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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K/A

                                (AMENDMENT NO. 2)

                        FOR ANNUAL AND TRANSITION REPORTS
                     PURSUANT TO SECTIONS 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

(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, 2004

                                       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|

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |_| No |X|.

As of March 29, 2005, the only class of voting or non-voting common equity
issued and outstanding was the Registrant's Voting Common Stock, par value $.01
per share, 100% of which was owned by North Atlantic Holding Company, Inc. There
is no trading market for the Voting Common Stock. As of March 29, 2005, 10
shares of the Registrant's Voting Common Stock, par value $.01 per share were
outstanding.
<PAGE>
                                Explanatory Note


This Form 10-K/A amends and restates North Atlantic Trading Company, Inc.'s (the
"Company") Form 10-K for the year ended December 31, 2004 filed on March 31,
2005, as amended by the Form 10-K/A filed on April 4, 2005 (collectively, the
"Original Annual Report"). The Company has restated its previously issued
financial statements, as of and for the year ended December 31, 2004 to reflect
the correction of errors related to the calculation of the deferred income tax
valuation. During the fourth quarter of 2004, the Company and its subsidiaries
provided a full valuation allowance against its net deferred tax assets.
Following a review of the Company's deferred tax assets and deferred tax
liabilities, the Company determined that in calculating the valuation allowance,
deferred tax liabilities relating to inventories and tax-deductible goodwill had
been inappropriately netted against certain deferred tax assets. It cannot be
determined that the temporary differences related to inventories and goodwill
will reverse during the time period in which the Company's temporary differences
related to its deferred tax assets are expected to reverse or expire. Therefore,
these deferred tax liabilities should not have been utilized to reduce the
amount of the valuation allowance against deferred tax assets. This resulted in
an understatement of the valuation allowance in the amount of these deferred tax
liabilities of $9.8 million and an understatement of income tax expense of $9.8
million as of and for the year ended December 31, 2004. The correction of this
understatement has the effect of increasing deferred tax liabilities, increasing
accumulated deficit and decreasing net income, with no effect on net cash flows,
as of and for the year ended December 31, 2004.


The Items of the Original Annual Report which are amended and restated are as
follows: Item 1 Business (only the paragraph titled "Maintain lean, low cost
culture" in the "Business Strategy" section); Item 6 Selected Financial Data;
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations; Item 8 Financial Statements and Supplementary Data (including the
Report of Independent Registered Public Accounting Firm, Consolidated Balance
Sheet, Consolidated Statements of Net Earnings, Consolidated Statements of
Shareholders' Equity, Consolidated Statements of Cash Flows, Notes to
Consolidated Financial Statements (Notes 1, 4, 13, 18, and 20)) and Item 9A
Controls and Procedures. Further, this Form 10-K/A contains new Exhibits 31.1,
31.2, 32.1 and 32.2, dated the date of the filing of this Form 10-K/A.


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









                                       i
<PAGE>
                      North Atlantic Trading Company, Inc.
                          2004 Form 10-K Annual Report

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                                      PAGE
                                                                                                                      ----
<S>                                                                                                                  <C>
                                                      PART I


Item 1.  Business                                                                                                        1

Item 2.  Properties                                                                                                     15

Item 3.  Legal Proceedings                                                                                              16

Item 4.  Submission of Matters to a Vote of Security Holders                                                            19

                                                      PART II


Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
            Securities                                                                                                  19

Item 6.  Selected Financial Data                                                                                        21

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

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

Item 9A. Controls and Procedures                                                                                        31

Item 9B. Other Information                                                                                              31

                                                     PART III


Item 10. Directors and Executive Officers of the Registrant                                                             32

Item 11. Executive Compensation                                                                                         35

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                 44

Item 13. Certain Relationships and Related Transactions                                                                 46

Item 14. Principal Accountant Fees and Services                                                                         48

                                                      PART IV


Item 15. Exhibits and Financial Statement Schedules                                                                     50


SIGNATURES                                                                                                              62

</TABLE>


                                       ii
<PAGE>
                                     PART I

ITEM 1.       BUSINESS

OVERVIEW

         North Atlantic Trading Company, Inc. (the "Company") is a holding
company which owns National Tobacco Company, L.P. ("NTC"), North Atlantic
Operating Company, Inc. ("NAOC"), North Atlantic Cigarette Company, Inc.
("NACC"), National Tobacco Finance Corporation and its recently acquired
subsidiaries, Fred Stoker & Sons, Inc., RBJ Sales, Inc. and Stoker, Inc.
(collectively, "Stoker"). NTC is the third largest manufacturer and marketer of
loose leaf chewing tobacco in the United States, selling its products under the
BEECH-NUT(R), TROPHY(R), HAVANA BLOSSOM(R), DURANGO(R), STOKER(TM), OUR
PRIDE(TM) , and other brand names. 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(R) brand name pursuant to an exclusive long-term
distribution agreement with Bollore, S.A. NAOC also manufactures and distributes
Make-Your-Own ("MYO") cigarette tobaccos under the ZIG-ZAG(R), STOKER NO. 2(TM),
OLD HILLSIDE(TM), and other brand names, pursuant to its trademarks. NACC
markets and distributes ZIG-ZAG Premium Cigarettes.

EVOLUTION OF THE COMPANY

         In 1988, Thomas F. Helms, Jr., Chairman and Chief Executive Officer of
the Company, and an investor group led by Lehman Brothers, formed NTC to acquire
the smokeless tobacco division of Lorillard Tobacco Company ("Lorillard").
Lorillard had manufactured and sold the popular BEECH-NUT brand of loose leaf
chewing tobacco since 1897.

         In 1997, the Company was formed to facilitate a corporate
reorganization undertaken in connection with the acquisition (the "1997
Acquisition") of NATC Holdings USA, Inc., which owned the exclusive rights to
market and distribute ZIG-ZAG premium cigarette papers in the United States,
Canada and certain other international markets. Upon consummation of the 1997
Acquisition and the related reorganization, the Company became the holding
company of NTC, which operates the Company's smokeless tobacco business, and
NAOC, which operates the Company's premium cigarette paper and MYO cigarette
business.

         On November 17, 2003, the Company consummated the acquisition of
Stoker. Through the acquisition, the Company acquired the Stoker family of
brands and the related business operations, including the equipment used to
manufacture and package the Stoker products. The Stoker family consists of 18
loose leaf chewing tobacco products and five brands of MYO tobacco and related
products, as well as a number of moist snuff and pipe tobacco brands. The
Company also acquired the Stoker catalog business which principally sells
tobacco products.

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

RECENT EVENTS

         Effective as of February 9, 2004, the Company consummated a holding
company reorganization, whereby North Atlantic Holding Company, Inc., a Delaware
corporation ("Parent"), became the parent company of the Company. The holding
company reorganization was consummated in part to allow Parent to issue senior
discount notes in connection with the Company's refinancing of its existing debt
and preferred stock, as more fully discussed below.

         The holding company reorganization was effected pursuant to an
Agreement and Plan of Merger (the "Merger Agreement"), dated as of February 9,
2004, among the Company, Parent and NATC Merger Sub, Inc., a Delaware
corporation and direct wholly-owned subsidiary of Parent ("Merger Sub"). The
Merger Agreement provided for, among other things, the merger of Merger Sub with
and into the Company, with the Company being the surviving corporation (the
"Merger"). In accordance with Section 228(a) of the Delaware General Corporation
Law, the Company received the required written approval of the Merger by the
holders of a majority of the outstanding shares of the Company's voting common
stock.

         As a result of the Merger, (i) the Company became a direct,
wholly-owned subsidiary of Parent; (ii) each issued and outstanding share of
Company Stock, was converted into the right to receive one share of common stock
of Parent, par value $0.01 per share ("Parent Common Stock"); (iii) each issued
and outstanding share of common stock of Merger Sub was converted into one
issued and outstanding share of common stock of the Company and Merger Sub
ceased to exist; and (iv) all of the issued and outstanding shares of Parent
Common Stock held by the Company were cancelled.


                                       1
<PAGE>
         In connection with the Merger, Parent assumed all of the Company's
obligations under the Company's outstanding warrants and stock options which
were converted into rights to purchase an identical number of shares of Parent
Common Stock. The subsidiaries of the Company were unaffected by the
reorganization.

         On February 17, 2004, the Company consummated the refinancing of its
existing debt and preferred stock, as well as a general corporate
reorganization. The refinancing consisted principally of (1) the offering and
sale of $200.0 million principal amount of senior notes by the Company, (2) the
Company entering into an amended and restated loan agreement that provided a
$50.0 million senior secured revolving credit facility and (3) the concurrent
offering and sale of $97.0 million aggregate principal amount at maturity of
senior discount notes of Parent. Both the senior notes and the senior discount
notes were offered pursuant to Rule 144A and Regulation S under the Securities
Act of 1933, as amended.

         Concurrently with the closing of the refinancing, the Company also
called for redemption all of its outstanding 11% senior notes due 2004, in
accordance with the terms of the indenture governing such notes, at the
applicable redemption price of 100.0% of the principal amount thereof, plus
interest accrued to the redemption date of April 2, 2004.

         On March 18, 2004, the Company redeemed all outstanding shares of its
12% senior exchange payment-in-kind preferred stock, at the applicable
redemption price equal to the liquidation preference of the preferred stock
($22.00 per share), plus an amount in cash equal to all accumulated and unpaid
dividends.

BUSINESS STRATEGY

         The Company's business strategy is to grow, both internally and through
acquisitions, by responsibly marketing its products to adult consumers and by
complying with all applicable laws, regulations and statutes. The Company
intends to (i) capitalize on the strong brand identities of its products with a
focus on product linkages and extensions; and (ii) improve the sales, marketing
and operating efficiencies of its subsidiaries. The Stoker acquisition and the
Company's recently launched ZIG-ZAG Premium Cigarette significantly enhance its
product offerings to distributors, retailers and consumers. Through the
elimination of certain administrative costs, the achievement of certain
manufacturing synergies and through growth in distribution, the Company expects
to meaningfully increase its sales and cash flows. In addition, the Company has
tailored strategies for each of its product groups that are designed to maximize
their profitability.

         Expand the Company's leadership position in the premium cigarette
papers business. Building upon its exclusive long-term distribution and license
agreement with Bollore in the United States and Canada, the Company expects to
expand its market-leading ZIG-ZAG premium cigarette papers brand. The Company
believes that it can manage its premium cigarette papers business for maximum
profitability by focusing on its existing product lines and by increasing the
distribution of its premium cigarette papers products into the large chain
convenience store channel.

         Enhance the profit contribution of the Company's loose leaf chewing
tobacco segment. Historically, the Company has maintained the profit
contribution of its loose leaf chewing tobacco segment by offsetting volume
declines with price increases and by controlling costs. With the addition of the
Stoker products, which target the growing value-oriented category of the loose
leaf chewing tobacco market, the Company expects to be able to slow its
historical trend of volume declines. In addition, the Company believes it can
expand sales of Stoker's value-oriented products by offering them through the
Company's current distribution network. The Company also expects to further
improve profitability through manufacturing cost synergies by consolidating
operations.

         Continue to benefit from the growth in the MYO tobacco and related
products market. MYO tobacco and related products currently enjoy a significant
price advantage over manufactured cigarettes, primarily due to a lower level of
federal and state excise taxation on MYO tobacco and the higher level of Master
Settlement Agreement ("MSA") compliance costs associated with manufactured
cigarettes. Other countries, such as the United Kingdom and Canada, indicate a
strong correlation between rising manufactured cigarette prices and increasing
consumption of MYO tobacco and related products. In 1999, the Company launched
the industry's first fully-integrated MYO line of products, comprised of smoking
tobaccos, tubes, injectors and starter kits under the ZIG-ZAG brand. The Company
recently expanded its portfolio of MYO tobacco and related products by acquiring
the Stoker brands. The Company believes its existing portfolio of ZIG-ZAG
premium MYO tobacco and related products, supplemented by the recently acquired
Stoker portfolio of value-oriented MYO tobacco and related products, will allow
it to continue to benefit from the growth trend in this market. Furthermore, the
Company expects overall category growth of MYO tobacco and related products to
continue for the near future, and accordingly, it intends to focus on expanding
distribution of its MYO tobacco and related products into the large chain
convenience store channel. In addition, the Company has developed and placed
innovative, highly visible point-of-purchase displays to enhance retail category
merchandizing of its MYO products and to increase consumer awareness.


                                       2
<PAGE>
         Grow sales of the Company's new ZIG-ZAG Premium Cigarette. During
September 2003, the Company began a highly focused launch of its new premium
manufactured cigarette under the ZIG-ZAG Premium Cigarette brand in Dallas, Los
Angeles, Miami and Seattle. By leveraging its well-developed brand equity, the
Company believes it can successfully market and increase the sales of this new
premium product in the largest and most profitable segment of the cigarette
industry. In 2004 the Company expanded distribution of its cigarette into
Colorado, Montana, Georgia and Nevada.

         Maintain lean, low cost culture. The Company's most significant cost of
goods sold, other than federal excise taxes, are tobacco and packaging. The
Company rigorously monitors these costs and has relationships with multiple
suppliers to maintain competitive pricing. The Company operates an efficient
manufacturing operation that requires a modest level of capital expenditures.
The Company maintains a lean corporate staff and an operating company culture
that seeks to minimize the overhead costs associated with its vertically
integrated tobacco operations. The Company believes that the application of its
efficient management and manufacturing processes to the recently acquired Stoker
operations will generate significant short-term and ongoing cost savings.

INDUSTRY AND MARKETS

         The Company currently competes in three distinct markets within the
overall tobacco industry: (1) the smokeless tobacco market, which includes loose
leaf chewing tobacco; (2) the MYO products market, which is comprised of premium
cigarette papers and MYO tobaccos and related products; and (3) the premium
cigarette category of the manufactured cigarette market. The Company believes
that the tobacco industry is characterized by non-cyclical demand, relative
brand loyalty, meaningful barriers to entry, defined channels of distribution,
modest 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 loose leaf chewing tobacco, have
a long, established tradition of use in the United States. An estimated 7.8
million Americans are regular users of smokeless tobacco products, according to
the U.S. Department of Health and Human Services. The smokeless tobacco market
is composed of the five product categories listed below:

           o          Moist Snuff: Moist snuff made from dark, air-cured tobacco
                      that is aged, flavored, finely ground and packaged in 1
                      ounce round fiber or plastic cans.

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

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

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

           o          Dry Snuff: Dry snuff is a very finely ground, powdered
                      tobacco product, which is sometimes flavored and is
                      packaged in a variety of containers.

         The Company believes that many consumers of smokeless tobacco regularly
use products in more than one of the aforementioned categories. Further, many of
its competitors in the smokeless tobacco market offer products in more than a
single smokeless tobacco category. In addition to the Company, other major
manufacturers and marketers of smokeless tobacco include US Smokeless Tobacco
Co., Swedish Match North America, Inc., Conwood Corporation and Swisher
International, Inc.

         According to information provided by the Smokeless Tobacco Council,
manufacturers' sales for the smokeless tobacco market increased to $2.268
billion in 2003 from $1.7 billion in 1995, representing an 8-year compound
annual growth rate of 1%. The increase in sales is primarily related to an
increase in manufacturers' sales of moist snuff, which grew to $1.88 billion in
2003 from $1.3 billion in 1995, representing a compound annual growth rate of
5.1%. In contrast to the growth of moist snuff sales, there has been a decline
in manufacturers' sales of chewing tobacco products, including loose leaf
chewing tobacco.

         Loose leaf chewing tobacco, although a mature product category, remains
popular in the Southeast, Southwest and rural Northeast and North Central
regions of the United States. Consistent with a general trend in the tobacco
industry, however, unit volumes of loose leaf chewing tobacco products have been
declining and decreased at a compound annual decline rate of 4% from 1995 to


                                       3
<PAGE>
2003. Manufacturers and marketers of loose leaf chewing tobacco products have
partially offset the impact of this decline with increases in the prices of
loose leaf chewing tobacco products. While there has been an overall decline in
volume, the Company estimates that the volume of sales of the large-sized,
value-oriented category of loose leaf chewing tobacco products has grown.
Large-sized, value-oriented loose leaf chewing tobacco products are packaged in
8 oz. or 16 oz. bag sizes (as compared to the 3 oz. bag size in which other
loose leaf chewing tobacco products are usually sold) and are generally sold at
a lower price per ounce of product than other loose leaf chewing tobacco
products.

         The Company estimates it has a current share of approximately 16.5% of
the loose leaf chewing tobacco market. The other three principal competitors in
the loose leaf chewing tobacco product category, together with the Company,
represented nearly all of the loose leaf chewing tobacco category in the United
States in 2004. The Company's market share and those of its principal
competitors in the loose leaf chewing tobacco products market have remained
relatively consistent over the past five years, with Swedish Match North
America, Inc. holding an approximate 43% market share; Conwood Corporation, an
approximate 33% market share; and Swisher International, Inc., an approximate 6%
market share.

         Loose leaf chewing tobacco products are typically sold through mass
merchandisers, chain and independent convenience stores, tobacco outlets, food
stores and chain and independent drug stores. Tobacco outlets are becoming an
increasingly important distribution channel for all tobacco products, including
loose leaf chewing tobacco. Some retailers purchase loose leaf chewing tobacco
direct from manufacturers although most purchase through wholesale distributors.

MYO Products

         The MYO products market consists of several different product
categories, with each product designed to work with the others to allow the
consumer to make their own cigarettes. Among the products are premium cigarette
papers, MYO tobacco, which is cigarette smoking tobacco in loose form, packaged
typically in canisters, pouches or bags, and products relating to MYO tobacco,
which include cigarette tubes (papers with a filter fashioned into an "empty"
cigarette), cigarette rolling machines, used to roll cigarette papers and
tobacco into a cigarette, and cigarette injector machines, used to insert the
smoking tobacco into the empty cigarette tubes.

         Premium Cigarette Papers. The production and sale of premium cigarette
papers long preceded the invention of machine-made mass manufactured filtered
cigarettes and cigarette tubes. Overall market sales of premium cigarette papers
have been historically stable and during the past six years have benefited to a
slight degree from the increasing growth of MYO tobacco and related products.

         There are two principal paper categories: premium, interleaved paper
and discount "flat" or non-interleaved paper. Premium cigarette papers are made
primarily from rice, flax or combinations of other natural fibers.
Characteristics used to distinguish various papers include size, stability and
cut, all of which affect the ease of making your own cigarettes, and variations
of material and flavor, which impact taste. Premium cigarette papers are sold in
booklets in various sizes and are also segmented by price and quality.

         The Company's principal competitors in the premium cigarette paper
market are Republic Tobacco L.P., which markets JOB(R); Robert Burton
Associates, Inc., a wholly-owned subsidiary of Imperial Tobacco Group plc, which
markets EZ Wider(R); and VCT B.V., which markets the Bambu(R) brand. While
market information is not officially compiled, the Company estimates that it,
together with these three companies, collectively have a market share in excess
of 95% of the premium cigarette papers market.

         Premium cigarette papers are typically sold through the following
retail distribution channels: convenience stores, chain and independent drug
stores, mass merchandisers, food stores and tobacco outlets. Retailers purchase
premium cigarette papers primarily from wholesale distributors.

