          Redeemable preferred stock                                                            57,443                50,698

                                                                                            YEAR ENDED DECEMBER 31,
                                                                                  ------------------------------------------
                                                                                           2001                 2000
                                                                                  --------------------- --------------------

          Equity in earnings of subsidiaries                                      $             18,746  $             19,551
          Income loss before extraordinary loss and preferred stock dividends                  (1,308)               (2,305)

</TABLE>


19.     SEGMENT INFORMATION:

        In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments
        of an Enterprise and Related Information." The Company has been
        historically organized on the basis of product lines which are comprised
        of two 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 cigarette papers, tobaccos and related
        products primarily through wholesale distributors in the United States.

        The accounting policies of the segments are the same as those described
        in the "Summary of Significant Accounting Policies." Segment data
        includes a charge allocating all corporate costs to each operating
        segment. Elimination and Other includes the assets of the Company not
        assigned to segments and the elimination of intercompany accounts
        between segments.

        The Company evaluates the performance of its segments and allocates
        resources to them based on earnings before interest, taxes,
        depreciation, amortization, certain non-cash charges and other income
        and expenses (Adjusted EBITDA).



                                      F-32
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


19.        SEGMENT INFORMATION, CONTINUED:

        The table below presents financial information about reported segments
        for 2001, 2000 and 1999 (in thousands):

<TABLE>
<CAPTION>
                                                SMOKELESS                                   ELIMINATIONS
                   2001                          TOBACCO             MAKE-YOUR-OWN           AND OTHER              TOTAL
 ----------------------------------------- -------------------- ------------------------ ------------------- --------------------
<S>                                        <C>                  <C>                      <C>                 <C>
 Net sales                                          $   39,177             $     54,571           $       -         $     93,748
 Adjusted EBITDA                                        10,542                   22,491                                   33,033
 Assets                                                 68,106                  236,904            (90,126)              214,884

                   2000
 -----------------------------------------

 Net sales                                              39,733                   53,412                   -               93,145
 Adjusted EBITDA                                        10,684                   22,498                                   33,182
 Assets                                                 73,845                  223,732            (69,820)              227,757

                   1999
 -----------------------------------------

 Net sales                                              45,814                   48,647                   -               94,461
 Adjusted EBITDA                                        14,747                   22,941                                   37,688
 Assets                                                 81,482                  208,539            (46,418)              243,603

</TABLE>

        A reconciliation of Adjusted EBITDA to total consolidated operating
        income for 2001, 2000, and 1999 is as follows (in thousands):

<TABLE>
<CAPTION>
                                                         2001                2000                1999
                                                  ------------------------------------------------------------
<S>                                               <C>                   <C>                  <C>
            Adjusted EBITDA                               $   33,033          $    33,182         $    37,688
            Depreciation expense                               (637)              (1,067)             (1,923)
            Amortization expense                             (5,490)              (5,490)             (5,490)
            LIFO adjustment                                  (2,682)              (2,434)               (174)
            Stock option expense                                (33)                 (33)                (70)
            Postretirement/Pension expense                   (1,128)                (666)             (1,151)
                                                  ------------------------------------------------------------

            Operating income                              $   23,063          $    23,492          $   28,880
                                                  ============================================================

</TABLE>


                                      F-33
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


20.     NEW ACCOUNTING STANDARDS:

        In July 2001, the Financial Accounting Standards Board (FASB) issued
        Statement of Financial Accounting Standards No. 141, "Business
        Combinations" ("SFAS No. 141"). The Statement addresses financial
        accounting and reporting for business combinations and supercedes
        Accounting Principles Board Opinion No. 16 "Business Combinations", and
        Statement of Financial Accounting Standards No. 38, "Accounting for
        Pre-acquisition Contingencies of Purchased Enterprises". All business
        combinations in the scope of SFAS No. 141 are to be accounted for using
        one method - the purchase method. SFAS No. 141 is effective for all
        business combinations initiated after June 30, 2001.

        Also in July 2001, the FASB issued Statement of Financial Accounting
        Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"),
        which establishes the accounting for goodwill and other intangible
        assets following their recognition. SFAS 142 applies to all goodwill and
        other intangible assets whether acquired singly, as part of a group, or
        in a business combination. SFAS 142 provides that goodwill and other
        intangible assets believed to have indefinite lives should not be
        amortized but should be tested for impairment annually using a
        fair-value based approach. In addition, SFAS 142 provides that other
        intangible assets other than goodwill should be amortized over their
        useful lives and reviewed for impairment in accordance with Statement of
        Financial Accounting Standards No. 121, "Accounting for the Impairment
        of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS
        142 is effective for the Company beginning on January 1, 2002. Upon
        adoption, the Company will be required to perform a transitional
        impairment test under SFAS 142 for all goodwill recorded as of January
        1, 2002. Any impairment loss recorded as a result of completing the
        transitional impairment test will be treated as a change in accounting
        principle. Management has not completed the transitional impairment test
        and has not determined whether an impairment adjustment will be required
        upon adoption. Additionally, Management has not yet determined the
        impact of SFAS 142 on the Company's amortization expense. The adoption
        of SFAS 142 will not impact the Company's Adjusted EBITDA, which is
        Management's performance standard.

        In October 2001, the FASB issued Statement of Financial Accounting
        Standards No. 144, Accounting for the Impairment or Disposal of
        Long-Lived Assets (FAS 144). The Statement addresses financial
        accounting and reporting for the impairment or disposal of long-lived
        assets. This Statement supercedes Statement of Financial Accounting
        Standards No. 121, Accounting for the Impairment of Long-Lived Assets
        and for Long-Lived Assets to be Disposed Of (FAS 121), and the
        accounting and reporting provisions of Accounting Principles Board
        Opinion No. 30, Reporting the Results of Operations, Reporting the
        Effects of Disposal of a Segment of a Business, and Extraordinary,
        Unusual and Infrequently Occurring Events and Transactions, for the
        disposal of a segment of a business (as previously defined in that
        Opinion). This Statement also amends Accounting Research Bulletin No.
        51, Consolidated Financial Statements, to eliminate the exception to
        consolidation for a subsidiary for which


                                      F-34
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


20.     NEW ACCOUNTING STANDARDS, CONTINUED:

        control is likely to be temporary. The objectives of FAS 144 are to
        address significant issues relating to the implementation of FAS 121 and
        to develop a single accounting model, based on the framework established
        in FAS 121, for long-lived assets to be disposed of by sale, whether
        previously held and used or newly acquired. The Company will adopt FAS
        144 in the first quarter 2002. Management has not determined the impact
        of FAS 144 but does not believe that the adoption will have a material
        effect on the Company's results of operations or financial position.

        During 2001, the Emerging Issues Task Force issued: EITF No. 00-14,
        "Accounting for Certain Sales Incentives" addressing the recognition,
        measurement and statement of earnings classification of certain sales
        incentives; and EITF No. 00-25, "Vendor Income Statement
        Characterization of Consideration Paid to a Reseller of the Vendor's
        Products" addressing the statement of earnings classification of
        consideration from a vendor to an entity that purchases the vendor's
        products for resale. The Company will adopt EITF 00-14 and 00-25 in the
        first quarter of 2002. Management is currently evaluating the impact of
        EITF 00-14 and 00-25 and expects that their adoption will result in a
        reclassification of certain expenses from selling, general and
        administrative expenses to net sales with no impact on the operating
        income (loss) or net income (loss) for 2002 and future years. Prior year
        amounts will be reclassified to be consistent with the Company's 2002
        presentation.







                                      F-35
<PAGE>
                                  EXHIBIT INDEX

                                       TO

                      NORTH ATLANTIC TRADING COMPANY, INC.

                           ANNUAL REPORT ON FORM 10-K

                     FOR FISCAL YEAR ENDED DECEMBER 31, 2001

EXHIBIT
NUMBER            DESCRIPTION
------            -----------

3.1(a)     --     Restated Certificate of Incorporation of North Atlantic
                  Trading Company, Inc., filed February 19, 1998 (incorporated
                  herein by reference to Exhibit 3.1(a)(i) the Registrant's
                  Annual Report on Form 10-K for the fiscal year ended December
                  31, 1997).