         MYO tobacco and related products. If viewed as a part of a total
cigarette market, which includes both manufactured cigarettes and MYO tobacco
and related products, the Company believes that on a cigarette-equivalent basis,
aggregate MYO tobacco and related products sales would have represented an
estimated U.S. market share of 0.7% in 1998 and 1.65% in 2003, doubling its
share of the market. Based on MSA calculations, this would equate to an
estimated 3.5 billion cigarette equivalents sold in 1998, increasing to an
estimated 6.0 billion cigarette equivalents sold in 2003 in the United States.

         The MYO tobacco and related products market has been one of the fastest
growing markets in the tobacco industry over the past five years. The Company
believes this growth has been driven primarily by the increasing price
differential between the cost of a consumer making cigarettes using MYO products
and the prices of manufactured cigarettes. Manufactured cigarette prices have
risen during this period primarily as a result of increased state excise and
sales taxes and the pass through by cigarette manufacturers of the cost of
complying with the MSA. U.S. growth in sales of MYO tobacco and related products
is consistent with sales trends that have occurred for these products in Canada
and Europe. For example, in the United Kingdom, following significant increases


                                       4
<PAGE>
in specific excise and ad-valorem sales (VAT) taxes on manufactured cigarettes,
sales of MYO products on a cigarette-equivalent basis grew from representing 5%
of the cigarette market in 1993 to 13% of the market in 2002.

         The other principal U.S. competitors in the MYO tobacco and related
products market are Republic Tobacco, L.P., and its TOP Tobacco, L.P.
subsidiary, which markets the Top(R) brand; and Lane Limited, a subsidiary of
Reynolds America, which markets the Bugler(R) and Kite(R) brands. Many other
companies also compete in this market, such as, Peter Stokkebye International
A/S, which markets the Bali Shag(R) brand, and Santa Fe Natural Tobacco Company
Inc., a Division of Reynolds America, which markets the Natural America
Spirit(R) brand.

         MYO tobacco and related products are typically sold through mass
merchandisers, chain and independent convenience stores, tobacco outlets, food
stores and chain and independent drug stores. Some retailers purchase MYO
tobacco and related products direct from manufacturers although most purchase
through wholesale distributors.

Manufactured Cigarettes

         The U.S. tobacco industry has faced substantial challenges in recent
years, including large price increases to pay for litigation, increased federal
and state excise taxes, the advent of the MSA, the tobacco quota buyout for
farmers, large-scale media campaigns run by anti-smoking groups, increased
restrictions on cigarette marketing and a decrease in the number and types of
locations where smoking is permitted. Despite these challenges, U.S. cigarette
consumption has only declined modestly in recent years. Further, overall
industry dollar sales have grown due to strong price increases and the ability
to pass excise taxes and other costs through to consumers.

         For a number of years, major U.S. cigarette manufacturers have been
faced with lawsuits by private plaintiffs and governmental entities. In response
to the growing number of lawsuits, the major cigarette manufacturers settled
several claims with the state attorneys general. On November 23, 1998, the major
U.S. cigarette manufacturers entered into the MSA with attorneys general
representing 46 states, the District of Columbia, Puerto Rico, Guam, the Virgin
Islands, American Samoa and the Northern Mariana Islands (the "Settling States")
to settle the asserted and unasserted health care cost recovery and certain
other claims of those states and territories. Separately, the major cigarette
manufacturers settled similar claims on an individual basis that were brought by
Florida, Texas, Minnesota and Mississippi (the "Non-MSA States").

         Under the MSA and the settlement agreements with the Non-MSA States,
the manufacturers that participated in the settlement are obligated to make
annual payments to the states. In addition, pursuant to the terms of the MSA,
industry participants agreed to various restrictions and limitations regarding
the advertising, promotion and marketing of tobacco products in the United
States. For a more detailed description of the business restrictions and annual
payments due under the MSA, see "--State Attorney General Settlement
Agreements."

         The original major manufacturers that negotiated and initially signed
the MSA are called the Original Participating Manufacturers ("OPMs"). Some
smaller manufacturers who subsequently elected to participate in the MSA are
called Subsequent Participating Manufacturers ("SPMs"). OPMs and SPMs are
required to make annual MSA payments to the 46 signatory states based on their
national sales volumes, regardless of the state in which cigarettes are sold.
Manufacturers who elected to comply with the MSA through escrow deposits are
referred to as Non-Participating Manufacturers ("NPMs"). NPMs are required to
make annual or quarterly escrow deposits to each of the 46 states separately
based upon units sold to a particular state and are not required to deposit
escrow amounts related to sales in the Non-MSA states. For a more detailed
description of signatory payment requirements of OPMs and SPMs and the escrow
deposit requirements of NPMs, see "--State Attorney General Settlement
Agreements."

         In order to fund their payment obligations under the MSA, major
cigarette manufacturers have instituted a series of price increases from 1997
through 2004. The average wholesale list price charged for a carton of premium
cigarettes has increased at a 17.5% compound annual growth rate from 1997 to
2004.

         There are four primary categories of manufactured cigarettes in the
United States, commonly referred to as "Tiers," that are generally determined
based upon average price per carton and the level of marketing and promotional
support provided at retail: Premium (Tier 1); Branded Savings (Tier 2); Generic
(Tier 3); and Deep-Discount (Tier 4).

         In general, premium brands contain higher-quality raw materials and
packaging and are sold at a higher price point than the generally less
established brands in the other tiers. Most of the premium brands are sold by
four major cigarette manufacturers, which include Philip Morris USA, Inc., R.J.
Reynolds Tobacco Company, Brown & Williamson Tobacco Corporation and Lorillard
Tobacco Company. These brands historically had considerable funds spent in their
support through marketing and advertising, as well as through discounts, coupons
and buy-downs. In September 2003, the Company launched its ZIG-ZAG Premium


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<PAGE>
Cigarette to compete in the premium segment. The Company believes current brand
switching trends among adult consumers highlight the opportunity for additional
well-known premium entrants.

         The discount categories are defined primarily by price. Tier 2
cigarettes are generally less well-recognized brands, sold nationally by major
cigarette manufacturers, marketed at lower retail prices. Tier 3 cigarettes are
sold at even lower retail prices, have less distribution, in general, than Tier
2 brands and are generally manufactured by SPMs. Tier 4 cigarettes are sold by
smaller companies, many of whom are NPMs, and are sold at the lowest retail
prices. Manufacturers of Tier 4 cigarettes are fragmented geographically. In the
last 12 months, Reynolds American, an OPM, has increased its private label brand
competition in the Tier 4 segment.

         The premium category continues to make up the largest share of overall
U.S. cigarette sales volumes, with a 73% market share in 2003. Of that amount,
over 95% are related to sales of the top three major cigarette manufacturers.
The discount category (Tiers 2 - 4) had an approximate 27% market share.

         Overall industry volumes have decreased at a compound annual rate of
2.4% from 1995 to 2003. Competition is primarily based on brand recognition,
consumer loyalty, distribution, retail display and promotion, quality and price.
Meaningful market share shifts among the major manufacturers require significant
discounting and other marketing expenses, however, the MSA contains provisions
limiting the ability of OPMs and SPMs to market and advertise cigarettes.

         In response to increased competition, large manufacturers have
increased promotions and discounts in order to maintain, or at least slow their
decline in market share, particularly in the premium category. Further, these
premium manufacturers have realigned their strategy by focusing marketing
expenditures on their core premium brands. Despite the decline in overall
cigarette volumes and the shift toward discount brands, the Company believes
that the size of the premium cigarette market still offers meaningful
opportunities for a new premium cigarette product with a well-recognized brand
name due to consumer behavior and attitudes toward brand switching.

PRODUCTS

         Currently, the Company manufactures, markets and distributes loose leaf
chewing tobacco for the smokeless tobacco market and MYO smoking tobaccos and
related products for the MYO cigarette market, which also includes the marketing
and distribution of cigarette papers and related products. The Company is also a
marketer and distributor of premium manufactured cigarettes.

Loose Leaf Chewing Tobacco

         Loose leaf chewing tobacco is made from aged, air-cured tobacco, which
is processed and flavored and then packaged in foil pouches. Loose leaf chewing
tobacco products can be broadly characterized as either full-flavored or mild.
According to Company estimates, in 2003, full-flavored products accounted for
approximately 75% of the loose leaf volume and mild flavored products comprised
an estimated 25%. The Company sells its loose leaf chewing tobacco products
under the BEECH-NUT, TROPHY, HAVANA BLOSSOM and DURANGO brand names. The
BEECH-NUT brands are available in two flavors: Regular and Wintergreen.
BEECH-NUT REGULAR is a full-flavored product, which the Company believes is
ranked third in market share in both the full-flavored loose leaf chewing
tobacco category, and in the overall loose leaf chewing tobacco market.
BEECH-NUT WINTERGREEN was introduced in 1979 and has the largest market share of
any premium flavored loose leaf brand. The Company introduced its TROPHY brand
into the mild product category in 1992. The Company's HAVANA BLOSSOM brand is a
regional brand, sold primarily in West Virginia, Pennsylvania and Ohio. Its
DURANGO brand, which was introduced in March 1998, is a nationally distributed
value brand.

         The Company acquired additional brands (with a total of 18 distinct
styles and flavors) of loose leaf chewing tobacco as a result of the Stoker
acquisition. These brands include TENNESSEE CHEW, OUR PRIDE and FRED'S CHOICE.
The Stoker brands appeal to value-conscious consumers. The Company believes the
Stoker brands are the market leaders in the value-oriented category of the loose
leaf chewing tobacco market. The Stoker brands are principally sold in 8 oz. and
16 oz. value-oriented packages as opposed to the industry standard of 3 oz.
packages.

MYO Products

         The Company's MYO products include ZIG-ZAG premium cigarette papers,
MYO tobacco and related products, such as cigarette tubes, cigarette rolling and
injector machines and MYO starter kits.

         The Company sells its premium cigarette papers under the ZIG-ZAG brand.
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 and
ZIG-ZAG 1 1/4 sized French Orange premium cigarette papers. Other premium paper
products sold under tHE ZIG-ZAG name are Kutcorners, which are designed for
easier hand-rolling; -- 1 1/2 sized; king-sized; and double-wide.


                                       6
<PAGE>
         The Company's MYO tobacco products include its ZIG-ZAG Classic American
Blend and its recently acquired STOKER'S NUMBER 2 and OLD HILLSIDE brands of
value-oriented MYO tobaccos, both of which appeal to the price-conscious
consumer. STOKER'S NUMBER 2 was the first brand of MYO tobacco to be sold in 16
oz. bags, thus contributing to the growth of the value-oriented category.

Premium Cigarettes

         During September 2003, the Company introduced a new, premium
manufactured cigarette under the ZIG-ZAG brand in the cities of Dallas, Los
Angeles, Miami and Seattle. The cigarette is now also marketed and sold in
Georgia, Nevada, Montana and Colorado. The Company currently offers both
king-size full flavor and light versions of ZIG-ZAG Premium Cigarettes.

Other Products

         In connection with the Stoker acquisition, the Company acquired the
Stoker catalog business, which principally sells tobacco and tobacco related
products.

SALES AND MARKETING

         The Company has a nationwide sales organization of approximately 100
people, which is divided into a national accounts group, a field sales
organization and a sales administration staff. The field sales organization
focuses on the Company's loose leaf chewing tobacco and MYO products and was
re-organized in 2002-2003, primarily to allow the Company to more effectively
provide sales coverage and to penetrate the distribution channel of the chain
convenience stores, where tobacco product sales are significant. The national
accounts group focuses on large national convenience store headquarters and
district offices as well as other major accounts, such as, Couche-Tard/Circle K,
Valero, Mapco, Wal-Mart, Sam's Club, Costco, K-Mart, Walgreens and others. The
Company is utilizing various marketing and sales promotional partnerships with
respect to the sales and marketing surrounding the launch and distribution of
its ZIG-ZAG Premium Cigarettes.

         The Company has focused and will continue to focus its sales efforts
for both its loose leaf chewing tobacco and MYO products on both wholesale
distributors and retail merchants in the independent and chain convenience
store, drug store and mass merchandising channels as well as the food store and
tobacco outlet channels. Since the 1997 Acquisition, the Company has expanded
and intends to continue to expand the sales of its loose leaf chewing tobacco
and MYO products into geographic markets and retail channels that had previously
been underdeveloped. The Company has established relationships with
approximately 1,000 wholesale customers and its products are sold in
approximately 100,000 retail locations through the United States. The Company
intends to capitalize on its existing distribution channels for loose leaf
chewing tobacco and MYO products by selling its ZIG-ZAG Premium Cigarettes
through those channels in selected markets. The Company also expects to sell its
ZIG-ZAG Premium Cigarettes through alternative distribution channels in those
markets, such as, upscale hotels, bars and specialty tobacconists.

         At the retail level, the Company's loose leaf chewing tobacco products
are promoted through volume and price-discount programs and the use of
innovative, high visibility point-of-purchase floor and shelf displays, banners
and posters. The Company has neither relied upon nor conducted any advertising
in the consumer media for its loose leaf chewing tobacco products.

         The majority of ZIG-ZAG premium cigarette papers promotional activity
is at the wholesale 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 displays and at the consumer level with price-off promotions,
primarily through the use of coupons.

         The Company provides to its distributor customers, for redistribution
to retailers, point-of-sale materials, such as, posters, pole signs, display
racks and counter top and floor displays. The Company also produces marketing
materials for use by distributors and their direct sales force to promote the
sale of its products to their retail customers. The Company responsibly focuses
its marketing efforts on adult consumers, and is committed to full legal
compliance in the sale and marketing of its products.

         The Company's largest customers, COD Company and the McLane Company,
accounted for approximately 18.25% and 8.64%, respectively, of its net sales in
2004. The loss of either of these customers could have a material adverse effect
on the results of operations, financial position and cash flows of the Company.
The Company does not believe that the loss of any other customer would have a
material effect on the results of operations, financial position or cash flows
of the Company either in the intermediate or long term.


                                       7
<PAGE>
DISTRIBUTION AGREEMENTS

         NAOC is party to two long-term distribution and licensing agreements
with Bollore with respect to sales of premium cigarette papers, cigarette tubes
and cigarette injector machines (collectively the "Products") in the United
States and Canada (collectively, the "Distribution Agreements"). Under the
Distribution Agreements, Bollore granted NAOC the exclusive right to purchase
the Products bearing the ZIG-ZAG brand name from Bollore for resale in the
United States and Canada. 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 these
countries.

         The Distribution Agreements establish the purchase pricing mechanism
for premium cigarette papers through 2004, which allows 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 from such date thereafter, the parties would
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
Company and Bollore have agreed to extend the existing pricing mechanisms for a
new five year term.

         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 from
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, which terms
have been extended through 2009.

         According to the Distribution Agreements, NAOC must purchase the
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 the
Distribution Agreements, and (ii) maintaining a two month supply of safety stock
inventory of the premium papers, tubes and injector machines in the United
States at Bollore's expense.

         Under the Distribution Agreements, NAOC has also agreed for a period of
five years after the termination of such Distribution Agreements not to engage,
directly or indirectly, in the manufacturing, selling, distributing, marketing
or otherwise promoting in the United States and Canada, of 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 a 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 twenty year term commencing on the date of such
agreement and will be renewed automatically for successive twenty year terms
unless 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, in the case of the U.S. Distribution Agreement
and the Canada Distribution Agreement were significantly exceeded in 2004) 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 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, the Canada Distribution Agreement is terminable by either NAOC or
Bollore upon the termination of the U.S. Distribution Agreement.

PATENTS, TRADEMARKS AND TRADE SECRETS

         The Company has numerous registered trademarks relating to its loose
leaf chewing tobacco and MYO tobacco products, including the trademarks for its
BEECH-NUT, TROPHY, HAVANA BLOSSOM, DURANGO and TENNESSEE CHEW products. The
Company is applying for registration of its FRED'S CHOICE, OLD HILLSIDE, OUR
PRIDE and STOKER'S NUMBER 2 trademarks. The registered trademarks, which are
significant to the Company's business, expire periodically and are renewable for


                                       8
<PAGE>
additional 20-year terms upon expiration. Flavor and blend formulae trade
secrets relating to NTC'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 licensed to NAOC in the United States and
Canada. NAOC owns the ZIG-ZAG trademark with respect to tobacco products. The
Company's catalog business is operated under the Fred Stoker & Sons, Inc. name.

RAW MATERIALS, PRODUCT SUPPLY AND INVENTORY MANAGEMENT

Loose Leaf Chewing Tobacco

         NTC's loose leaf chewing tobacco is produced from air-cured leaf
tobacco. Each of the Company's brands has its own unique tobacco blend. NTC
utilizes tobaccos grown domestically in Pennsylvania and Wisconsin as well as
those imported from countries such as Argentina, Brazil, France, Germany,
Indonesia, Italy, and the Philippines. Management does not believe that it is
dependent on any single country source for tobacco. Pursuant to agreements with
NTC, Lancaster Leaf Tobacco Company of Pennsylvania, a wholly owned subsidiary
of Universal Corporation ("Lancaster"), (i) purchases and processes tobacco on
an exclusive basis, (ii) stores tobacco inventory purchased on behalf of NTC and
(iii) generally maintains a 12- to 24-month supply of NTC's various tobacco
types at their facilities. NTC generally maintains up to a two-month operating
supply of tobacco at its manufacturing facilities in Louisville, Kentucky.

         In addition to raw tobacco, NTC's loose leaf chewing tobacco products
include food grade flavorings, all of which have been approved by the Food and
Drug Administration and/or other federal agencies. NTC is not dependent upon any
single supplier for those raw materials or for the supply of its packaging
materials.

         NTC generally maintains up to a two-month supply of finished loose leaf
chewing tobacco. This supply is maintained at the Louisville facility and in
four regional bonded public warehouses to facilitate distribution.

MYO Products

         Pursuant to NAOC's Distribution Agreements with Bollore, NAOC must
purchase its premium cigarette papers, cigarette tubes and cigarette injecting
machines 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. To ensure that NAOC has a steady supply of
premium cigarette paper products as well as each style of cigarette tubes and
injectors, Bollore is required to maintain, at its expense, a two-month supply
of inventory in a public warehouse in the United States. See "--Distribution
Agreements."

         To facilitate general distribution, in addition to the inventory
maintained by Bollore, NAOC also maintains a supply of its products at the
Louisville facility and in four regional bonded public warehouses.

         NAOC obtains their MYO smoking tobaccos primarily from international
sources and are not dependent on any one type of tobacco for its blends. NAOC
purchases these smoking tobaccos principally through multiple purchasing agents.
The MYO related products are purchased in finished form from various suppliers
at Bollore's direction.

         Bollore has from time to time been unable to produce and supply the
Company with sufficient quantities of cigarette tubes and injectors due, in
part, to the rapid growth in NAOC's sales of those products. Bollore has not,
however, experienced any problems supplying the Company with sufficient
quantities of its premium cigarette paper products. Management currently
believes that the Company's other sources for its supplies are adequate for its
projected needs.

Premium Cigarettes

         The Company outsources the manufacture of its ZIG-ZAG Premium
Cigarettes. The Company purchases all of the raw materials used in the
manufacture of its ZIG-ZAG Premium Cigarettes, including the tobacco, papers,
filters and packaging, and arranges for the raw materials to be delivered to the
contract manufacturer who then assembles the finished product under the
Company's supervision. Similar to the Company's arrangement with Lancaster Leaf
Tobacco Company of Pennsylvania for its loose leaf chewing tobacco products,
Blending Services International, Inc., a wholly-owned subsidiary of Universal
Corporation, is the exclusive purchaser of the tobacco used in its ZIG-ZAG
Premium Cigarettes. Kentucky Cut Rag, LLC processes the tobacco, and the Company
stores the processed tobacco in its Louisville, Kentucky facility. The Company
generally maintains a one-year supply of tobacco at its Louisville facility. The
Company obtains the other raw materials for its ZIG-ZAG Premium Cigarettes from
various other sources. The Company is not dependent on one single source for any
of its other raw materials.

                                       9
<PAGE>
         The manufacturing agreement for the Company's ZIG-ZAG Premium
Cigarettes provides that the contract manufacturer will manufacture the
Company's requirements for the product on an "as-needed" basis. The contract is
terminable by the Company upon 90 days written notice. The Company maintains
quality control personnel at the contract manufacturer's facility to oversee the
manufacturing process and to test the finished product. Once the manufacturing
is completed, the contract manufacturer ships the finished goods to bonded
public warehouses to facilitate distribution.

MANUFACTURING

         The Company's subsidiaries manufacture their loose leaf chewing tobacco
products at their manufacturing facility in Louisville, Kentucky. They also
contract for the manufacture of their premium cigarette papers, cigarette tubes,
rolling and injector machines, MYO smoking tobaccos and ZIG-ZAG Premium
Cigarettes. In the case of its MYO smoking tobacco products, the subsidiaries
complete the processing of and packaging of these products at their
manufacturing facility in Louisville. The Company consolidated its manufacturing
operations into its Louisville manufacturing facility in 2004, eliminating its
manufacturing facility in Dresden Tennessee. The Company believes that its
production capabilities, quality control procedures, research and development
activities and overall facilities and equipment are adequate for its projected
operations.

Production and Quality Control

         The Company uses proprietary production processes and techniques,
including strict quality controls. During the course of each day, NTC's quality
control group periodically tests the quality of the tobacco; flavorings;
application of flavorings; premium cigarette papers, tubes and injectors; and
packaging materials. 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 ensures that established written procedures and
standards are strictly adhered to by each of its contract manufacturers.

Research and Development

         The Company has a Research and Development Department that reformulates
existing loose leaf and MYO tobacco 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, which
includes the development and testing of ZIG-ZAG Premium Cigarettes.

         The Company spent approximately $539,000, $577,000 and $521,000 on its
research and development and quality control efforts for the years 2002, 2003
and 2004, respectively.

Facilities

         NTC's Louisville facility was formerly owned and 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 very good condition and have received
regular maintenance and capital improvements. The facility provides ample space
to accommodate an expansion of the Company.

         The Company believes its production capabilities, quality control
procedures, research and development and overall facilities and equipment are
adequate for its projected operations.

COMPETITION

         The Company, through NTC and Stoker, is the third largest manufacturer
and marketer of loose leaf chewing tobacco in the United States. The other three
principal competitors in the loose leaf chewing tobacco segment, which, together
with the Company, generate approximately 98% of this segment's sales, are
Swedish Match North America, Inc., 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, US
Smokeless Tobacco Company, the largest manufacturer of moist snuff (and of all
smokeless tobacco products when taken as a whole) is also 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


                                       10
<PAGE>
during that same period. In addition, the Company's three principal competitors
in the loose leaf chewing tobacco segment also manufacture and market moist
snuff.

         NAOC is the largest importer and distributor in North America of
premium cigarette papers. NAOC's three major competitors for premium cigarette
paper sales are Republic Tobacco, L.P., Robert Burton Associates, Inc., a
wholly-owned subsidiary of Imperial Tobacco Group plc and VCT B.V. Although
there is no source for comprehensive industry data, the Company believes that
it, together with these three companies, collectively have a market share in
excess of 95% of the premium cigarette papers market.

         The Company's principal competitors in the MYO segment are Republic
Tobacco, L.P., in conjunction with its TOP Tobacco, L.P. subsidiary, and Lane
Ltd, a division of Reynolds America, Inc., the third largest cigarette company
in the United States. Many other companies also compete in this segment,
including Peter Stokebye International A/S, and Santa Fe Natural Tobacco, a
Division of Reynolds America Inc. These competitors, unlike the Company, all are
granted "protected share" under the cigarette MSA which allows them to avoid a
substantial amount of their payment obligations under that agreement. The
Company does not have protected share and therefore is at an economic
disadvantage with respect to those competitors. (See "State Attorney General
Settlement Agreements".)

         The Company's primary competitors in the manufactured cigarette market
are the three "majors": Philip Morris USA, Inc., the brands of which accounted
for approximately 50% of all cigarette sales in the United States in 2004; R.J.
Reynolds Tobacco Company Inc.; and Lorillard Tobacco Company, as well as Vector
Group Ltd. (the parent company of Liggett Group Inc.).

         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 ability to effectively compete and
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 March 15, 2005, the Company employed a total of 296 full-time
employees. With the exception of 100 manufacturing employees, none of the
Company's employees are represented by unions. The unionized employees are
covered by three collective bargaining agreements. Two of these agreements,
covering 98 employees, will expire in January 2008. The other agreement,
covering two employees, will expire in April 2008.

REGULATION

         The tobacco industry, in particular, cigarette manufacturers has been
under public scrutiny for over forty years. Industry critics include special
interest groups, the U.S. Surgeon General and many legislators at the state and
federal levels. Although smokeless tobacco companies have recently come under
some scrutiny, the principal focus has been directed at the manufactured
cigarette market due to its large size relative to the smokeless tobacco market
and the MYO segment of the cigarette market.

         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, requirements that tobacco products be
displayed "behind-the-counter" and public smoking restrictions, has been a major
cause of the overall decline in the consumption of tobacco products since the
early 1970's. Moreover, the future trend is toward increasing regulation of the
tobacco industry.

         In 1996, the U.S. Food and Drug Administration (the "FDA") promulgated
regulations asserting jurisdiction over tobacco products. These regulations,
among other things, included severe restrictions on the manufacture,
distribution and sale of tobacco products and required compliance with a wide
range of labeling, reporting, record keeping, manufacturing and other
requirements, among other things. On March 21, 2000, the U.S. Supreme Court
ruled that the FDA does not have the authority to regulate tobacco products
without more explicit direction from Congress and that the FDA regulations were
unconstitutional. The Company remains, however, subject to regulation by
numerous other federal agencies, including the Federal Trade Commission ("FTC").
If Congress were to enact legislation granting the FDA specific authority over
tobacco products, the FDA's exercise of jurisdiction could lead to more
expansive FDA-imposed restrictions on tobacco operations than those set forth in
the current regulations.

         In 2004, Congress passed a federal buyout program for tobacco farmers.
The costs associated with the quota buy-out will be borne by all importers and
domestic manufacturers selling any form of tobacco product sold in the US. The
buy-out provides for a $10 billion payment to farmers over a 10 year period,
with payments based on a calculation of assessed market share in each tobacco
product segment. Payments under the buyout scheme will be assessed quarterly on
manufacturers beginning March 31, 2005 and ending March 31, 2015. The buyout


                                       11
<PAGE>
initial assessment on individual manufacturers will be received during the first
half of 2005, and at that time the Company will be in a position to provide
better guidance on the financial implications of this program.

         In recent years, a variety of bills relating to tobacco issues have
been introduced in the U.S. Congress, including bills that would (i) prohibit
the advertising and promotion of all tobacco products and/or restrict or
eliminate the tax 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 Federal Trade Commission to the
Food and Drug Administration; (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
results of operations or financial condition of the Company.

         While there are no current federal or state regulations that materially
and adversely affect 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 a material adverse
effect on the results of operations, financial position and cash flows of NAOC
and the Company.

         The Company's catalog business is also subject to various federal,
state and local regulations, which, among other things, prohibit the sale of
tobacco products to minors. Further regulations could have an adverse impact on
the Company's catalog business.

STATE ATTORNEY GENERAL SETTLEMENT AGREEMENTS

         On November 23, 1998, the major U.S. cigarette manufacturers, Philip
Morris USA, Inc., Brown & Williamson Tobacco Corporation, Lorillard Tobacco
Company and R.J. Reynolds Tobacco Company, entered into the MSA with attorneys
general representing the Settling States. The MSA settled all the asserted and
unasserted health-care cost recovery actions brought by, or on behalf of, the
settling jurisdictions.

         In the Settling States, the MSA released all signing parties from all
claims of the Settling States and their respective political subdivisions and
other recipients of state health-care funds, (i) relating to past conduct
arising out of the use, sale, distribution, manufacture, development,
advertising, marketing or health effects of, the exposure to, or research,
statements or warnings about, tobacco products and (ii) relating to future
conduct arising out of the use of, or exposure to, tobacco products that have
been manufactured in the ordinary course of business.

         The MSA also contains provisions restricting signatory companies in
their advertising, promotion and marketing of cigarettes in the U.S. Among these
are restrictions or prohibitions on the use of cartoon characters, brand name
sponsorships, targeting of youth, outdoor advertising, event sponsorship (such
as concerts and sporting events), payments for product placement, providing free
samples, and branded apparel and merchandise.

Required Payments

         The MSA required the four OPMs to make a series of initial payments
over five years totaling $13.2 billion. The last of these five payments was paid
on January 10, 2003. The MSA also requires annual industry payments for
participating manufacturers which were $8.0 billion in 2004, but will increase
to $8.13 billion in 2008, and to $9.0 billion in 2017 and thereafter in
perpetuity. Ten additional payments of $861 million are due annually beginning
in April 2008. All payments are to be allocated among the OPMs on the basis of
relative national market share and most are subject to adjustments, including
but not limited to, adjustments for inflation, volume, loss of market share to
SPM's and NPM's, operating income, and payments to the four Non-MSA States.

National Public Education Fund

         In addition, the MSA calls for the creation of a national foundation
that would establish public education and other programs, and conduct or sponsor
research, to reduce youth smoking, and to understand and educate the public
about diseases associated with tobacco product use. OPMs agreed to fund the
foundation with (i) ten annual payments of $25 million due by March 31 of each
year until 2008 and (ii) five additional payments totaling $1.45 billion due by
March 31 of each year that increased from $250 million in the first year to $300
million in each of the subsequent four years. The last of these five payments
was paid on March 31, 2003. In addition, if for any calendar year beginning with
2003, the OPMs have an aggregate market share of 99%, the OPMs are obligated to
pay $300 million to the Fund by April 15th of the following year. Each of these
payments is to be allocated among the OPMs on the basis of relative market
share. Other than the $25 million annual payments and the $250 million payment


                                       12
<PAGE>
made on March 31, 1999, the payments for the foundation are subject to
adjustments for changes in sales volume units, inflation and other factors.

MSA Fees and Litigation Costs

         The OPMs also agreed to pay the litigation costs, including government
attorneys' fees, of the offices of the Attorneys General relating to the settled
cases and, subject to certain quarterly and annual payment caps, the costs and
fees of outside counsel to the jurisdictions.

Inflation Adjustment

         The inflation adjustment applied to annual and strategic contribution
payments and to payments for the benefit of the national public education fund
established by the foundation. It increases payments on a compound annual basis
by the greater of 3% or the actual total percentage change in the consumer price
index for the preceding year. The inflation adjustment is measured starting with
inflation for 1999.

Volume Adjustment

         The volume adjustment applies to initial payments, annual and strategic
contribution payments and payments for the benefit of the national public
education fund established by the foundation. It increases or decreases payments
for OPMs based on the increase or decrease in the total number of cigarettes
shipped in or to the 50 states, the District of Columbia and Puerto Rico by the
OPMs during the preceding year, as compared to the 1997 base number of
cigarettes shipped by the OPMs. When volume has increased, the volume adjustment
increases payments by the same percentage as the number of cigarettes exceeds
the 1997 base number. When volume has decreased, the volume adjustment decreases
payments by a percentage equal to 98% of the percentage reduction in volume.
There are also limits to the extent to which OPMs can benefit by volume
decreases in years where OPMs achieve certain increases in aggregate operating
income.

Subsequent Participating Manufacturers

         Under the MSA each SPM is required to make payments in any year that
equal, on a per-cigarette basis, the sum of the annual and strategic
contribution payments and payments for the benefit of the national public
education fund by the OPMs in that year, provided that SPMs who signed the MSA
within 90 days of its effective date are required to make such payments only on
unit volumes that represent the increase in its market share in such year over
the greater of the SPM's 1998 market share or 125% of its 1997 market share.

Non-Participating Manufacturers

         Each of the states which are parties to the MSA, except for a few
territories, has enacted a statute as provided for in the MSA to address
manufacturers that do not participate in the MSA. The statutes require that any
cigarette manufacturer that is not a signatory to the MSA make payments into an
escrow fund to cover possible future liabilities to the relevant Settling State.
The payment required by an NPM under the state statutes is calculated on a per
cigarette or a cigarette equivalent basis for MYO. Some smaller manufacturers
who were not a party to the state litigation against the OPMs have chosen to
remain outside the MSA and operate as escrow compliant NPMs.

         The Company was not a party to the state litigation against the OPMs.
The Company has chosen to participate as an escrow compliant NPM. As of December
31, 2004, the Company had deposited approximately $9.4 million into an escrow
fund to maintain state-by-state compliance.

         Under the escrow statutes, NPMs pay the lesser of the rates stated in
the statutes or the amount that the NPM would have paid had it been a
hypothetical SPM under the MSA. Recent legislation adopted in some 42 states has
eliminated the share provision of the escrow state that allowed an NPM to
recover any overpayment it may have made under the NPM allocable share formula.
Since the payment calculations (to a state as an SPM or to an escrow account as
an NPM) had been different, the payment to escrow could have been smaller on a
unit basis than the payment to the MSA would be, depending on the state in which
the NPM marketed its cigarettes. As a result of this change in the legislation,
an NPM must now escrow an amount almost equivalent to the amount a similarly
situated SPM must pay under the MSA payment formula.

         The NPM escrow deposits are required to be held for 25 years and remain
the property of such NPM. During the holding period, the NPMs have the right to
receive the earnings on such deposits. On the 25th anniversary of each annual
deposit, the principal amount of escrow remaining for that year will be returned
to the NPM.

         As a condition of maintaining annual OPM and SPM payments, the state
Attorneys General have an obligation to diligently enforce the state obligations
provisions of the MSA and the State Statute, and have been taking increased
action to ensure compliance by all NPMs. As a result, the Company expects that


                                       13
<PAGE>
there may be further consolidation among smaller Tier 4 manufacturers, who lack
efficient manufacturing operations, wide distribution, or the resources to meet
the higher state escrow obligation required by the allocable share amendment
change to the escrow statute.

         In 2004, Michigan, Utah and Alaska passed new legislation that places
additional payment obligations on NPM products sold in these states. In addition
to making escrow payments, NPM's must now make an additional advance payment on
cigarette and MYO sales based on anticipated cigarette or MYO sales in the
state. These `equity assessment' payments range from $3.50 to $5.00 per carton
of manufactured cigarettes, and $1.22 to $1.50 per pound of MYO tobacco. Such
equity assessments limit the ability of NPM's to compete against OPM's and SPM's
that are not required to make these additional payments in these states. The
Michigan statute is currently subject to a NPM legal challenge from Carolina
Tobacco Company. The Company currently sells MYO products in the above states.

Growers Trust

         As part of the MSA, the OPMs agreed to work with U.S. tobacco growers
to address the possible adverse economic impact of the MSA on growers. As a
result, the OPMs agreed to participate in funding a $5.2 billion trust fund to
be administered by a trustee, in conjunction with a certification entity from
each of the tobacco growing communities in 14 states. The trust agreement was
dissolved in 2004 as a result of the adoption by Congress of the federal tobacco
quota buyout program. The trust agreement had provided for a schedule of
aggregate annual payments, subject to various adjustments, that were payable in
quarterly installments each year from 1999 through 2010.

Payment Obligations in Non-MSA States

         In June 1994, the Mississippi attorney general brought an action, Moore
v. American Tobacco Co., against various US tobacco companies. This case was
brought on behalf of the state to recover state funds paid for health care and
medical and other assistance to state citizens suffering from diseases and
conditions allegedly related to tobacco use. The large cigarette manufacturer
defendants settled the Mississippi case in 1998, and also, at later dates,
similar cases in Texas, Florida and Minnesota. Future payments under the
settlement agreements with these Non-MSA States will be allocated among the OPMs
on the basis of relative unit volume of domestic cigarette shipments, and will
be subject to adjustment for inflation and for changes in the volume of domestic
cigarette shipments on terms substantially similar to those in the MSA states.
There are no requirements imposed on NPMs in the Non-MSA States as a result of
these settlements. The MSA required the OPMs to make a series of initial
payments to the Non-MSA States over five years totaling $6.9 billion, the last
of which was paid in 2003. On December 31, 2001, and on each December 31
thereafter, the OPMs were required to pay 17% of $6.5 billion in 2001 and 2002
and will be required to pay 17% of $8.0 billion in 2003 and thereafter to the
Non-MSA States.

         In 2003, the State of Minnesota enacted a new statute requiring
non-signatory companies to the Minnesota tobacco settlement to pay an `equity
assessment' on all cigarette products sold in the State. The statute does not
extend to MYO products, and is currently subject to a legal challenge by the
Council of Independent Tobacco Manufacturers of America. The Company does not
currently sell manufactured cigarette products in the state.

Recent Developments

         The MSA has been challenged as unconstitutional in several legal
actions. The grounds asserted have varied from case-to-case but have included
challenges based on the Commerce Clause, the Interstate Compact Clause, the Due
Process and Equal Protection Clauses and the Preemption Doctrine. The preemption
argument has asserted that the MSA and the associated state escrow legislation
constitute an illegal output cartel under Section 1 of the Sherman Act, and are,
therefore, preempted by virtue of the Supremacy Clause of the U.S. Constitution.
The Supremacy Clause provides that federal law, in this case the Sherman Act,
takes priority over inconsistent state laws, here the escrow statutes.

         Until recently, courts have rejected those claims. In two cases arising
in the United States Court of Appeals for the Third Circuit, A.D. Bedell
Wholesale Co. v. Philip Morris Inc., 263 F.3d 239 (3d Cir. 2001) and Mariana v.
Fisher, 338 F.3d 189 (3d Cir. 2003), the Court held that the MSA constituted an
output cartel that would ordinarily be illegal per se under the Sherman Act, but
that it was protected under the Noerr-Pennington doctrine, and therefore immune
from liability. The Noerr-Pennington doctrine generally provides that the act of
petitioning the government (e.g., legislative lobbying or litigating) is
protected under the First Amendment and immune from liability.

         On January 6, 2004, the United States Court of Appeals for the Second
Circuit issued an opinion in which it concluded, under the allegations in that
case, that the MSA and associated escrow legislation could be construed as an
output cartel and that it would not be protected under the Noerr-Pennington
doctrine. The case was remanded to the district court for further proceedings.
Freedom Holdings Inc. v. Spitzer, 357 F.3d 205, rehearing denied, 363F.3d 149
(2d Cir. 2004). The District Court held hearings and issued a ruling, holding on
a motion for a preliminary injunction that the MSA was not an illegal cartel,


                                       14
<PAGE>
but that certain New York legislation extending the reach of the MSA was illegal
under the antitrust laws. Identical statutes have been passed in many of the MSA
states. New York State elected not to appeal that ruling. The plaintiffs in
Freedom Holdings have appealed, seeking a ruling that the MSA is illegal under
the antitrust laws. That appeal is pending.