3.1(b)     --     Certificate of Incorporation of North Atlantic Operating
                  Company, Inc., filed June 9 1997 (incorporated herein by
                  reference to Exhibit 3.1(b)(i) to the Registrant's Annual
                  Report on Form 10-K for the fiscal year ended December 31,
                  1997).

3.1(c)     --     Certificate of Amendment of Certificate of Incorporation of
                  North Atlantic Operating Company, Inc., filed June 17, 1997
                  (incorporated herein by reference to Exhibit 3.1(b)(ii) to
                  Amendment No. 1 to Registration Statement (Reg. No. 333-31931)
                  on Form S-4 filed with the Commission on September 3, 1997).

3.1(d)     --     Restated Certificate of Incorporation of National Tobacco
                  Finance Corporation, filed April 24, 1996 (incorporated herein
                  by reference to Exhibit 3.1(c) to Amendment No. 1 to
                  Registration Statement (Reg. No. 333-31931) on Form S-4 filed
                  with the Commission on September 3, 1997).

3.1(e)     --     Amended and Restated Certificate of Limited Partnership of
                  National Tobacco Company, L.P., filed May 17, 1996
                  (incorporated herein by reference to Exhibit 3.1(d) to
                  Amendment No. 1 to Registration Statement (Reg. No. 333-31931)
                  on Form S-4 filed with the Commission on September 3, 1997).

3.1(f)     --     Certificate of Incorporation of International Flavors and
                  Technology, Inc., filed August 7, 1997 (incorporated herein by
                  reference to Exhibit 3.1(e)(i) to the Registrant's Annual
                  Report on Form 10-K for the fiscal year ended December 31,
                  1997).

3.1(g)     --     Certificate of Amendment of Certificate of Incorporation of
                  International Flavors and Technology, Inc., filed February 19,
                  1998 (incorporated herein by reference to Exhibit 3.1(e)(ii)
                  to the Registrant's Annual Report on Form 10-K for the fiscal
                  year ended December 31, 1997).


<PAGE>
3.2(a)     --     Amended and Restated Bylaws of North Atlantic Trading Company,
                  Inc. (incorporated herein by reference to Exhibit 3.2(a) to
                  the Registrant's Quarterly Report on Form 10-Q for the fiscal
                  quarter ended March 31, 1998).

3.2(b)     --     Bylaws of North Atlantic Operating Company, Inc. (incorporated
                  herein by reference to Exhibit 3.2(b) to Registration
                  Statement (Reg. No. 333-31931) on Form S-4 filed with the
                  Commission on September 3, 1997).

3.2(c)     --     Bylaws of National Tobacco Finance Corporation (incorporated
                  herein by reference to Exhibit 3.2(c) to Registration
                  Statement (Reg. No. 333-31931) on Form S-4 filed with the
                  Commission on September 3, 1997).

3.2(d)     --     Third Amended and Restated Agreement of Limited Partnership of
                  National Tobacco Company, L.P., effective May 17, 1996
                  (incorporated herein by reference to Exhibit 3.2(d)(i) to
                  Amendment No. 1 to Registration Statement (Reg. No. 333-31931)
                  on Form S-4 filed with the Commission on September 3, 1997).

3.2 (e)    --     Amendment No. 1 to Third Amended and Restated Agreement of
                  Limited Partnership of National Tobacco Company, L.P.,
                  effective June 25, 1997 (incorporated herein by reference to
                  Exhibit 3.2(d)(ii) to Amendment No. 1 to Registration
                  Statement (Reg. No. 333-31931) on Form S-4 filed with the
                  Commission on September 3, 1997).

3.2(f)     --     Bylaws of International Flavors and Technology, Inc.
                  (incorporated herein by reference to Exhibit 3.2(e) to the
                  Registrant's Annual Report on Form 10-K for the fiscal year
                  ended December 31, 1997).