         If the Second Circuit's analysis prevails over the Third Circuit's, and
the facts as alleged in the Freedom Holdings are proven, those provisions of the
MSA that give rise to the output cartel would be declared illegal. Due to other
provisions of the MSA, the major manufacturers would be required to enter into a
new settlement with the states. Management believes, although no assurance can
be given, the Company and its subsidiaries would benefit since (i) it would have
maintained its favorable business development options, (ii) it would likely
receive a refund of its escrow funds, and (iii) it would not likely have to
escrow funds going forward. However, should the Third Circuit's analysis prevail
over the Second Circuit, the Company will not be adversely affected since the
Third Circuit's analysis merely maintains the status quo.

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 federal excise 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 federal excise
tax on cigarette tubes was increased to $0.0244 from $0.0213 per fifty tubes,
and the federal excise tax on MYO tobacco was increased to $1.0969 from $0.9567
per pound. Although these more recent increases in the rate of federal excise
taxes are not expected to have an adverse effect on the Company's business,
future enactment of increases in federal excise taxes on the Company's products
could have a material adverse effect on the results of operations or financial
condition of the Company. The Company is unable to predict the likelihood of
passage of future increases in federal excise taxes.

         Tobacco products and premium cigarette papers are also subject to
certain state and local taxes. The imposition of state and local taxes in a
jurisdiction could have a detrimental impact on sales in that jurisdiction. Any
enactment of new state or local excise taxes or an increase in existing excise
taxes on the Company's products is likely to have an adverse effect on sales.

         Cigarettes are also subject to substantial and increasing excise taxes.
On January 1, 2002, the federal excise tax included in the price of cigarettes
increased by $2.50 to $19.50 per thousand cigarettes (or $0.39 per pack of 20
cigarettes). Additional excise taxes, which are levied upon and paid by the
distributors, are also in effect in the 50 states, the District of Columbia and
many municipalities. Various states have proposed, and certain states have
recently passed, increases in their state tobacco excise taxes. The state taxes
generally range from $.025 to $2.55 per package of 20 cigarettes. Future
enactment of increases in federal excise taxes on the Company's ZIG-ZAG Premium
Cigarettes could adversely affect demand for them and have a material adverse
effect on the Company's results of operations, financial position and cash
flows. In addition, further increases in state and local excise taxes could
affect demand for the Company's cigarettes. The Company is unable to predict the
likelihood of passage or magnitude of future increases in excise taxes.

ENVIRONMENTAL REGULATIONS

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

OTHER

         Additional information in response to Item 1 can be found in Note 23
(Segment Information) to the Consolidated Financial Statements.

ITEM 2.       PROPERTIES

         As of December 31, 2004, the Company operated manufacturing,
distribution, office and warehouse space in the United States with a total floor
area of approximately 751,351 square feet. Of this footage, approximately
600,000 square feet are owned and 151,351 square feet are leased.

         To provide a cost-efficient supply of products to its customers, the
Company maintains centralized management of manufacturing and nationwide
distribution facilities. The Company's two manufacturing and distribution
facilities are located in Louisville, Kentucky and Dresden, Tennessee.


                                       15
<PAGE>
         The following table describes the principal properties of the Company
as of December 31, 2004:

<TABLE>
<CAPTION>
    LOCATION               PRINCIPAL USE                        SQUARE FEET            OWNED OR LEASED
----------------------------------------------------------------------------------------------------------
<S>                  <C>                                       <C>                    <C>
New York, NY          Corporate headquarters                       10,351                   Leased

                      Manufacturing, R&D,
Louisville, KY        warehousing, distribution and
                      administration                              600,000                   Owned

Dresden, TN
                      Catalog distribution facility                76,000                   Leased
</TABLE>


ITEM 3.       LEGAL PROCEEDINGS

LITIGATION WITH REPUBLIC TOBACCO

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

         On June 30, 1998, Republic Tobacco filed a complaint against the
Company, NAOC and NTC in the U.S. District Court of the Northern District of
Illinois (the "Illinois Complaint") and served it on the Company after the
institution of the Kentucky action. In the Illinois Complaint, Republic Tobacco
seeks declaratory relief with respect to the Company's claims. In addition, the
Illinois Complaint alleges that certain actions taken by 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 alleged that the Company has unlawfully
monopolized and attempted to monopolize the market on a national and regional
basis for premium cigarette papers. Republic sought unspecified compensatory
damages, injunctive relief and attorneys fees and costs.

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

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

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


                                       16
<PAGE>
On December 18, 2003, Republic accepted these reduced awards. The Company
reversed $11.16 million during the fourth quarter 2003 due to this court ruling.

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

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

         The Company has also applied to the Court of Appeals for an order
awarding the Company approximately $1.0 million for the difference in the
expense of the original bond of $18.8 million and the subsequent reduced bond of
$7.0 million, on the one hand, and the lesser expense the Company would have
incurred to bond the final $3.0 million judgment, on the other hand. On November
30, 2004, the Court of Appeals ruled that the application for costs should be
directed to the District Court. On December 17, 2004, the Company filed this
motion with the District Court. That motion has been fully briefed and the
parties are waiting for the Court to rule.

LITIGATION RELATED TO COUNTERFEITING

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

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

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

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

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


                                       17
<PAGE>
and the entry of a permanent injunction. The Company is seeking to execute on
the outstanding $11.0 million judgment against the remaining Makki Defendants
and those efforts are currently underway.

         Pursuant to the U.S. Distribution Agreement and a related agreement
between Bollore and the Company, 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.

         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. On June 27, 2003, the Court found
Import Warehouse and Mr. Bhatia in contempt of court for violating an existing
injunction barring those parties from distributing infringing ZIG-ZAG cigarette
paper products. The Court requested that the Company and Bollore (the Company's
co-plaintiff in the case) file a submission detailing the damages incurred. The
Company and Bollore filed their submission on July 25, 2003 which reported and
requested damages of $2.4 million.

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

LITIGATION RELATED TO ALLEGED PERSONAL INJURY

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

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

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

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


                                       18
<PAGE>
         All of the West Virginia smokeless tobacco actions have been
consolidated before the West Virginia Mass Litigation Panel for discovery and
trial of certain issues. Trial of these matters was planned in two phases. In
the initial phase, a trial was to be held to determine whether tobacco products,
including all forms of smokeless tobacco, cigarettes, cigars and pipe and
roll-your-own tobacco, can cause certain specified diseases or conditions. In
the second phase, individual plaintiffs would attempt to prove that they were in
fact injured by tobacco products. Fact and expert discovery in these cases has
closed, however, in the cigarette cases the Court has allowed additional
discovery.

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

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

         The trial court has now vacated the initial trial plan in its entirety
because of concerns that its provisions violated the dictates of the United
States Supreme Court's decision in State Farm Mutual Automobile Insurance
Company v. Campbell, 538 U.S. 408 (2003). A new trial plan has not yet been
implemented with regard to the consolidated claims against the cigarette
manufacturer defendants. The West Virginia Supreme Court has accepted review of
the case management order and the plaintiffs filed their brief on March 24,
2005. The claims against the smokeless tobacco manufacturer defendants remain
severed and indefinitely stayed.

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

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

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

ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         None.


                                     PART II

ITEM 5.       MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
              MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

         There is no established public trading market for the Company's Voting
Common Stock, par value $.01 per share, 100% of which is owned by Parent.

         No dividends have been declared or paid on the Voting Common Stock.
Except as described below, the 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. The Board of Directors reserves the right, however, to
review the dividend policy periodically to determine whether the declaration of
dividends is appropriate.

                                       19
<PAGE>
         In connection with the refinancing of the Company's existing debt and
preferred stock on February 17, 2004 (as described under Part I, Item 1,
"Business-Recent Events" above and in Part I, Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" below), Parent
offered and sold $97.0 million aggregate principal amount at maturity (March 1,
2014) of senior discount notes. Interest on these notes will become payable
semiannually in cash, at the rate of 12-1/4% per annum, commencing March 1,
2008. As Parent is a holding company with no operations or material assets other
than the capital stock of the Company, its ability to make payments on such
notes is dependent on the distribution of funds (through loans, dividends or
otherwise) from the Company. It is currently contemplated that the Company will
declare and pay dividends to fund Parent's interest payment obligations under
its notes.

         The payment of dividends by the Company is subject to restrictions
contained in (i) the Company's new senior revolving credit facility and (ii) the
indenture governing the Company's new senior notes.






















                                       20
<PAGE>
ITEM 6.       SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                              YEAR ENDED DECEMBER 31,
                                                    ------------------------------------------------------------------------
                                                         2004
                                                     AS RESTATED,
                                                         (6)           2003          2002           2001           2000
                                                    -------------  ------------  -------------  -------------  -------------
<S>                                                  <C>            <C>           <C>           <C>           <C>
                                                               (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

STATEMENT OF OPERATIONS DATA:

      Net sales(1), (4)                             $    115,320   $    101,593  $     94,425   $      89,622  $      90,365
      Net income (loss)(2), (3), (4), (5)                (27,835)        (6,241)        5,485          (1,364)        (3,200)
      Net income (loss) applicable to common
         shares(2), (3)                                  (29,448)       (13,516)        3,904          (8,109)        (9,205)
      Basic earnings per common share:
            Income (loss)                                (506.32)  $     (25.59) $       7.39   $      (15.35) $      (16.96)
            Cumulative effect of change in
               accounting principle                           --             --           ---              --          (0.47)
                                                    -------------  ------------  -------------  -------------  -------------
            Net income (loss) applicable to common                       (25.59)                       (15.35)
               shares                               $    (506.32)  $             $       7.39   $              $      (17.43)
                                                    =============  ============  =============  =============  =============

      Diluted earnings per common share:
            Income (loss)                           $    (506.32)  $     (25.59) $       5.87   $      (15.35) $      (16.96)
            Cumulative effect of change in
               accounting principle                           --             --           ---              --          (0.47)
            Net income (loss) applicable to common
               shares                               $    (506.32)  $     (25.59) $       5.87   $      (15.35) $      (17.43)
                                                    =============  ============  =============  =============  =============

COMMON STOCK CASH DIVIDENDS PER SHARE               $       8.20   $         --   $        --    $         --  $          --
                                                    =============  ============  =============  =============  =============

BALANCE SHEET DATA (AT END OF PERIOD):

      Total assets                                  $    228,699   $    243,644  $    213,594   $     216,663  $     227,757
                                                    =============  ============  =============  =============  =============
      Total debt, including current maturities           214,500        191,986       160,500         167,500        180,000
                                                    =============  ============  =============  =============  =============
      Mandatorily redeemable preferred stock                  --         65,080        57,805          57,443         50,698
                                                    =============  ============  =============  =============  =============
</TABLE>


(1)   During 2002, the Company adopted EITF No. 00-14, "Accounting for Certain
      Sales Incentives" and EITF 00-25, "Vendor Income Statement
      Characterization of Consideration Paid to a Reseller of the Vendor's
      Products". As a result of this adoption, certain expenses have been
      reclassified from selling, general and administrative to net sales for the
      years ended 2001 and 2000. Net sales for 2001 and 2000 have been reduced
      by $4,126 and $2,859, respectively, from previously reported amounts. The
      adoption of EITF 00-14 and EITF 00-25 had no impact on the Company's net
      income for any of these periods.

(2)   Net income (loss) and net income (loss) attributable to common shares for
      the year ended December 31, 2000 includes a 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". Pursuant to the adoption of
      Statement of Financial Accounting Standards No. 145, "Rescission of FASB
      Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
      Technical Corrections," the Company reclassified the write-off of $1.4
      million of deferred financing costs incurred upon refinancing the
      Company's term loan on December 29, 2000 to other expense from
      extraordinary loss.

(3)   Net income (loss) and net income applicable to common shares for the year
      ended December 31, 2003, includes expenses of $7.4 million relating to the
      Republic judgment and $3.3 million relating to the terminated Star asset
      purchase agreement.

(4)   Net income (loss) and net income applicable to common shares for the year
      ended December 31, 2004, includes income of $4.5 million relating to the
      Republic judgment.

(5)   Includes federal excise taxes of $3,251, $1,899, $1,684, $1,241 and $1,310
      for the years ended December 31, 2004, 2003, 2002, 2001 and 2000,
      respectively.

(6)   For an explanation of the restatement, see the Explanatory Note on page
      (i).

                                       21
<PAGE>
ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
              RESULTS OF OPERATIONS

RESTATEMENT

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

GENERAL

         The Company is the third largest manufacturer, marketer and distributor
of loose leaf chewing tobacco in the United States and the largest marketer and
distributor in the United States and Canada of premium cigarette papers. The
Company is also a leading manufacturer, marketer and distributor of MYO smoking
tobaccos and related products. In addition, in September 2003, the Company began
marketing and distributing premium manufactured cigarettes under the ZIG-ZAG
Premium Cigarettes brand name.

         The Company generates revenues from the sale of its products primarily
to wholesale distributors who in turn resell them to retail operations. The
Company's net sales, which include federal exercise taxes, consist of gross
sales, net of cash discounts, returns, and selling and marketing allowances.

         The Company's principal operating expenses include the cost of raw
materials used to manufacture its products; the cost of finished products, which
are purchased goods; direct labor; federal excise taxes and tobacco quota buyout
payments; manufacturing overhead; and selling, general and administrative
expenses, which includes sales and marketing related expenses, legal expenses
and compensation expenses, including benefits costs of salaried personnel. In
2002, the Company ceased the amortization of goodwill in accordance with FASB
Statement 142, Goodwill and Other Intangible Assets ("Statement 142") and
consequently, beginning in 2002, amortization of goodwill no longer constitutes
one of the Company's principal operating expenses. The Company's other principal
expenses include interest expense and amortization of deferred financing costs
and other expenses, the last of which has arisen during the last several years
and has during 2001 and 2002 primarily represented the legal, investigative and
related costs associated with the Texas and California Infringing Products
Litigations instituted by the Company against alleged counterfeiters of ZIG-ZAG
premium cigarette papers and during 2003 and 2004 primarily represented the
Republic litigation judgment and subsequent reduction, respectively.

         The following factors have affected the Company's results during the
period of 2000 to 2004:

      o     The existence of counterfeit cigarette papers bearing the ZIG-ZAG
            trademark. From 1999-2002, management believes the Company lost in
            excess of $10 million of net sales and incurred approximately $7
            million in expenses relating to the litigation and investigation of
            counterfeiting claims and to brand promotions intended to offset
            damage done to the legitimate distribution channels. While
            management believes that the inflow and sale of counterfeit products
            has been substantially reduced as a result of the actions taken by
            the Company during this period, it is believed that some level of
            counterfeit product continues to enter the market.

      o     The impact of increased manufactured cigarette prices. Management
            believes such price increases have resulted in higher MYO cigarette
            sales. During the period of 2001 to 2004, a number of states
            increased their excise taxes on cigarettes. Management expects this
            trend to continue as more states seek additional sources of revenue
            to combat significant budget deficits.

      o     The continuing downward trend of loose leaf chewing tobacco
            consumption. This is a result of an aging consumer base coupled with
            an increasing trend of consumers switching to moist snuff due to
            changing demographics. Management believes that the switch to moist
            snuff has been caused, in part, by the recent availability of
            discount moist snuff products being priced at the same levels or
            lower than loose leaf products. However, management believes that
            the current rate of switching has slowed significantly as those
            consumers who found the moist snuff product more attractive have


                                       22
<PAGE>
            already switched, leaving a loyal base of higher use consumers in
            the loose leaf category. Historically, increased prices for loose
            leaf products have largely offset this downward trend in
            consumption. Management expects this pricing trend to continue and,
            as a result, the Company expects that this segment's contribution to
            the Company's earnings will remain relatively constant and stable
            for the foreseeable future.

      o     The impact of currency fluctuations. Currency movements and
            suppliers' price increases relating to premium cigarette papers,
            cigarette tubes and cigarette injector machines are the primary
            factors affecting cost of sales. Those products are purchased from
            Bollore on terms of net 45 days and are payable in Euros. Thus, the
            Company bears certain foreign exchange risks for its inventory
            purchases. To minimize this risk, the Company has in the past and
            may in the future choose to utilize short-term forward currency
            contracts, through which the Company secures Euros in order to
            provide payment for its monthly purchases of inventory. In 2004, as
            the Euro continued to increase in value in comparison to the U.S.
            dollar, the Company experienced an increase in cost of goods sold.

      o     The impact of marketing and promotional initiatives. Historically,
            based upon the timing of the Company's marketing and promotional
            initiatives, the Company has experienced significant variability in
            its month-to-month results. Promotional activity significantly
            increases net sales in the month in which it is initiated, while net
            sales are adversely impacted in the month after a promotion.

      The following factors also affected the Company's results in 2004:

      o     Stoker acquisition. On November 17, 2003, the Company consummated
            the acquisition of Stoker, Inc. Through the acquisition, the Company
            acquired the Stoker family of brands and the related business
            operations, including the equipment used to manufacture and package
            Stoker products. The purchase price for the Stoker acquisition was
            $22.5 million in cash and was financed with borrowings under the
            Tranche B term loan in the Company's existing senior credit
            facility. As a result of the Stoker acquisition, the Company's net
            sales, cost of goods sold and other operating results are expected
            to increase significantly. It is the Company's intention to
            consolidate all production and packaging of its and Stoker's
            smokeless tobacco and MYO products into a single location. This
            consolidation is expected to be completed during 2005 and to result
            in significant tangible synergies as excess production capacity will
            be utilized with modest incremental costs and as personnel
            redundancies will be eliminated.

      o     Launch of ZIG-ZAG Premium Cigarettes. During 2004, the Company
            incurred approximately $5.0 million of expenses associated with the
            start-up of the ZIG-ZAG Premium Cigarette business. No meaningful
            revenues from these products were generated during this period and
            these expenses are considered non-recurring as they are deemed by
            management to be start-up costs.

RESULTS OF OPERATIONS

         For financial reporting purposes, the Company has three reporting
segments: smokeless tobacco, which principally includes the sale of loose leaf
chewing tobacco; MYO, which includes sales of premium cigarette papers and MYO
tobacco and related products; and premium manufactured cigarettes. The Company
launched its premium manufactured cigarette business late in the third quarter
of 2003. To date, this business is in a developmental phase and its results have
not been significant. As a result of the Stoker acquisition, the Company also
operates a catalog business which sells tobacco and non-tobacco products. The
Stoker acquisition was completed on November 17, 2003.

SUMMARY

         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, 2004, 2003 and 2002.