3.2(g)     --     Amendment No. 2 to the Third Amended and Restated Agreement of
                  Limited Partnership of National Tobacco Company, L.P.,
                  effective February 10, 2000 (incorporated by reference to
                  Exhibit 3.2 (g) to the Registrant's Annual Report on Form 10-K
                  for the fiscal year ended December 31, 2000).

3.3        --     Certificate of Designation of 12% Senior Exchange
                  Payment-In-Kind Preferred Stock of North Atlantic Trading
                  Company, Inc., filed July 22, 1997 (incorporated herein by
                  reference to Exhibit 3.3(b) to Amendment No. 1 to Registration
                  Statement (Reg. No. 333-31931) on Form S-4 filed with the
                  Commission on September 3, 1997).

4.1        --     Indenture, dated as of June 25, 1997, among North Atlantic
                  Trading Company, Inc., as issuer, National Tobacco Company,
                  L.P., North Atlantic Operating Company, Inc. and National
                  Tobacco Finance Corporation, as guarantors, and United States
                  Trust Company of New York, as trustee (incorporated herein by
                  reference to Exhibit 4.1 to Amendment No. 1 to Registration
                  Statement (Reg. No. 333-31931) on Form S-4 filed with the
                  Commission on September 3, 1997).

<PAGE>
4.2        --     First Supplemental Indenture, dated as of February 26, 1998,
                  among North Atlantic Trading Company, Inc., National Tobacco
                  Company, L.P., National Tobacco Finance Corporation,
                  International Flavors and Technology, Inc. and The United
                  States Trust Company of New York (incorporated herein by
                  reference to Exhibit 4.3 to the Registrant's Annual Report on
                  Form 10-K for the fiscal year ended December 31, 1997).

9.1        --     Exchange and Stockholders' Agreement, dated as of June 25,
                  1997, by and between North Atlantic Trading Company, Inc. and
                  those stockholders signatory thereto (incorporated herein by
                  reference to Exhibit 9 to Amendment No. 1 to Registration
                  Statement (Reg. No. 333-31931) on Form S-4 filed with the
                  Commission on September 3, 1997).

9.2        --     Voting Trust Agreement, dated as of December 17, 1997, among
                  Thomas F. Helms, Jr., David I. Brunson and Jeffrey S. Hay, as
                  voting trustees, and Helms Management Corp. (incorporated
                  herein by reference to Exhibit 9.2 to the Registrant's Annual
                  Report on Form 10-K for the fiscal year ended December 31,
                  1997).

9.3        --     Amendment No. 1 to Voting Trust Agreement, dated as of August
                  2, 1999, among Thomas F. Helms, Jr. and David I. Brunson, as
                  voting trustees, and Helms Management Corp. (incorporated by
                  reference to Exhibit 9.3 to the Registrant's Annual Report on
                  Form 10-K for the fiscal year ended December 31, 2000).

10.1       --     Third Amended and Restated Purchasing and Processing
                  Agreement, dated as of June 25, 1997, between National Tobacco
                  Company, L.P. and Lancaster Leaf Tobacco Company of
                  Pennsylvania (incorporated herein by reference to Exhibit 10.1
                  to Amendment No. 1 to Registration Statement (Reg. No.
                  333-31931) on Form S-4 filed with the Commission on September
                  3, 1997).

10.2+      --     Amended and Restated Distribution and License Agreement, dated
                  as of November 30, 1992, between Bollore Technologies, S.A.
                  and North Atlantic Trading Company, Inc., a Delaware
                  corporation and predecessor to North Atlantic Operating
                  Company, Inc. [United States] (incorporated herein by
                  reference to Exhibit 10.2 to Amendment No. 2 to Registration
                  Statement (Reg. No. 333-31931) on Form S-4 filed with the
                  Commission on September 3, 1997).

10.3+      --     Amended and Restated Distribution and License Agreement, dated
                  as of November 30, 1992, between Bollore Technologies, S.A.
                  and North Atlantic Trading Company, Inc., a Delaware
                  corporation and predecessor to North Atlantic Operating
                  Company, Inc. [Asia] (incorporated herein by reference to
                  Exhibit 10.3 to Amendment No. 2 to Registration Statement
                  (Reg. No. 333-31931) on Form S-4 filed with the Commission on
                  September 3, 1997).