<TABLE>
<CAPTION>
                                                                          YEAR ENDED DECEMBER 31,
                                               ----------------------------------------------------------------------------
                                                   2004 AS RESTATED                 2003                     2002
                                               ----------------------------------------------------------------------------
<S>                                           <C>            <C>        <C>              <C>      <C>           <C>
                                                                         (AMOUNTS IN THOUSANDS)

Net sales                                     $    115,320     100.0%    $    101,593     100.0%   $    94,425     100.0%
Cost of sales                                       58,617      50.8           48,616      47.9         40,973      43.4
                                              -------------   -------    -------------   -------   ------------   -------
Gross profit                                        56,703      49.2           52,977      52.1         53,452      56.6
Selling, general and administrative expenses        37,031      32.1           32,589      32.1         24,065      25.5
Amortization expense                                   462       0.4               67        --             --        --
                                              -------------   -------    -------------   -------   ------------   -------
Operating income                                    19,210      16.7           20,321      20.0         29,387      31.1
Interest expense, net, and deferred financing
   costs                                            24,196      21.0           19,122      18.8         18,744      19.8




                                       23
<PAGE>
Other expense (income)                              (4,361)     (3.8)          11,129      10.9          1,944       2.1
                                              -------------   -------    -------------   -------   ------------   -------
Income (loss) from continuing operations
   before income tax expense                          (625)     (0.5)          (9,930)     (9.7)         8,699       9.2
Income tax expense (benefit)                        27,210      23.6           (3,689)     (3.6)         3,214       3.4
                                              -------------   -------    -------------   -------   ------------   -------
Net income (loss)                             $    (27,835)    (24.1%)   $     (6,241)     (6.1%)  $     5,485       5.8%
                                              =============   =======    =============   =======   ============   =======

</TABLE>























                                       24
<PAGE>
COMPARISON OF YEAR ENDED DECEMBER 31, 2004 TO YEAR ENDED DECEMBER 31, 2003

         Net Sales. For 2004, net sales were $115.3 million, an increase of
$13.7 million or 13.5% from the prior year. Net sales of the smokeless tobacco
segment increased from $36.7 million to $46.2 million or 25.9% from the prior
year reflecting the acquisition of Stoker and an approximate 5% price increase
during 2004. Of the $9.5 million increase, the acquisition of Stoker increased
sales by $9.2 million for the smokeless segment. Overall poundage increased
35.8% from the prior year. Net sales continue to be adversely impacted by
competitive pressures, including increased discounting from other loose leaf
competitors, growth of the moist snuff value brands and increased discounting
activity by moist snuff manufacturers.

         Net sales of the MYO segment decreased from $64.7 million to $63.5
million or 1.9% from the prior year. This was due to a decrease of $6.8 million
in sales of premium cigarette papers, due to the efforts of the Company's
customers to reduce overall trade inventories; an increase of $4.8 million in
sales of the expanded MYO smoking tobacco and related products line, including
sales by Stoker which, in management's opinion, resulted from increases in
prices and taxes of manufactured cigarettes; and an increase of $0.8 million in
premium cigarette paper sales to Canada. Of the $4.8 million increase in the MYO
smoking tobacco and related products line, $6.3 million related to the sales of
Stoker brands. All of these factors were partially offset by an increase in
customer incentives, both to expand the distribution in the MYO area and to
enhance recovery from counterfeiting activity. The Company attributes its
continuing recovery from counterfeiting activity to the litigation instituted by
the Company against alleged counterfeiters as discussed under Part I, Item 3,
"Legal Proceedings" above.

         Gross Profits. For 2004, gross profit increased 7.0% to $56.7 million
from $53.0 million for the prior year while gross margins decreased to 49.2%
from 52.2%.

         Gross profit of the smokeless tobacco segment increased to $20.8
million in 2004 from $17.1 million for the prior year, or 21.6%, relating to the
Stoker acquisition. Gross margin of this segment decreased to 45.0% of net sales
in 2004 from 46.5% of net sales for the prior year. This decrease is attributed
primarily to sales of the lower margin Stoker brands.

         Gross profit of the MYO segment decreased 8.4% to $32.8 million from
$35.8 million in 2003 due to higher cost of goods with respect to MYO premium
cigarette papers resulting from a stronger Euro in comparison to the U.S. dollar
partially offset by the increase in sales relating to the Stoker acquisition.
The gross margin decreased from 55.3% of net sales in 2003 to 51.7% due to the
impact of the stronger Euro in comparison to the U.S. dollar and to changes in
product mix (greater growth in lower margin products).

         Currency. Currency movements and suppliers' price increases relating to
premium cigarette papers, cigarette tubes and cigarette injector machines are
the primary factors affecting cost of sales. Those products 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 may choose to utilize short-term forward currency contracts, through
which NAOC secures Euros in order to provide payment for its monthly purchases
of inventory. For 2005, the Company projects that the strong Euro against the
U.S. dollar will again result in an increase in cost of goods sold. No forward
contracts were utilized in 2004.

         Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 2004 increased 13.5% to $37.0 million from the prior
year's $32.6 million. This increase was due primarily to Stoker expenses of $3.3
million; start-up expenses of NACC's premium cigarette business of $2.2 million;
recruitment expenses of $0.4 million; legal/litigation/lobbying of $0.4 million;
Sales/Marketing expenses of $0.2 million; professional fees of $0.1 million;
partially offset by a reduction in compensation and related expenses of $2.2
million.

         Amortization Expense. Amortization of goodwill was eliminated effective
January 1, 2002. Amortization expense totaling $0.4 million for the year ending
December 31, 2004 related to the intangible assets acquired from Stoker.

         Net Interest Expense and Amortization of Deferred Financing Costs.
Interest expense and amortization of deferred financing costs increased to $24.2
million in 2004 from $19.1 million for the prior year. This increase was the
result of the refinancing of the Company's debt.

         Other Expense (Income). Other income of $4.4 million in 2004 represents
principally $4.5 million associated with the reduction in the judgment rendered
against the Company in connection with the litigation with Republic Tobacco, Inc
as described in Part I, Item 3, "Legal Proceedings" above. Other expense of
$11.1 million in 2003 primarily represents $7.4 million associated with the
judgment rendered against the Company in connection with the litigation with
Republic Tobacco, Inc. and $3.3 million associated with the termination of the
Star Cigarette Asset Purchase Agreement.


                                       25
<PAGE>
         Income Tax Expense (Benefit). Income tax expense was $27.2 million for
2004, reflecting the net loss of the Company and the recording of the valuation
reserve relating to the realization of the net deferred taxes of $26.5 million.
Income tax benefit was $3.7 million in 2003.

         Net Income (Loss). Due to the factors described above, the Company
incurred a net loss of $23.0 million for 2004 compared to $6.2 million for 2003.

COMPARISON OF YEAR ENDED DECEMBER 31, 2003 TO YEAR ENDED DECEMBER 31, 2002

         Net Sales. For 2003, net sales were $101.6 million, an increase of $7.2
million or 7.6% from the prior year. Net sales of the smokeless tobacco segment
increased from $35.7 million to $36.7 million or 2.8% from the prior year
reflecting the acquisition of Stoker and an approximate 5% price increase during
2003, which was partially offset by an overall volume decline of 5.9%. Net sales
continue to be adversely impacted by competitive pressures, including increased
discounting from other loose leaf competitors, growth of the moist snuff value
brands and increased discounting activity by moist snuff manufacturers.

         Net sales of the MYO segment increased from $58.7 million to $64.7
million or 10.2% from the prior year. This was due to an increase of $2.6
million in sales of the expanded MYO smoking tobacco and related products line,
including sales by Stoker which, in management's opinion, resulted from
increases in prices and taxes of manufactured cigarettes; an increase of $2.6
million in sales of premium cigarette papers, due to the continuing recovery
from the counterfeiting activity; and an increase of $0.8 million in premium
cigarette paper sales to Canada. The Company attributes its continuing recovery
from counterfeiting activity to the litigation instituted by the Company against
alleged counterfeiters as discussed under Part I, Item 3, "Legal Proceedings"
above.

         Gross Profits. For 2003, gross profit decreased 0.9% to $53.0 million
from $53.5 million for the prior year while the gross margin decreased to 52.1%
from 56.6%.

         Gross profit of the smokeless tobacco segment increased to $17.1
million in 2003 from $16.5 million for the prior year, or 3.6%, due to sales by
Stoker, which was acquired on November 17, 2003. Gross margin of this segment
increased to 46.5% of net sales in 2003 from 46.1% of net sales for the prior
year. This increase is attributed primarily to price increases instituted in
September 2003.

         Gross profit of the MYO segment decreased 3.2% to $35.8 million from
$37.0 million in 2002 due to higher cost of goods with respect to MYO premium
cigarette papers resulting from a stronger Euro in comparison to the U.S.
dollar. The gross margin decreased from 63.0% of net sales in 2002 to 55.3% due
to the impact of the stronger Euro in comparison to the U.S. dollar and to
changes in product mix (greater growth in lower margin products).

         Currency. Currency movements and suppliers' price increases relating to
premium cigarette papers, cigarette tubes and cigarette injector machines are
the primary factors affecting cost of sales. Those products 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 may choose to utilize short-term forward currency contracts, through
which NAOC secures Euros in order to provide payment for its monthly purchases
of inventory. No forward contracts were utilized in 2003.

         Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 2003 increased 35.3% to $32.6 million from the prior
year's $24.1 million. This increase was due primarily to the start up expenses
of NACC's premium cigarette business of $2.9 million, increased compensation and
related expenses of $3.3 million (including increased pension expense of $0.2
million), increased legal/litigation expenses of $0.7 million, increased
travel/entertainment expenses of $0.5 million, increased Sales/Marketing
expenses of $0.6 million and Stoker expenses of $0.5 million.

         Amortization Expense. Amortization of goodwill was eliminated effective
January 1, 2002. Amortization expense totaling $0.07 million for the year ending
December 31, 2003 related to the intangible assets acquired from Stoker.

         Net Interest Expense and Amortization of Deferred Financing Costs.
Interest expense and amortization of deferred financing costs increased to $19.1
million in 2003 from $18.7 million for the prior year. This increase was the
result of additional borrowings relating to the acquisition of Stoker and the
funding of a bond in the Republic litigation.

         Other Expense. Other expense increased to $11.1 million in 2003 from
$1.9 million for the prior year. Other expense consisted primarily of $7.4
million associated with the judgment rendered against the Company in connection
with the litigation with Republic Tobacco, Inc. and $3.3 million associated with
the termination of the Star Cigarette Asset Purchase Agreement.


                                       26
<PAGE>
         Income Tax Expense (Benefit). Income tax benefit was $3.7 million for
2003, reflecting the net loss of the Company. Income tax expense was $3.2
million in 2002.

         Net Income (Loss). Due to the factors described above, the Company
incurred a net loss of $6.2 million for 2003 compared to net income of $5.5 for
2002.

LIQUIDITY AND CAPITAL REQUIREMENTS

         The Company's principal uses for cash are working capital, debt
service, its annual MSA escrow account deposit and capital expenditures. In
2003, the Company also had significant cash expenditures in connection with
acquisitions and the Republic litigation. The Company's principal sources of
cash are from operating cash flows and from borrowings under its senior secured
credit facility. As described below, the Company consummated the refinancing of
its existing debt and preferred stock on February 17, 2004.

         Working capital was $16.8 million at December 31, 2004 compared to
$34.4 million at December 31, 2003. This decrease was the result of decreased
accounts receivable of $2.5 million, decreased inventories of $4.3 million,
increased accounts payable and accrued expenses of $5.8 million, an increase in
the revolving credit facility of $8.2 million offset by increased other current
assets of $2.3 million, increased net deferred tax liabilities of $1.1 million
and higher cash balance of $2.0 million. The Company contributed $1.7 million to
its defined benefit plans in 2004. As of December 31, 2004, the Company had an
undrawn availability of $35.5 million under the revolving credit portion of its
New Credit Agreement. On January 19, 2005, however, the amount of such facility
was reduced from $50 million to $35 million.

         During 2004, the Company had $3.3 million in capital expenditures. The
Company believes that its capital expenditure requirements for 2005 will be
approximately $2.0 million. Management believes that it will be able to fund its
capital expenditure requirements from operating cash flows and, if needed,
borrowings under its New Credit Agreement.

         On June 25, 1997, the Company issued $155.0 million aggregate principal
amount of 11% Senior Notes due 2004 (the "Notes") which were called for
redemption on April 2, 2004 in connection with the refinancing. The Notes were
unsecured senior obligations of the Company which were scheduled to 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.

         At December 31, 2003, the Company was operating under a Loan Agreement
(the "Loan Agreement"), dated December 31, 2000, with Bank One, Kentucky, N.A.
as Agent (the "Agent"), and the banks named therein, which provided for a $25.0
million term loan and a $10.0 million revolving credit facility. The Term Loan
was payable in eight (8) quarterly installments of $3.125 million each plus
accrued interest, which commenced on March 31, 2001. Both the term loan and the
revolving credit facility matured on December 31, 2002, at which time the term
loan was paid in full. On December 31, 2002, the Company entered into an Amended
Loan Agreement (the "Amended Loan Agreement") with Bank One in which the
revolving credit facility was increased to $20.0 million and extended to
December 31, 2003. During 2003, the Amended Loan Agreement was amended to reduce
the revolving credit facility to $15.0 million and to extend the maturity to
March 31, 2004. The unused portion of revolving credit facility at December 31,
2003 was $8.7 million. All terms of the original Loan Agreement remained in
place except for the replacement of a Fixed Charge Coverage Covenant with an
Interest Coverage Covenant. The Company's obligations under the Loan Agreement
were guaranteed by National Tobacco, NAOC and NTFC. In addition, the Company's
obligations were collateralized by all of the Company's assets and the Company's
equity in its subsidiaries. The interest rate on borrowings under the Amended
Loan Agreement was based, at the Company's option, on either LIBOR or the prime
rate as announced by the Agent from time to time. At December 31, 2003, the
Notes Payable outstanding under the Tranche B term loan portion consisted of
$7.7 million incurred to finance the posting of a $7.7 million judgment bond
(including accrued interest and fees) in connection with the litigation with
Republic Tobacco (See Note 21), Contingencies, to the Consolidated Financial
Statements contained herein) and $23.0 million to finance the acquisition of
Stoker (See Note 5, Acquisition of Business, to the Consolidated Financial
Statements contained herein). At December 31, 2003, the interest rate on
borrowings under the Amended Loan Agreement was 5.15%.

         The Loan Agreement and the Notes included cross default provisions and
limited the incurrence of additional indebtedness, dividends, transactions with
affiliates, asset sales, acquisitions, mergers, prepayments of indebtedness,
liens and encumbrances, and other matters. At December 31, 2003, the Company was
in compliance with all provisions of the Amended Loan Agreement and Notes.

         On December 31, 2003, the Notes and Notes Payable, as described above,
were reclassified as noncurrent liabilities in the Consolidated Balance Sheet,
reflecting the Company's intention and ability to refinance the Amended Loan
Agreement and Senior Notes as described below.


                                       27
<PAGE>
         On February 17, 2004, the Company consummated the refinancing of its
existing debt and preferred stock. The refinancing consisted principally of (1)
the offering and sale of $200.0 million principal amount of the Senior Notes
(the "New Senior Notes") by the Company, (2) the entering into of an amended and
restated loan agreement that provides a $50.0 million senior secured revolving
credit facility to the Company and (3) the concurrent sale of $97.0 million
aggregate principal amount at maturity of senior discount notes of Parent.

         The New Senior Notes are senior unsecured obligations of the Company,
mature on March 1, 2012 and are guaranteed on a senior unsecured basis by all of
the Company's existing and certain of its future subsidiaries. The New Senior
Notes bear interest at the rate of 9 1/4% per annum from the date of issuance,
or from the most recent date to which interest has been paid or provided for,
and interest is payable semiannually on March 1 and September 1 of each year.
The Company is not required to make mandatory redemptions or sinking fund
payments prior to the maturity of the Notes. The Company or Parent may from time
to time seek to retire all or a portion of the New Senior Notes through cash
purchases and/or exchanges for other securities in open market purchases,
privately negotiated transactions or otherwise.

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


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


2008                                           104.625%

2009                                           102.313%

2010 and thereafter                            100.000%

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

         In addition, at any time prior to March 1, 2007, the Company may, at
its option, redeem up to 35% of the aggregate principal amount of the New Senior
Notes with the net cash proceeds of one or more equity offerings by Parent or
the Company, subject to certain conditions, at a redemption price equal to
109.250% of the principal amount thereof, plus accrued and unpaid interest
thereon, if any, to the date of redemption.

         The New Senior Notes limit the incurrence of additional indebtedness,
the payment of dividends, entering into transactions with affiliates, asset
sales, engaging in mergers or acquisitions, creating liens or other encumbrances
on assets, and other matters. At December 31, 2004, the Company was in
compliance with all provisions of the New Senior Notes.

         In connection with the refinancing, the Company also amended and
restated the existing credit facility, resulting in a new $50.0 million
(reducing to $40.0 million in August 2005) senior revolving credit facility with
Bank One, N.A. as agent (the "Agent Bank") and La Salle Bank, National
Association. The new credit agreement (the "New Credit Agreement") governing the
new senior revolving credit facility includes a letter of credit sublimit of
$25.0 million and terminates three years from the closing date. The Company will
use the new senior revolving credit facility for working capital and general
corporate purposes. On January 19, 2005, the New Credit Agreement was amended to
reduce the revolving credit facility to $35.0 million.

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

         Each advance under the New Credit Agreement will bear interest at
variable rates based, at the Company's option, on either the prime rate plus 1%
or LIBOR plus 3%. The New Credit Agreement provides for voluntary prepayment,
subject to certain exceptions, of loans. In addition, without the prior written
consent of the Agent Bank, the Company will not allow a Change in Control (as
defined in the New Credit Agreement), the sale of any material part of its
assets and the assets of its subsidiaries on a consolidated basis or, subject to
certain exceptions, the issuance of equity or debt.


                                       28
<PAGE>
         Under the New Credit Agreement, the Company is required to pay the
lenders an annual commitment fee in variable amounts ranging from 0.50% to 0.65%
of the difference between the commitment amount and the average usage of the
facility, payable on a quarterly basis. The Company is also required to pay to
the lenders letter of credit fees equal to 3.00% per annum multiplied by the
maximum amount available from time to time to be drawn under such letter of
credit issued under the New Credit Agreement and to the lender issuing a letter
of credit a fronting fee of 0.125% per annum multiplied by the aggregate face
amount of letters of credit outstanding during a fiscal quarter plus other
customary administrative, amendment, payment and negotiation charges in
connection with such letters of credit.

         The New Credit Agreement requires the Company and its subsidiaries to
meet certain financial tests, including a minimum fixed charge coverage ratio,
and a minimum consolidated adjusted earnings before interest, taxes, dividends
and amortization ("EBITDA"). The New Credit Agreement also contains covenants,
which among other things, limit the incurrence of additional indebtedness,
dividends, transactions with affiliates, asset sales, acquisitions, mergers,
prepayments of other indebtedness, liens and encumbrances and other matters
customarily restricted in such agreements. In addition, the New Credit Agreement
requires that certain members of Executive Management remain active in the
day-to-day operation and management of the Company and its subsidiaries during
the term of the facility.

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

         As of December 31, 2004 the Company would have failed to meet its
original required minimum fixed charge coverage ratio for the period then ended
due to its operating results in 2004. This would have represented an event of
default under the terms of the New Credit Agreement. This covenant, however, was
eliminated pursuant to the March 30, 2005 amendment to the New Credit Agreement.