<PAGE>
10.4+      --     Amended and Restated Distribution and License Agreement, dated
                  as of November 30, 1992, between Bollore Technologies, S.A.
                  and North Atlantic Trading Company, Inc., a Delaware
                  corporation and predecessor to North Atlantic Operating
                  Company, Inc. [Canada] (incorporated herein by reference to
                  Exhibit 10.4 to Amendment No. 2 to Registration Statement
                  (Reg. No. 333-31931) on Form S-4 filed with the Commission on
                  September 3, 1997).

10.5+      --     Restated Amendment, dated as of June 25, 1997, between Bollore
                  Technologies, S.A. and North Atlantic Operating Company, Inc.
                  (incorporated herein by reference to Exhibit 10.5 to Amendment
                  No. 2 to Registration Statement (Reg. No. 333-31931) on Form
                  S-4 filed with the Commission on September 3, 1997).

10.6       --     Warrant Agreement, dated as of June 25, 1997, between North
                  Atlantic Trading Company, Inc. and United States Trust Company
                  of New York, as warrant agent (incorporated herein by
                  reference to Exhibit 10.12 to Amendment No. 1 to Registration
                  Statement (Reg. No. 333-31931) on Form S-4 filed with the
                  Commission on September 3, 1997).

10.7++     --     1997 Share Incentive Plan of North Atlantic Trading Company,
                  Inc. (incorporated herein by reference to Exhibit 10.12 to
                  Amendment No. 1 to Registration Statement (Reg. No. 333-31931)
                  on Form S-4 filed with the Commission on September 3, 1997).

10.8++     --     Employment Agreement, dated May 17, 1996, between North
                  Atlantic Trading Company, Inc. and Thomas F. Helms, Jr.
                  (incorporated herein by reference to Exhibit 10.17 to
                  Amendment No. 1 to Registration Statement (Reg. No. 333-31931)
                  on Form S-4 filed with the Commission on September 3, 1997).

10.9 ++    --     Employment Agreement, dated April 14, 1997, between National
                  Tobacco Company, Inc. and David I. Brunson (incorporated
                  herein by reference to Exhibit 10.18(a) to Amendment No. 1 to
                  Registration Statement (Reg. No. 333-31931) on Form S-4 filed
                  with the Commission on September 3, 1997).

10.10++    --     Letter Agreement, dated April 23, 1997, between Thomas F.
                  Helms, Jr. and David I. Brunson (incorporated herein by
                  reference to Exhibit 10.18(b) to Amendment No. 1 to
                  Registration Statement (Reg. No. 333-31931) on Form S-4 filed
                  with the Commission on September 3, 1997).

10.11++    --     Nonqualified Stock Option Agreement, dated as of June 25,
                  1997, between North Atlantic Trading Company, Inc. and David
                  I. Brunson (incorporated herein by reference to Exhibit
                  10.18(c) to Amendment No. 1 to Registration Statement (Reg.
                  No. 333-31931) on Form S-4 filed with the Commission on
                  September 3, 1997).

<PAGE>
10.12++    --     Amendment No. 1, dated and effective September 2, 1997, to the
                  Nonqualified Stock Option Agreement, dated as of June 25,
                  1997, between North Atlantic Trading Company, Inc. and David
                  I. Brunson (incorporated herein by reference to Exhibit
                  10.18(d) to Amendment No. 1 to Registration Statement (Reg.
                  No. 333-31931) on Form S-4 filed with the Commission on
                  September 3, 1997).

10.13++    --     Amendment No. 2, dated as of December 31, 1997, to the
                  Nonqualified Stock Option Agreement, dated as of June 25,
                  1997, between North Atlantic Trading Company, Inc. and David
                  I. Brunson (incorporated herein by reference to Exhibit
                  10.18(e) to the Registrant's Annual Report on Form 10-K for
                  the fiscal year ended December 31, 1997).

10.14++    --     Consulting Agreement, dated as of June 25, 1997, between North
                  Atlantic Trading Company, Inc. and Jack Africk (incorporated
                  herein by reference to Exhibit 10.20 to Amendment No. 1 to
                  Registration Statement (Reg. No. 333-31931) on Form S-4 filed
                  with the Commission on September 3, 1997).

10.15++    --     National Tobacco Company Management Bonus Program
                  (incorporated herein by reference to Exhibit 10.25 to
                  Amendment No. 1 to Registration Statement (Reg. No. 333-31931)
                  on Form S-4 filed with the Commission on September 3, 1997).

10.16++    --     Amended and Restated Nonqualified Stock Option Agreement dated
                  as of January 12, 1998, between North Atlantic Trading
                  Company, Inc. And Jack Africk (incorporated herein by
                  reference to Exhibit 10.28 to the Registrant's Annual Report
                  on Form 10-K for the fiscal year ended December 31, 1997).

10.17++    --     Assignment and Assumption, dated as of January 1, 1998,
                  between National Tobacco Company, L.P. and North Atlantic
                  Trading Company, Inc. (incorporated herein by reference to
                  Exhibit 10.30 to the Registrant's Annual Report on Form 10-K
                  for the fiscal year ended December 31, 1997).

10.18+     --     Amendment, dated October 27, 1997, to Amended and Restated
                  Distribution and License Agreements, between Bollore and North
                  Atlantic Operating Company, Inc. (incorporated herein by
                  reference to Exhibit 10.31 to the Registrant's Annual Report
                  on Form 10-K for the fiscal year ended December 31, 1997).

10.19      --     Sales Representative Agreement, effective as of January 1,
                  1998, between National Tobacco Company, L.P. and North
                  Atlantic Operating Company, Inc. (incorporated herein by
                  reference to Exhibit 10.32 to the Registrant's Annual Report
                  on Form 10-K for the fiscal year ended December 31, 1997).

<PAGE>
10.20      --     Amendment to Credit Agreement, dated as of June 5, 1998, among
                  North Atlantic Trading Company, Inc., the various lending
                  institutions referenced therein, and National Westminster Bank
                  plc, as Administrative Agent (incorporated herein by reference
                  to Exhibit 10.1 to the Registrant's Quarterly Report on 10-Q
                  for the fiscal quarter ended June 30, 1998).

10.21++    --     Amended and Restated Employment Agreement dated as of April
                  30, 1998, between North Atlantic Trading Company, Inc. and
                  David I. Brunson (incorporated herein by reference to Exhibit
                  10.2 to the Registrant's Report on 10-Q for the fiscal quarter
                  ended June 30, 1998).

10.22      --     Option Grant Letter, dated April 30, 1998, from Helms
                  Management Corp. to David I. Brunson (incorporated herein by
                  reference to Exhibit 10.5 to the Registrant's Quarterly Report
                  on 10-Q for the fiscal quarter ended June 30, 1998).

10.23      --     Promissory Note, dated April 14, 1998, issued by Helms
                  Management Corp. in favor of North Atlantic Trading Company,
                  Inc. (incorporated herein by reference to Exhibit 10.7 to the
                  Registrant's Quarterly Report on 10-Q for the fiscal quarter
                  ended June 30, 1998).

10.24      --     Amendment, dated as of February 1, 1998, among North Atlantic
                  Trading Company, Inc., the various lending institutions
                  referenced therein and National Westminster Bank plc, as
                  administrative agent (incorporated herein by reference to
                  Exhibit 10.39 to the Registrant's Quarterly Report on 10-Q for
                  the fiscal quarter ended March 31, 1998).

10.25      --     Consent, dated as of March 12, 1998, among North Atlantic
                  Trading Company, Inc., the various lending institutions
                  referenced therein and National Westminster Bank plc, as
                  administrative agent (incorporated herein by reference to
                  Exhibit 10.40 to the Registrant's Quarterly Report on 10-Q for
                  the fiscal quarter ended March 31, 1998).

10.26      --     Subscription Agreement, dated as of March 24, 1998, between
                  North Atlantic Trading Company, Inc. and David I. Brunson
                  (incorporated herein by reference to Exhibit--10.42 to the
                  Registrant's Quarterly Report on 10-Q for the fiscal quarter
                  ended March 31, 1998).