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

         Concurrently with the offering of the New Senior Notes, Parent issued
$97.0 million aggregate principal amount at maturity ($60.0 million in gross
proceeds) of its senior unsecured discount notes due 2014 (the "Senior Discount
Notes"). Proceeds of approximately $53.8 million from this issuance were used to
make a capital contribution to the Company. The Senior Discount Notes are
Parent's senior obligations and are unsecured, ranking equally in right of
payment to all of Parent's future unsubordinated obligations and senior in right
of payment to any obligations that are by their terms subordinated to the Senior
Discount Notes, and will be effectively subordinated to any secured obligations
of Parent to the extent of the assets securing those obligations. The Senior
Discount Notes are not guaranteed by the Company or any of its subsidiaries and
are structurally subordinated to all of the Company and its subsidiaries'
obligations, including the New Senior Notes. The Company or Parent may from time
to time seek to retire all or a portion of the Senior Discount Notes through
cash purchases and/or exchanges for other securities in open market purchases,
privately negotiated transactions, or otherwise.

         Pursuant to the U.S. Distribution Agreement (one of the Distribution
Agreements, as more fully discussed in Item 1. Business), the Company is
committed to purchase a minimum number of booklets of premium cigarette papers
annually to avoid the termination of that agreement. This level of purchases has
been significantly exceeded since the 1997 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 premium cigarette papers through 2004, subject to certain 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.

         As discussed in "Item. 1 Business - State Attorney General Settlement
Agreements," in order to be in compliance with the MSA and subsequent states'
statutes, the Company is required to fund an escrow account with each of the
settling states based on the number of cigarettes or cigarette equivalents
(i.e., the pounds of MYO smoking tobacco) sold in such state. Funding of the
escrow deposit by the Company in 2004 was $4.1 million in respect of sales of
MYO smoking products in 2003. The Company estimates the total payments will be
$3.7 million in 2005 due to a decrease of sales of MYO smoking products in 2004.


                                       29
<PAGE>
         The following table summarizes the Company's contractual obligations at
December 31, 2004 after giving effect to the refinancing of the Company's
existing debt and preferred stock (in thousands):

<TABLE>
<CAPTION>

CONTRACTUAL OBLIGATIONS                                TOTAL      LESS THAN 1 YEAR    1-3 YEARS    4-5 YEARS   AFTER 5 YEARS
-------------------------------------------------- ------------- ------------------ ------------- ------------ --------------
<S>                                                <C>           <C>                <C>           <C>          <C>
Senior notes                                       $    200,000  $             --   $        --   $      --    $    200,000
Interest on senior notes                                157,250            18,500       55,500       37,000          46,250
New Credit Agreement                                     14,500            14,500           --           --              --
Purchase obligations                                      2,368             2,368           --           --              --
Operating leases                                          5,592             1,213        2,581          637           1,161
Non-competition agreement                                   564               300          264           --              --
                                                   ------------- ------------------ ------------- ------------ --------------
                                                   $    380,274  $         36,881   $   58,345    $  37,637    $    247,411
                                                   ------------- ------------------ ------------- ------------ --------------
</TABLE>

         Looking forward, due to the lower than anticipated operating
performance of the Company's core business and increased net expenses resulting
from the Company's developmental activities relating to ZIG-ZAG Premium
Cigarettes, the Company currently anticipates that it will not likely meet the
fixed charge coverage ratio test contained in the New Credit Agreement for the
rolling four quarter periods ending June 30, 2005 and thereafter without the
contribution of additional equity into the Company. In the event that such
covenant is breached, the Company would be in default under the New Credit
Agreement, pursuant to which the lenders would have all rights and remedies
available to them at that time, including the right to accelerate payment of all
obligations thereunder. Such acceleration would trigger an event of default
under the indentures governing the New Senior Notes and the Senior Discount
Notes, allowing an acceleration of the obligations thereunder. In the event of
an acceleration of its obligations under either the New Credit Agreement or New
Senior Notes, the Company would not be able to satisfy its obligations and would
likely be required to seek protection from its creditors under applicable laws.
Although there can be no assurance, the Company believes that it will be able to
successfully negotiate new senior secured financing on reasonably acceptable
terms, refinance out the existing lenders and avoid a default under the New
Credit Agreement.

         The Company believes that its operating cash flows, together with
borrowings under the New Credit Agreement, subject to its ability to be in
compliance with the covenants thereunder or to obtain waivers or amendments of
such covenants or its ability to refinance the New Credit Agreement, should be
adequate to satisfy its reasonably foreseeable operating capital requirements.

INFLATION

         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 products due, in part, to its successful procurement and reformulation
activities with regard to its tobacco products and, in part, to its existing
contractual agreement for the purchase of its premium cigarette papers.

CRITICAL ACCOUNTING POLICIES

         The Company believes the accounting policies below represent its
critical accounting policies due to the estimation process involved in each. See
Note 4, in the Consolidated Financial Statements, for a detailed discussion of
the Company's accounting policies.

         Revenue Recognition - The Company recognizes revenues and the related
costs upon the transfer of title and risk of loss to the customer.

         Goodwill and Other Intangible Assets - The Company has adopted
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142").).

         Under SFAS No. 142, goodwill is no longer to be amortized but reviewed
for impairment annually or more frequently if certain indicators arise, using a
two-step approach. The net goodwill balances attributable to each of the
Company's reporting units are tested for impairment by comparing the fair value
of each reporting unit to its carrying value as of December 31 each year. Fair
value was determined by using the valuation technique of calculating the present
value of estimated expected future cash flows (using a discount rate
commensurate with the risks involved) with consideration given to multiples of
operating results The Company has reported that no impairment of goodwill has
been incurred as of December 31, 2004.


                                       30
<PAGE>
         Taxes - The Company has provided a valuation allowance to reduce its
net deferred income tax assets since it is management's judgment that it is not
"more likely than not" to be able to realize these benefits before they expire.
Accordingly, an adjustment to the net deferred income tax assets has been
charged to earnings for the year ending December 31, 2004.

         Contingencies - Note 21 of the Consolidated Financial Statements
contained herein discusses various litigation matters that impact the Company.
No loss or gain contingencies have been recorded for these matters because
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
have a material impact, either positively or negatively, on the results of
operations or financial condition of the Company.

         Inventory/LIFO Adjustment - 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.

         Pension and Postretirement Benefits Obligations - Pension and
postretirement benefits obligations accounting is intended to reflect the
recognition of future benefit costs over covered employees' approximate service
periods based on the terms of the plans and the investment and funding decisions
made by the Company. The Company is required to make assumptions regarding such
variables as the expected long-term rate of return on plan assets and the
discount rate applied to determine service costs and interest cost to arrive at
pension income or expense for the year. As of December 31, 2004 and 2003, the
Company used expected long-term rates of return on pension plan assets of 8.5%.
The postretirement plan has no assets. The Company analyzed the rates of returns
on assets used and determined that this rate is reasonable based upon the plans'
historical performance relative to the overall markets and mix of assets. The
Company will continue to assess the expected long-term rate of return on plan
assets assumptions for each plan based on relevant market conditions and will
make adjustments to the assumptions as appropriate. As of December 31, 2004, the
Company used discount rates of 5.5% and 5.75% for the pension and postretirement
plans, respectively. As of December 31, 2003, the Company used 6.25% for the
pension and postretirement plans, respectively. The decrease in the discount
rate used in the current year correlates with a decline in interest rates on
noncallable, high quality bonds over the past year. The Company bases its
discount rate used for postretirement benefits on Moody's Aa bond index plus an
adjustment upward to the next quarter percentage point. See Note 14 to the
Consolidated Financial Statements for the full list of assumptions for the
pension and postretirement plans.

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 comply with certain New Credit Agreement financial covenants, its
ability to extend the maturity date of the New Credit Agreement or obtain
alternative financing, its ability to implement its business strategy
successfully, which may be dependent on business, financial, and other factors
beyond the Company's control, including, among others, federal, state and/or
local regulations and taxes, competitive pressures, prevailing changes in
consumer preferences, consumer acceptance of new product introductions and other
marketing initiatives, market acceptance of the Company's current distribution
programs, access to sufficient quantities of raw material or inventory to meet
any sudden increase in demand, disruption to historical wholesale ordering
patterns, product liability litigation and any disruption in access to capital
necessary to achieve the Company's business strategy.

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

ITEM 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 revolving
loans under its New Credit Agreement. The Company's credit facility bears
interest at rates which vary with changes in LIBOR or the prime rate. As of
December 31, 2004, $14.5 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 interest rates on the Company's consolidated financial


                                       31
<PAGE>
position, results of operations or cash flows would not be significant. A 1%
change in the interest rate would change pre-tax income by approximately $0.15
million per year.

         Foreign Currency Sensitivity. NAOC purchases inventory from Bollore on
terms of net 45 days which are payable in Euros. Accordingly, exposure exists to
potentially adverse movement in foreign currency rates (Euros). 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 offsets the effects of changes in foreign exchange
rates.

         NAOC regularly reviews its foreign currency risk and its hedging
programs and may as part of that review determine at any time to change its
hedging policy. As of December 31, 2004, 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 registered public accounting firm, with respect thereto, referred to
in the Index to Financial Statements of the Company contained in Item 15(a),
appear on pages F-1 through F-30 of this Form 10-K/A 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.

ITEM 9A.      CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

         The Company's management, with the participation of the Company's
principal executive and principal financial officers, has evaluated the
effectiveness of the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), as of December 31, 2004. In connection with the
restatement described in Note 1 to the Company's consolidated financial
statements, management determined that there was a material weakness in the
Company's internal control over financial reporting as of December 31, 2004, as
more fully described below. Based on their evaluation, the Company's principal
executive and principal financial officers concluded that the Company's
disclosure controls and procedures were not effective as of December 31, 2004
because of the material weakness discussed below.

Restatement of Previously Issued Consolidated Financial Statements

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

         The Company evaluated the materiality of the correction on its
consolidated financial statements using the guidelines of Staff Accounting
Bulletin No. 99, "Materiality" and concluded that the effects of the corrections
were material to its consolidated financial statements as of and for the year
ended December 31, 2004. As a result, the Company concluded that it will restate
such previously issued consolidated financial statements to recognize the impact
of the correction.

                                       32
<PAGE>
Internal Control Over Financial Reporting

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

Management's Remediation Plan

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

Changes in Internal Control

         Other than the changes discussed above, there has been no change in the
Company's internal control over financial reporting (as defined in Rules
13a-15(f) and 15-d-15(f) under the Exchange Act) that occurred during the
Company's quarter ended December 31, 2004, that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting. However, subsequent to August 11, 2005, the Company is in
the process of determining the remedial steps necessary to eliminate the
material weakness relating to financial disclosure controls that resulted in the
restatement and intends to engage the services of consultants with appropriate
levels of income tax accounti8ng knowledge to assist in the review of complex
tax matters.



ITEM 9B.      OTHER INFORMATION

         None.










                                       33
<PAGE>
                                    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" below.


<TABLE>
<CAPTION>
NAME                              AGE   POSITION
----------------------------------------------------------------------------------------------------------------------
<S>                             <C>    <C>
Thomas F. Helms, Jr.              64    Chief Executive Officer, President and Chairman of the Board
Douglas P. Rosefsky               36    Chief Financial Officer
Jack Africk*                      76    Director
Marc S. Cooper*                   44    Director
Geoffrey J. F. Gorman*            48    Director
James W. Dobbins                  45    Senior Vice President--General Counsel and Secretary
Robert A. Milliken, Jr            48    President and Chief Operating Officer - National Tobacco Company, L.P.
James M. Murray                   44    Senior Vice President--Sales & Marketing - National Tobacco Company, L.P.
Lawrence S. Wexler                52    President and Chief Operating Officer - North Atlantic Cigarette Company, Inc.

</TABLE>

*  Audit committee members.

         Thomas F. Helms, Jr. Thomas F. Helms, Jr. has been Chief Executive
Officer and Chairman of the Board since June 1997 and President since January
19, 2005. He is also the Chairman of the Board of Directors, Chief Executive
Officer, President, and a Director of Parent; the President as well as a
Director of NTC; the President and a Director of NACC; the President of National
Tobacco Finance Corporation; the Chairman of the Board of Directors, President,
Chief Executive Officer, and a Director of NAOC; the Chairman, President, and a
Director of Stoker; the Chairman, President, and a Director of Fred Stoker &
Sons, Inc.; and the Chairman, President and a Director of RBJ Sales, Inc. In
1988, Mr. Helms formed National Tobacco Company, L.P., which acquired certain
loose leaf chewing tobacco assets of Lorillard, Inc. 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. From 1964 to
1979, Mr. Helms was employed in marketing and sales positions in various
divisions of Revlon, Inc.

         Douglas P. Rosefsky. Douglas P. Rosefsky became the Chief Financial
Officer on January 19, 2005. He is also a Managing Director of Alvarez & Marsal,
LLC. Mr. Rosefsky became a Director of Alvarez & Marsal in November 2000, and a
Managing Director in September 2003. Mr. Rosefsky has worked in a variety of
management and advisory services roles in several industries, most recently,
from November 2003 until August 2004, as an advisor and Chief Executive Officer
of DLT Solutions, Inc., a leading technology solutions provider to the
government with $300 million in annual revenues. From January 2003 to August
2003, Mr. Rosefsky acted as Chief Restructuring Officer and Chief Financial
Officer of Kleinert's Buster Brown, a leading designer, manufacturer and
retailer of children's apparel. From April 2001 until January 2003, Mr. Rosefsky
served as Senior Vice President - Finance and Co-Head of International of
Warnaco Inc., a global retail and apparel company based in New York. From
January 2001 until August 2001, Mr. Rosefsky served as Financial Advisor,
Communications Corporation of America, and between January 2000 and December
2000, as Vice President - Finance of Charter Behavioral Health Corporation. Mr.
Rosefsky formerly held positions at JP Morgan Chase (Chase Securities, Inc.),
Hoffman-La Roche, and Andersen Consulting.

         Jack Africk. Jack Africk has been a Director of the Company since
October 1997 and has been serving as a consultant to it since January 1999. From
January through December 1998 he served as President and Chief Operating Officer
of the Company. From 1996 to June 1997, he was Chief Executive Officer of NATC
Holdings USA, Inc. Prior to that time, from 1993 to 1996, Mr. Africk was a
consultant and Director of NATC Holdings USA, Inc. Mr. Africk is a former Vice
Chairman of UST Inc. ("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 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 S. 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 served as Vice Chairman of Barington Capital Group,
an investment bank of which he was a founding member. Prior to his tenure with


                                       34
<PAGE>
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 Steve Madden, Inc. and Maxcor Financial.

         Geoffrey J. F. Gorman. Geoffrey Gorman has served as a Director of the
Company since April 2002. He is the Managing Partner of Private Equity Partners,
LLC. Since 1985, he has organized and led leveraged acquisitions and private
equity investments. Mr. Gorman has served as a Chairman of the Board of
Directors of Protein Genetics, Inc., Southern Dental Corporation, Waterbury
Companies, Inc. and Compass Plastics & Technologies, Inc. Mr. Gorman has also
served as a member of the board of directors of Swanson Manufacturers, Inc.,
Golden State Vintners, Inc., The Company Store, Inc., Avanti Petroleum, Inc. and
Koala Springs International Corporation. Mr. Gorman currently serves as Chairman
of the Board of Advisors of Santa Maria Foods Corporation and as a member of the
board of directors of Winnfield Funeral Homes and Life Insurance Company. Prior
to 1996, Mr. Gorman was a partner at Ardshiel, Inc., an investment bank.

         James W. Dobbins. James W. Dobbins has been Senior Vice President and
General Counsel of the Company since June 1999. He has also held the position of
Secretary since April 2002. Mr. Dobbins is also the Senior Vice President,
General Counsel and Secretary of Parent, the Secretary of NACC, the Senior Vice
President, General Counsel and Secretary of NAOC, the Senior Vice President,
General Counsel and Secretary of Stoker, the Senior Vice President, General
Counsel and Secretary of Fred Stoker & Sons, Inc. and the Senior Vice President,
General Counsel and Secretary of RBJ Sales, Inc. Prior to joining the Company,
Mr. Dobbins was in private practice in North Carolina and held various positions
in the legal department of Liggett Group Inc., a major cigarette manufacturer,
including, at the time he left that company, Vice President, General Counsel and
Secretary. Mr. Dobbins had been an outside litigation attorney with Webster &
Sheffield, a New York law firm, representing a variety of clients including
Liggett Group Inc. Prior to joining Webster & Sheffield, he served as a law
clerk to the Honorable J. Daniel Mahoney, United States Circuit Judge for the
Second Circuit Court of Appeals.

         Robert A. Milliken, Jr. Robert A. Milliken, Jr. has been the President
and Chief Operating Officer of NTC since April, 2002. From May, 1979 to June,
1995 he held numerous senior management positions with increasing responsibility
with Arco Products Company and AMPM Mini Markets; from June 1995 to April 2001
he held positions of Vice President, Marketing for Sunoco which included their A
Plus retail convenience stores; Vice President, Retail Business Unit for Amoco
where he operated more than five hundred Amoco owned convenience stores, then,
subsequent to the BP Amoco merger, he became Vice President, Convenience
Retailing for BP Amoco responsible for all convenience store activity in North
America; and Vice President and General Manager of Irving Oil and their branded
Mainway retail convenience stores. During this period, Mr. Milliken leveraged
his significant tobacco category experience working with the major tobacco
manufacturers and wholesalers strategizing how to sustain and optimize the
tobacco category as the most significant contributor of convenience store sales
and profitability. Immediately prior to joining the Company, he was Senior Vice
President of Willard Bishop Consulting (WBC) in Illinois, a major firm in
providing leadership primarily to large national convenience store chains.
During his tenure at WBC, Mr. Milliken provided business consulting services to
candy and tobacco wholesalers as well as major chain retailers within the
convenience store, supermarket and drug store industries from April 2001 until
March 2002.

         James M. Murray. James M. Murray has been the Senior Vice
President--Sales & Marketing for NTC since November 2001. Prior to that time, he
was the Vice President--Marketing for NTC. Before joining NTC, from 1995 to
1999, Mr. Murray was employed by Brachs Confections in a variety of senior sales
and marketing positions, including Director of Trade Marketing and Vice
President of Marketing--Fresh Candy Shoppe. From 1985 until 1994, Mr. Murray
held numerous sales and marketing positions with increasing responsibility with
The American Tobacco Company, including Product Manager, Strategic Sales
Operations Director, Business Unit Director and Vice President--Premium Brands
where he was responsible for the profitable development of the Carlton, Pall
Mall and Lucky Strike brands. Prior to joining American Tobacco, Mr. Murray was
employed by A.C. Nielsen Marketing Research.

         Lawrence S. Wexler. Lawrence S. Wexler has been the President and Chief
Operating Officer of NACC since December 2003. Prior to joining NACC, from 1998
to 2003 he was a consultant to a number of emerging marketing, communication and
financial companies, advising them on financial, marketing, and strategic
matters, at times in an operating role. From 1977 to 1998, he was employed by
Philip Morris, USA in various positions in the Sales, Marketing and Finance
Departments. As Group Director, Discount Brands his group introduced the Basic
and Alpine brands. He served as Senior Vice President of Marketing from 1992-93
and Senior Vice President Finance, Planning and Information Services from 1993
to 1998, when he left that company.