10.27      --     Promissory Note, dated March 24, 1998, issued by David I.
                  Brunson in favor of North Atlantic Trading Company, Inc.
                  (incorporated herein by reference to Exhibit 10.44 to the
                  Registrant's Quarterly Report on 10-Q for the fiscal quarter
                  ended March 31, 1998).

10.28      --     Promissory Note, dated April 14, 1998, issued by Helms
                  Management Corp. in favor of North Atlantic Trading Company,
                  Inc. (incorporated herein by reference to Exhibit 10.7 to the
                  Registrant's Quarterly Report on 10-Q for the fiscal quarter
                  ended June 30, 1998).

<PAGE>
10.29++    --     Letter Agreement, dated September 24, 1999, between North
                  Atlantic Trading Company, Inc. and Jack Africk (incorporated
                  by reference to Exhibit 10.34 to the Registrant's Annual
                  Report on Form 10-K for the fiscal year ended December 31,
                  2000).

10.30++    --     North Atlantic Trading Company, Inc. 1999 Executive Incentive
                  Plan (incorporated by reference to Exhibit 10.35 to the
                  Registrant's Annual Report on Form 10-K for the fiscal year
                  ended December 31, 2000).

10.31++    --     North Atlantic Trading Company, Inc. 1999 Management Bonus
                  Plan (incorporated by reference to Exhibit 10.36 to the
                  Registrant's Annual Report on Form 10-K for the fiscal year
                  ended December 31, 2000).

10.32      --     Loan Agreement, dated as of December 29, 2000, by and among
                  North Atlantic Trading Company, Inc., National Tobacco
                  Company, L.P., North Atlantic Operating Company, Inc.,
                  National Tobacco Finance Corporation and Bank One, Kentucky
                  N.A., as agent bank and the various lending institutions named
                  therein (incorporated by reference to Exhibit 10.32 to the
                  Registrant's Annual Report on Form 10-K for the fiscal year
                  ended December 31, 2001).

10.33      --     Security Agreement, dated as of December 29, 2000, among North
                  Atlantic Trading Company, Inc., National Tobacco Company,
                  L.P., North Atlantic Operating Company, Inc., National Tobacco
                  Finance Corporation and Bank One Kentucky, N.A., as agent for
                  certain lending institutions (incorporated by reference to
                  Exhibit 10.33 to the Registrant's Annual Report on Form 10-K
                  for the fiscal year ended December 31, 2000).

10.34      --     Guaranty Agreement, dated as of December 29, 2000, among
                  National Tobacco Company, L.P., North Atlantic Operating
                  Company, Inc., National Tobacco Finance Corporation and Bank
                  One, Kentucky, N.A., as agent for certain lending institutions
                  (incorporated by reference to Exhibit 10.34 to the
                  Registrant's Annual Report on Form 10-K for the fiscal year
                  ended December 31, 2000).

10.35      --     Pledge Agreement, dated as of December 29, 2000 among and
                  North Atlantic Trading Company, Inc., National Tobacco
                  Company, L.P., North Atlantic Operating Company, Inc.,
                  National Tobacco Finance Corporation and Bank One Kentucky,
                  N.A., as agent for certain lending institutions (incorporated
                  by reference to Exhibit 10.35 to the Registrant's Annual
                  Report on Form 10-K for the fiscal year ended December 31,
                  2000).

10.36*++   --     2001 Share Incentive Plan of North Atlantic Trading Company,
                  Inc.

21         --     Subsidiaries of North Atlantic Trading Company, Inc.
                  (incorporated herein by reference to Exhibit 21 to the
                  Registrant's Annual Report on Form 10-K for the fiscal year
                  ended December 31, 1998).

<PAGE>
           * Filed herewith.

           + Portions of this agreement have been omitted pursuant to Rule 406
under the Securities Act of 1933, as amended, and have been filed confidentially
with the Securities and Exchange Commission.

           ++ Management contracts or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 14(c) of the rules governing the
preparation of this Report.