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

                                       35
<PAGE>
ELECTION OF DIRECTORS

         Pursuant to the terms of an Amended and Restated Exchange and
Stockholders' Agreement, dated as of February 9, 2004, among the Company, Parent
and certain of the stockholders of Parent (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 Parent. 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.
Parent, in turn, votes all of the Common Stock of the Company and, accordingly,
has the right to elect all of its directors.

AUDIT COMMITTEE FINANCIAL EXPERT

         The Board of Directors has determined that Geoffrey J.F. Gorman
qualifies as an "audit committee financial expert" as such term is defined in
rules adopted by the Securities and Exchange Commission implementing
requirements of the Sarbanes-Oxley Act of 2002. The Board of Directors has
further determined that Mr. Gorman is "independent" as such term is defined in
the Securities Exchange Act of 1934 and the rules thereunder.

CODE OF BUSINESS CONDUCT AND ETHICS

         The Company's Code of Business Conduct and Ethics has been approved by
its Board of Directors and will apply to all of its executive officers and
directors, including its principal executive officer, principal financial
officer and principal accounting officer. The Company's Code of Business Conduct
and Ethics covers all areas of professional conduct including, but not limited
to, conflicts of interest, disclosure obligations, insider trading, confidential
information, as well as compliance with all laws, rules and regulations
applicable to its business.

         The Company undertakes to provide without charge to any person, upon
request, a copy of its Code of Business Conduct and Ethics. Requests should be
directed in writing to North Atlantic Trading Company, Inc., Attention: General
Counsel, 257 Park Avenue South, New York, New York, 10010-7304.















                                       36
<PAGE>
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, 2002, 2003 and 2004 (each person
appearing in the table is referred to as a "Named Executive Officer"):


                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                         ANNUAL COMPENSATION           LONG-TERM COMPENSATION
                                                   -------------------------------  ------------------------------
                                                                                            AWARDS         PAYOUTS
                                                                                    ---------------------- -------
                                                                         OTHER      RESTRICTED  SECURITIES
                                                                         ANNUAL       STOCK     UNDERLYING   LTIP     ALL OTHER
                                                                         COMPEN-    AWARDS(S)   OPTIONS/    PAYOUTS    COMPEN-
NAME AND PRINCIPAL POSITION                  YEAR  SALARY ($)   BONUS   SATION ($)     ($)       SARS (#)     ($)     SATION ($)
---------------------------                  ----  ----------   -----   ----------  --------     --------   -------   ----------
<S>                                         <C>   <C>          <C>      <C>        <C>          <C>        <C>       <C>
Thomas F. Helms, Jr.                         2004   $725,000   $750,000  $50,000         --         --          --     $132,669 (1)
      Chairman of the Board and              2003    725,000         --   50,000         --         --          --     $130,499 (2)
      Chief Executive Officer                2002    725,000    400,000   50,000         --         --          --      106,705 (3)


David I. Brunson                             2004    600,000    750,000   35,000         --         --          --       95,787 (4)
      President, Chief Financial             2003    600,000         --   35,000         --         --          --       85,621 (5)
      Officer and Treasurer                  2002    425,000    300,000   35,000         --         --          --       94,005 (6)


Robert A. Milliken, Jr.                      2004    362,788     70,000       --         --         --          --       75,349 (7)
      President and Chief                    2003    350,000         --       --         --         --          --       25,462 (8)
      Operating Officer - National Tobacco
         Company, L.P.                       2002    262,500         --       --         --         --          --      108,096 (9)


Lawrence Wexler                              2004    350,000         --       --         --         --          --       33,358 (10)
      President and Chief--                  2003         --     50,000       --         --         --          --           --
      Operating Officer North Atlantic
         Cigarette Company                   2002         --         --       --         --         --          --           --


James M. Murray                              2004    227,346     43,000       --         --         --          --       21,281 (11)
      Senior Vice President--                2003    216,489         --       --         --         --          --       16,731 (12)
      Sales & Marketing - National Tobacco
         Company, L.P.                       2002    205,000     35,000       --         --         --          --       15,731 (13)

</TABLE>

---------------------------

(1)   Includes insurance premiums of $66,025 paid by the Company with respect to
      term life and disability insurance, contributions by the Company of
      $16,000 to a defined contribution plan, an allowance for use of a Company
      provided vehicle of $27,839 and $22,805 for miscellaneous payments.

(2)   Includes insurance premiums of $63,711 paid by the Company with respect to
      term life and disability insurance, contributions by the Company of
      $14,000 to a defined contribution plan, $50,000 as compensation for estate
      and tax planning activities and $2,788 for miscellaneous payments.

(3)   Includes insurance premiums of $41,917 paid by the Company with respect to
      term life and disability insurance, contributions by the Company of
      $12,000 to a defined contribution plan, $50,000 as compensation for estate
      and tax planning activities and $2,788 for miscellaneous payments.

(4)   Includes insurance premiums of $12,390 paid by the Company with respect to
      term life and disability insurance, contributions by the Company of
      $16,000 to a defined contribution plan, an allowance for use of a Company
      provided vehicle of $27,404 and $39,993 for miscellaneous payments. Mr.
      Brunson resigned as an officer of the Company effective January 19, 2005.

(5)   Includes insurance premiums of $12,390 paid by the Company with respect to
      term life and disability insurance, contributions by the Company of
      $14,000 to a defined contribution plan, $35,000 as compensation for estate
      and tax planning activities and $24,231 for miscellaneous payments.

(6)   Includes insurance premiums of $12,390 paid by the Company with respect to
      term life and disability insurance, contributions by the Company of
      $12,000 to a defined contribution plan, $35,000 as compensation for estate
      and tax planning activities and $34,615 for miscellaneous payments.


                                       37
<PAGE>
(7)   Includes insurance premiums of $6,000 paid by the Company with respect to
      term life insurance, contributions by the Company of $13,000 to a defined
      contribution plan, an allowance for use of a Company provided vehicle of
      $14,902 and $41,447 for miscellaneous payments.

(8)   Includes contributions by the Company of $12,000 to a defined contribution
      plan and $13,462 for miscellaneous payments.

(9)   Includes signing bonus of $87,500, contributions by the Company of $10,500
      to a defined contribution plan and $10,096 for miscellaneous payments.

(10)  Includes insurance premiums of $3,000 paid by the Company with respect to
      term life insurance, contributions by the Company of $15,423 to a defined
      contribution plan, an allowance for use of a Company provided vehicle of
      $9,729, and $5,206 for miscellaneous payments.

(11)  Includes contributions by the Company of $13,000 to a defined contribution
      plan and $8,281 for miscellaneous payments.

(12)  Includes contributions by the Company of $12,000 to a defined contribution
      plan and $4,731 for miscellaneous payments.

(13)  Includes contributions by the Company of $11,000 to a defined contribution
      plan and $4,731 for miscellaneous payments.

















                                       38
<PAGE>
                      OPTION/SAR GRANTS IN LAST FISCAL YEAR

         Stock options relating to the Parent's common stock granted to the
Named Executive Officers below for the year ended December 31, 2004 are as
follows:

<TABLE>
<CAPTION>

                                      INDIVIDUAL GRANTS                                        POTENTIAL REALIZABLE VALUE
                                -----------------------------                                   AT ASSUMED ANNUAL RATES
                                  NUMBER OF       % OF TOTAL                                    OF STOCK APPRECIATION FOR
                                 SECURITIES      OPTIONS/SARS                                           OPTION TERM
                                 UNDERLYING       GRANTED TO      EXERCISE OR                 ----------------------------
                                OPTIONS/SARS     EMPLOYEES IN     BASE PRICE     EXPIRATION
NAME                              GRANTED #      FISCAL YEAR        ($/SH)          DATE          5% ($)         10% ($)
-------------------------         ---------      -----------        ------          ----          ------         -------
<S>                             <C>             <C>             <C>             <C>             <C>           <C>
Robert A. Milliken, Jr.               2,085           14.8%        $   62.00      05/11/2014    $  200,535    $    304,806
Lawrence S. Wexler                   10,000           71.0%            62.00      08/02/2014       961,800       1,461,900
                                ------------
TOTAL                                12,085
                                ============
</TABLE>






















                                       39
<PAGE>
             AGGREGATED OPTION/SAR EXERCISES DURING LAST FISCAL YEAR
                      AND FISCAL YEAR-END OPTION/SAR VALUES

         The following table sets forth certain information with respect to the
exercise of options to purchase the Parent's common stock during 2004, and the
unexercised options held and the value thereof at December 31, 2004, for each of
the Named Executive Officers.

<TABLE>
<CAPTION>
                                SHARES                           NUMBER OF SECURITIES             VALUE OF UNEXERCISED
                              ACQUIRED ON       VALUE       UNDERLYING UNEXERCISED OPTIONS         IN-THE-MONEY OPTION
NAME                          EXERCISE (#)   REALIZED ($)          AT FISCAL YEAR END               AT FISCAL YEAR END
-------------------------    -------------   -----------    ------------------------------    -----------------------------
                                                            EXERCISABLE      UNEXERCISABLE    EXERCISABLE     UNEXERCISABLE
                                                            -----------      -------------    -----------     -------------
<S>                          <C>             <C>            <C>              <C>              <C>             <C>
Thomas F. Helms, Jr.               --              --               --                --               --             --
David I. Brunson                   --              --           37,249             3,775      $ 1,717,578             --
Robert A. Milliken, Jr.            --              --            5,664             4,336               --             --
Lawrence S. Wexler                 --              --            1,603             8,397               --             --
James M. Murray                    --              --            3,056               944      $   104,020             --

</TABLE>












                                       40
<PAGE>
                            LONG TERM INCENTIVE PLAN

         The Company has no current Long Term Incentive Plan in place.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         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 and to
administer the Option Plan. 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. Geoffrey Gorman will receive an
additional $25,000 for serving as Chairman of the Audit Committee. For services
provided to the Company in 2005 beyond those typically provided by corporate
directors, the outside directors will be compensated $1,500 per day.

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 the Helms Employment Agreement, Mr. Helms
was to receive an annual base salary of $300,000, which is reviewed annually,
plus a bonus in accordance with the Company's 1999 Executive Plan. In 2004, Mr.
Helms' salary was $725,000. 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, use of a company car,
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, provided in such event that the bonus
received shall be only for the year in which the termination occurred and shall
be prorated.

DAVID I. BRUNSON (RESIGNED JANUARY 19, 2005)

         David I. Brunson, the former President, Chief Financial Officer and
Treasurer of the Company, entered into an amended and restated employment
agreement with the Company on April 30, 1998 which was subsequently amended on
November 21, 2002 (as so amended, the "Brunson Employment Agreement"). Pursuant
to the Brunson Employment Agreement, Mr. Brunson received an annual base salary
of $600,000, which was reviewed annually, plus a bonus in accordance with the
Company's 1999 Executive Plan. The Brunson Employment Agreement provides for a
rolling two-year term such that in the event Mr. Brunson resigns for good reason
or is terminated without cause, he is entitled to receive a severance payment in
the amount of $425,000 per year, and a pro rated bonus (based on the highest
earned bonus under the Executive Bonus Plan paid to Mr. Brunson during the
preceding two years) for the remainder of the term of employment. The Brunson
Employment Agreement was effectively terminated with his resignation on January
19, 2005. Pursuant to the Brunson Employment Agreement, the Company is required
to make certain severance payments to Mr. Brunson, including $425,000, which was
paid within ten business days after January 19, 2005, and an additional $425,000
payable within the next 12 months. In addition, Mr. Brunson may become entitled
to a bonus payment of up to $725,000 relating to synergies achieved in the
integration of the business of Stoker, Inc. that was acquired by the Company in
2003. Pursuant to the Brunson Employment Agreement, after the last severance
payment is made, Mr. Brunson will have an option to require the Company to
repurchase all or a portion of his shares of Parent at their fair market value.
The Company will not be obligated to repurchase these shares if, upon or after
the payment, it would be in default under any instrument, agreement or law by
which it is bound; in this case, the repurchase may be deferred until it can be
completed without such default. Similarly, the Company has an option to
repurchase Mr. Brunson's shares at their fair market value. In the event the
Company and Mr. Brunson are unable to agree upon the fair market value of these
shares, an independent investment banking firm will be selected to determine
such fair market value, in accordance with the procedure provided for by the
Brunson Employment Agreement. If neither Mr. Brunson nor the Company exercise
their respective options by the earliest of the fifth anniversary of the
termination of Mr. Brunson's employment or the date on which the Company
refinances, or uses proceeds derived from refinancing, certain of its
obligations, the Company will be required to repurchase Mr. Brunson's shares on


                                       41
<PAGE>
such date unless Mr. Brunson waives his right to require the Company to purchase
his shares. During the first quarter of 2005, the Company expects to record
approximately $1.1 million relating to the resignation of Mr. Brunson. Any
options or shares of restricted stock granted to Mr. Brunson vest in full as of
the date of such termination.

         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, for a period of twelve months following his
resignation, Mr. Brunson will continue to receive various other benefits,
including life insurance and medical, disability, pension benefits, club
memberships, a company car, 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.

         Pursuant to a non-qualified stock option agreement, Mr. Brunson was
granted options to purchase 30,928 shares of Common Stock of Parent. One-third
of these options vested as of the closing of the 1997 Acquisition and one-third
of these options vested on each of April 23, 1998 and April 23, 1999. 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.

         In addition, the Board of Directors of the Company has approved an
incentive compensation arrangement for Mr. Brunson relating to the integration
of Stoker. Under this arrangement, Mr. Brunson is eligible to receive up to
$725,000 in the event that in excess of $4.0 million of synergies are achieved
following the integration of Stoker, as determined by the Board of Directors.

ROBERT A. MILLIKEN, JR.

         Robert A. Milliken, Jr., President and Chief Operating Officer of NTC,
is party to an employment agreement with the Company dated March 28, 2002 (the
"Milliken Employment Agreement") pursuant to which Mr. Milliken receives a base
annual salary of $350,000, plus a bonus in accordance with the Company's
Management Bonus Plan (as defined). The Milliken Employment Agreement provides
for a rolling twelve month term, such that in the event of termination of Mr.
Milliken's employment by the Company without cause, Mr. Milliken is entitled to
receive his then current annual salary, plus an amount equal to his bonus in the
prior year. The Milliken Employment Agreement also provides for club membership
dues and disability insurance, use of a company car, as well as a stock option
to purchase 10,000 shares of the common stock of Parent at an exercise price of
$62.00 per share.

LAWRENCE S. WEXLER

         Lawrence S. Wexler, the President and Chief Operating Officer of NACC,
has an employment agreement, dated December 1, 2003 (the "Wexler Agreement")
with NACC, pursuant to which he receives a base annual salary of $350,000, plus
a bonus in accordance with the Company's Management Bonus Plan. The agreement
also provides for severance benefits of one year's salary, and certain bonuses.
In addition, the agreement provides for certain other benefits during his
employment, such as options to purchase 10,000 shares of Parent's common stock
at an exercise price of $62.00 per share, use of a company car, reimbursement
for some club membership dues, and reimbursement for life and disability
insurance.

JAMES M. MURRAY

         James M. Murray, Senior Vice President--Sales and Marketing of NTC, has
an employment agreement, dated December 1, 2003 (the "Murray Agreement"), with
NTC pursuant to which he receives a base annual salary of $215,300, plus a bonus
in accordance with the Company's Management Bonus Plan. The agreement also
provides for a rolling twelve month term, such that in the event of termination
of Mr. Murray by the Company without cause, Mr. Murray is entitled to receive
his then current annual salary. The Murray Agreement also provides for certain
benefits in the event that Mr. Murray is relocated to the Louisville, Kentucky
facility, such as, use of a company vehicle and a club membership, as well as
stock options to purchase 2,000 shares of Parent's common stock at an exercise
price of $9.99 per share and 2,000 shares at an exercise price of $62.00 per
share.

JAMES W. DOBBINS

         James W. Dobbins, Senior Vice President, General Counsel and Secretary
of the Company, has an employment agreement with the Company, dated November 21,
2002 (the "Dobbins Agreement"), pursuant to which Mr. Dobbins is paid $227,500,
subject to annual review by the Board of Directors, is included in the
Management Bonus Plan, and is granted additional benefits such as life
insurance, stock options and reimbursement for a club membership as well as
stock options to purchase 2,000 shares of the common stock of Parent at an
exercise price of $9.99 per share and 2,000 shares at an exercise price of


                                       42
<PAGE>
$62.00 per share. The Dobbins Agreement provides for a rolling twelve month
term, such that in the event of termination of Mr. Dobbins' employment by the
Company without cause, Mr. Dobbins is entitled to receive his then current
annual salary plus an amount equal to his bonus in the prior year.

RETIREMENT PLAN

         Effective December 31, 2003, the Company froze its defined benefit
retirement plan for its salaried employees.

         The table below illustrates the approximate amounts of annual normal
retirement benefits, subject to the above action.

<TABLE>
<CAPTION>
                                                       ANNUAL BENEFITS AT RETIREMENT WITH
                                                           YEARS OF CREDITED SERVICE(1)
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 Executive
Officers are as follows: Thomas F. Helms, Jr., 17 years; David I. Brunson, 8
years; Robert A. Milliken, Jr., 2 years; Lawrence S. Wexler, 1 year; and James
M. Murray, 5 years.

BONUS PLANS

         In March 1999, the Compensation Committee of the Company's Board of
Directors adopted the 1999 Executive Incentive Plan (the "1999 Executive Plan"),
the 1999 Management Bonus Plan (the "Management Plan") and the 1999
Discretionary Bonus Plan (the "Discretionary Plan"). The 1999 Executive Plan
provides executive members of the Company with the opportunity to receive bonus
pay based on the Company's annual performance, as measured by earnings before
interest, taxes, depreciation and amortization, as adjusted for certain non-cash
add-backs, 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 1999 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 performance as well as the individual
performance of participants, subject to approval of Executive Management. If the
Company's annual performance is not achieved, Executive Management, subject to
approval of the Board of Directors, can make discretionary bonus payments. Under
the Discretionary 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.


                                       43
<PAGE>
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 "1997 Incentive Plan"), which, as a result of the 2004
reorganization, now relates to the shares of Parent Common Stock.

         The 1997 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 1997 Incentive Plan makes available for Benefits an aggregate
amount of 61,856 shares of Parent Common Stock (all 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 1997 Incentive Plan.

Administration

         The 1997 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 1997 Incentive Plan, to establish such rules and regulations as it deems
necessary for the proper administration of the 1997 Incentive Plan and to make
such determinations and interpretations and to take such action in connection
with the 1997 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 1997 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
1997 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 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 1997 Incentive Plan, the Administration Committee may grant
awards in the form of options to purchase shares of Parent 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 Parent 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 1997 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 1997 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, Common Stock or a
combination thereof, 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


                                       44
<PAGE>
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 1997 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 1997 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
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 1997 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 1997 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 1997 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 1997 Incentive Plan.
No Benefit shall be granted under the 1997 Incentive Plan after June 25, 2007.
The Board of Directors reserves the right to amend, suspend or terminate the
1997 Incentive Plan at any time, subject to the rights of participants with
respect to any outstanding Benefits.

         The 1997 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 Parent.

2002 SHARE INCENTIVE PLAN

         In November 2002, the Board of Directors of the Company adopted the
North Atlantic Trading Company, Inc. 2002 Share Incentive Plan (the "2002
Plan"), which, as a result of the 2004 reorganization, now relates to the shares
of Parent Common Stock. The 2002 Plan has terms that are substantially identical
to the terms of the 1997 Share Incentive Plan. Parent has reserved 50,000 shares
of Common Stock for benefits under the 2002 Plan. A nearly identical plan that
had been approved by the Board of Directors in 2001 (the "North Atlantic Trading
Company, Inc. 2001 Share Incentive Plan") and under which no awards had been


                                       45
<PAGE>
granted, was terminated by the Board of Directors in connection with the
adoption of the 2002 Share Incentive Plan.

ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
              AND RELATED STOCKHOLDER MATTERS

         The Company is a wholly owned subsidiary of Parent. The table below
sets forth certain information regarding the beneficial ownership of common
stock of Parent as of March 15, 2005, by (i) each person or entity who
beneficially owns five percent or more of the common stock, (ii) each of the
Company's and Parent's directors and Named Executive Officers and (iii) all of
the Company's and Parent's directors and executive officers 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)                                               461,285              78.4%             74.2%
   Helms Management Corp.

David I. Brunson(c)                                                    49,810               7.8               7.4

Herbert Morris(d)                                                      35,479               6.0               5.7
   Flowing Velvet Products, Inc.
   3 Points of View
   Warwick, New York 10990

Maurice R. Langston(d)                                                 34,590               5.9               5.6
   Langston Enterprises, Inc.

Alan R. Minsterketter(d)                                               25,788               4.4               4.1
   Alan M. Inc.

Jack Africk(e)                                                         19,810               3.3               3.1

Marc S. Cooper(f)                                                          --                 *                 *
   Peter J. Solomon Company Limited

Geoffrey J.F. Gorman                                                       --                 *                 *

Lawrence S. Wexler(g)                                                   2,500                 *                 *

Robert A. Milliken, Jr.(h)                                              5,937               1.0%              1.0%

James M. Murray(i)                                                      3,000               1.0%                *

Directors and Executive Officers as a Group (9 persons)               490,684              79.4%             79.5%

</TABLE>

---------------------------

*     Less than 1%.

(a)   The percentages assume, in the column entitled "Before Exercise of
      Warrants," that none of the outstanding warrants (i) to purchase an
      aggregate of 16,091 shares of Parent's common stock at an exercise price
      of $.01 per share issued in connection with the Company's recapitalization
      in 1997, (ii) to purchase an aggregate of 3,000 shares of Parent's common
      stock at an exercise price of $40.00 per share, issued in 2003 to Peter J.
      Solomon Company Limited, and (iii) to purchase an aggregate of 14,721
      shares of Parent's common stock at an exercise price of $62.00 per share,
      issued to Guggenheim Investment Management, LLC, are exercised. The
      percentages assume, in the column entitled "After Exercise of Warrants,"
      that all of such warrants are exercised.

(b)   Helms Management Corp., all of the voting capital stock of which is owned
      by Mr. Helms, who serves as its President, 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 251,033 shares of Parent's common stock,
      which represents approximately 42.1% of the outstanding shares, including
      currently exercisable options and assuming that none of the outstanding
      warrants are exercised, or 37.5% of the outstanding shares, including
      currently exercisable options and assuming that all such warrants are
      exercised. Because of Mr. Helms' ability to vote an additional 137,033
      shares of Parent's common stock held by members of the Parent's management
      in respect of the election of its 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 37,740 shares of the Company's 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 Parent's stockholders 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 35,479 shares that are subject to a voting
      agreement between Helms Management Corp. and Flowing Velvet Products,
      Inc., and an additional 5,000 shares held by an outside investor that are
      subject to the voting agreement. See "--Voting Agreements."


                                       46
<PAGE>
(c)   Includes (i) 2,250 shares of Parent's common stock owned by Mr. Brunson,
      (ii) 41,024 shares subject to currently exercisable stock options held by
      Mr. Brunson. 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 Parent's 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.

(f)   Reflects a warrant issued to the corporation listed below the name of such
      natural person currently exercisable for 3,000 shares of Parent's common
      stock. Such person is a Managing Director of the corporation.

(g)   Mr. Wexler holds 2,500 shares subject to currently exercisable stock
      options.

(h)   Mr. Milliken, Jr. holds 3,488 shares subject to currently exercisable
      stock options plus an additional 1,979 shares which will vest as of April
      1, 2005.

(i)   Mr. Murray holds 3,000 shares subject to currently exercisable stock
      options.










                                       47
<PAGE>
                  PARENT'S EQUITY COMPENSATION PLAN INFORMATION

<TABLE>
<CAPTION>
                                                                                                      NUMBER OF SECURITIES
                                                                                                     REMAINING AVAILABLE FOR
                                         NUMBER OF SECURITIES TO BE                                   FUTURE ISSUANCE UNDER
                                           ISSUED UPON EXERCISE OF    WEIGHTED-AVERAGE EXERCISE     EQUITY COMPENSATION PLANS
                                             OUTSTANDING OPTIONS,   PRICE OF OUTSTANDING OPTIONS,     (EXCLUDING SECURITIES
PLAN CATEGORY                               WARRANTS AND RIGHTS         WARRANTS AND RIGHTS          REFLECTED IN COLUMN (A))
------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>                         <C>                            <C>
                                                     (A)                         (B)                        (C)

Equity compensation plans approved by
   security holders (1)                                  140,168         $               43.33                      6,000

Equity compensation plans not approved by
   security holders                                           --                            --
                                           ----------------------        ----------------------       ----------------------

TOTAL                                                    140,168         $               43.33                      6,000
                                           ======================        ======================       ======================
</TABLE>


---------------------------

(1)   Relates to the 1997 Share Incentive Plan and 2002 Share Incentive Plan,
      which are described in Item II above.

STOCKHOLDERS' AGREEMENT

         The Company, Parent and certain stockholders of Parent are parties to
the Stockholders' Agreement, setting forth among other things, the manner in
which directors of Parent are to be selected. See "Directors and Executive
Officers of the Registrant-- Election of Directors." Pursuant to the
Stockholder's 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
Parent's directors. The Stockholders' Agreement also sets forth certain
restrictions on the transfer of shares of Parent's 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 Parent's common stock to third parties and requires existing
stockholders to participate ratably in certain sales of Parent's common stock to
third parties. Subject to the terms of all applicable debt agreements of Parent
and its subsidiaries, the Stockholders' Agreement provides that Parent 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
Parent 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 Parent and its
subsidiaries, Parent also has the right to repurchase the shares of its 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. Parent became a party to the Stockholders'
Agreement concurrently with the closing of the offering of the notes.

         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 Parent.

VOTING AGREEMENTS

         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. In addition, in connection
with the transfer of 32,115 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 Parent's
stockholders.

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         On March 24, 1998, David I. Brunson, former President, Chief Financial
Officer and Treasurer 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. On March 31, 2002, Mr. Brunson issued a new note to the Company in the
amount of $60,000 replacing the previous note. The note bears interest at 5.0%
per annum and has a final maturity on March 31, 2008.


                                       48
<PAGE>
         On April 26, 1988 and on December 15, 1988, Mr. Thomas F. Helms, Jr.,
Chief Executive Officer of the Company, borrowed $75,000 and $45,000,
respectively, in connection with the purchase of a portion of his partnership
interest in NTC 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 which owns all of the non-voting capital stock, issued a
promissory note to the Company in the aggregate principal amount of $886,686,
representing the principal on the notes discussed above, plus an additional loan
by the Company in the amount of $766,686 to cover certain income tax liabilities
of Helms Management Corp. resulting from the Company's conversion from a limited
liability company to a "C" corporation in connection with the Acquisition. Upon
execution of the $886,686 note, the prior notes issued by Mr. Helms were
cancelled. On March 31, 2002, Helms Management Corp. issued a promissory note to
the Company in the amount of $958,499 and the prior note was cancelled. The
current note bears interest at the rate of 5.0% per annum and has a final
maturity on March 31, 2008. 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 LLC conversion. 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. On March 31, 2002, Mr.
Helms issued a promissory note to the Company in the principal amount of
$475,071 representing the principal amounts on the notes discussed above, plus
accrued interest of $25,071 and the prior notes were cancelled. The current note
bears interest at the rate of 5.0% per annum and has a final maturity on March
31, 2008.

         Kent Helms and Thomas F. Helms, III, sons of Thomas F. Helms, Jr., are
employed by the Company. During 2004, Kent Helms, Interim Business Team Leader,
received aggregate compensation of $84,419 and Thomas F. Helms, III, Business
Team Leader, received aggregate compensation of $126,864 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
2005. For 2002, Mr. Africk received $75,000 pursuant to the terms of the Africk
Consulting Agreement and an additional $50,000 for consulting services that
exceeded the extent of services contemplated by the Africk Consulting Agreement.
For 2004, Mr. Africk's compensation under his agreement was $100,000 and he
received an additional $52,000 for consulting services relating to the sales and
distribution of the Company's products. For 2005, Mr. Africk's consulting fee is
$75,000.

         On November 8, 2002, the Company also entered into an agreement with
Marketing Solutions USA, a company controlled by Mr. Africk, under which
Marketing Solutions USA represents the Company with a specific customer, and
receives a percentage commission. The agreement commenced January 1, 2003 and
terminated on December 31, 2003. In 2004, a similar agreement was entered into
for which Mr. Africk received payment of $51,935. The Company intends to enter
into a similar contract with Mr. Africk for 2005.

         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 therefor, the Company
issued to PJSC, as a one time retainer fee, warrants to purchase 3,000 shares of
Common Stock at an exercise price of $40.00 per share, and agreed to reimburse
PJSC for out-of-pocket expenses incurred in connection with its provision of
services.

         On November 1, 2002, the Company engaged Peter J. Solomon Company to
provide support in the form of financial analysis and modeling, and strategic
advice with respect to the proposed purchase of assets of the Star Scientific,
Inc. The term of the contract expired on March 31, 2003, and the Company paid
Peter J. Solomon Company a total of $250,000.

         On September 18, 2003, the Company engaged Peter J. Solomon Company to
provide support in the form of financial analysis and modeling, and strategic
advice with respect to the refinancing transactions described herein. The term
of the contract expired, and the Company paid Peter J. Solomon Securities
Company Limited $500,000 in 2003 and an additional $1,000,000 upon the
successful completion of the refinancing transactions in February 2004.

         On January 20, 2005, Parent and the Company (collectively, the
"Companies") engaged the management consulting firm of Alvarez & Marsal ("A&M")
to assist in the development of an assessment of the Companies' operations and
to identify the potential for performance improvement and cost reduction
opportunities. In connection with such engagement, the Companies and A&M entered
into an Engagement Letter Agreement, dated January 19, 2005 (the "Letter


                                       49
<PAGE>
Agreement"). Pursuant to the Letter Agreement, A&M agreed to make available to
the Companies financial services of Douglas P. Rosefsky, its managing director,
which services, upon the Companies' request, will include serving as Chief
Financial Officer of the Companies, as well as the services of an additional A&M
professional as an assistant to Mr. Rosefsky, and, upon the Companies' request,
as Director-Finance of the Companies (the "Additional Professional").

         Under the terms of the Letter Agreement, the Companies will pay
$100,000 per month to A&M for the services of Mr. Rosefsky, and $50,000 per
month for the services of the Additional Professional. The Companies will also
compensate A&M for certain reasonable out-of-pocket expenses. The Letter
Agreement may be terminated by either party without cause upon thirty days'
prior written notice during the first ninety days after the date of the Letter
Agreement, and upon fifteen days' prior written notice thereafter, provided that
after thirty days from the date of the Letter Agreement, the Companies may
terminate the engagement of the Additional Professional by giving fifteen days'
prior written notice to A&M. The Companies agreed to indemnify Mr. Rosefsky and
the Additional Professional to the same extent as the most favorable
indemnification it extends to any of its officers or directors.

         In addition, on January 19, 2005, the Companies and A&M entered into
the Indemnification Agreement (the "Indemnification Agreement"), pursuant to
which the Companies agreed to indemnify A&M and its agents against losses in
connection with A&M's performance under the Letter Agreement.

ITEM 14.      PRINCIPAL ACCOUNTANT FEES AND SERVICES

         The following summarizes the fees paid to the Company's principal
accountant, PricewaterhouseCoopers for professional services to the Parent and
the Company in 2004 and the Company in 2003:

1) AUDIT FEES

The following fees were paid for professional services rendered by the principal
accountant relating to the audit of annual financial statements and required
quarterly and annual filings:

<TABLE>
<CAPTION>


                             2003                                                             2004
-------------------------------------------------------------- -------------------------------------------------------------------
<S>                                                            <C>
$                                                    605,653   $                                                         309,722

2) AUDIT-RELATED FEES

The following fees were paid for professional services rendered by the principal accountant relating to assurance
and related services of the post-retirement benefit plan (2003) and due diligence performed on a potential
acquisition (2003):



                             2003                                                             2004
-------------------------------------------------------------- -------------------------------------------------------------------

$                                                    122,013   $                                                          48,600

3) TAX FEES

The following fees were paid for professional services rendered by the principal accountant relating to tax
preparation, planning and compliance services:



                             2003                                                             2004
-------------------------------------------------------------- -------------------------------------------------------------------

$                                                     42,200   $                                                         150,982

4) ALL OTHER FEES

The following fees were paid for professional services rendered by the principal accountant relating to logistics
consulting for a distribution systems modeling project:



                                       50
<PAGE>
                             2003                                                             2004
-------------------------------------------------------------- -------------------------------------------------------------------

$                                                          0   $                                                         164,850

</TABLE>


























                                       51
<PAGE>
5) AUDIT COMMITTEE DISCLOSURES

The Audit Committee has established policies and procedures related to the
pre-approval of all audit and non-audit services and are contained within the
Audit Committee Policies & Procedures for Principal Accountant Fees & Services.

The Policies & Procedures require the Audit Committee members, or one delegated
independent director, to approve all audit and non-audit services performed by
the principal accountants in advance of the activity by no less than thirty days
prior to the start of the engagement.

Pre-approval requirements can be waived under the de minimis exception according
to the following standards:

      1)    All non-audit services do not aggregate more than five percent (5%)
            of total revenues paid by the Company to its outside principal
            accountants in the fiscal year when services are provided,

      2)    Were not recognized as non-audit services at the time of the
            engagement, and

      3)    Are promptly brought to the attention of the Audit Committee or
            designated member of such, and approved prior to the completion of
            the audit.

The Policies & Procedures also require that the principal accountants prepare
and submit an Annual Audit Plan outlining the audit strategy, scope and a
schedule of fees for each audit service performed.

All audit and non-audit services were approved by the Audit Committee, in
accordance with the Policies & Procedures described above, for fiscal years 2003
and 2004.






















                                       52
<PAGE>
                                     PART IV

ITEM 15.      EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

         (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:


<TABLE>
<CAPTION>
                                                                                                                    PAGE
                                                                                                                  ---------
<S>                                                                                                              <C>
Report of Independent Registered Public Accounting Firm                                                               F-1


Consolidated Balance Sheets as of December 31, 2004 and 2003                                                          F-2


Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2004,
   2003, and 2002.                                                                                                    F-3


Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2004, 2003, 2002              F-4


Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003, and 2002                           F-5


Consolidated Statements of Changes in Stockholders' Deficit for the years ended December 31, 2004, 2003, and
   2002.                                                                                                              F-6


Notes to Consolidated Financial Statements                                                                            F-7


      (a)(2) Financial Statement Schedules:

      The required information is given in the consolidated financial statements or notes thereto.

      (a)(3) Exhibits

</TABLE>
















                                       53
<PAGE>
EXHIBIT
NUMBER       DESCRIPTION
---------    -------------------------------------------------------------------

2.1          Asset Purchase Agreement, dated as of February 18, 2003, among
             North Atlantic Trading Company, Inc., Star Scientific, Inc. and
             Star Tobacco, Inc. (incorporated herein by reference to Exhibit 2.1
             to the Registrant's Current Report on Form 8-K filed on February
             19, 2003).

2.2          Termination and Release Agreement, dated as of July 15, 2003, among
             North Atlantic Trading Company, Inc., Star Scientific, Inc. and
             Star Tobacco, Inc. (incorporated herein by reference to Exhibit 2.1
             to the Registrant's Current Report on Form 8-K filed on July 17,
             2003).

2.3          Release, dated July 15, 2003, executed by North Atlantic Trading
             Company, Inc. (incorporated herein by reference to Exhibit 2.2 to
             the Registrant's Current Report on Form 8-K filed on July 17,
             2003).

2.4          Release, dated July 15, 2003, executed by Star Scientific, Inc. and
             Star Tobacco, Inc. (incorporated herein by reference to Exhibit 2.3
             to the Registrant's Current Report on Form 8-K filed on July 17,
             2003).

2.5          Stock Purchase Agreement, dated as of November 17, 2003, among
             North Atlantic Trading Company, Inc., Bobby Stoker, Ronald Stoker,
             Judith Stoker Fisher, BSF Partners, L.P., JFS Partners, L.P., and
             RBJ Machinery Co., LLC (incorporated herein by reference to Exhibit
             2.1 to the Registrant's Current Report on Form 8-K filed on
             November 24, 2003).

2.6          Agreement and Plan of Merger, dated as of February 9, 2004, among
             North Atlantic Trading Company, Inc., North Atlantic Holding
             Company, Inc., and NATC Merger Sub, Inc. (incorporated herein by
             reference to Exhibit 2.1 to the Registrant's Current Report on Form
             8-K filed on February 11, 2004).

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) the Registrant's Annual Report on Form
             10-K for the fiscal year ended December 31, 1997).

3.1(b)       Certificate of Correction to the Restated Certificate of
             Incorporation of North Atlantic Trading Company, Inc., dated as of
             June 28, 2002 (incorporated herein by reference to Exhibit 3.1(b)
             the Registrant's Annual Report on Form 10-K for the fiscal year
             ended December 31, 2002).

3.1(c)       Certificate of Amendment to the Certificate of Incorporation of
             North Atlantic Trading Company, Inc., dated July 30, 2002
             (incorporated herein by reference to Exhibit 3.1 to the
             Registrant's Current Report on Form 8-K filed on July 31, 2002).



                                       54
<PAGE>
EXHIBIT
NUMBER       DESCRIPTION
---------    -------------------------------------------------------------------

3.1(d)       Certificate of Incorporation of North Atlantic Operating Company,
             Inc., filed June 9 1997 (incorporated herein by reference to
             Exhibit 3.1(b)(i) to Amendment No. 1 to Registration Statement
             (Reg. No. 333-31931) on Form S-4 filed with the Commission on
             September 3, 1997).

3.1(e)       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(f)       Second Amended and 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(g)       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(h)       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(i)       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 July
             23, 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 July 23, 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).




                                       55
<PAGE>
EXHIBIT
NUMBER       DESCRIPTION
---------    -------------------------------------------------------------------

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, 1999).

4.1          Warrant to Purchase Common Stock, granted in favor of Guggenheim
             Investment Management, LLC by North Atlantic Trading Company, Inc.,
             dated September 30, 2002 (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, 2002).

4.2          Warrant to Purchase Common Stock, granted in favor of Peter J.
             Solomon Company Limited by North Atlantic Trading Company, Inc.,
             dated as of June 4, 2001 (incorporated herein by reference to
             Exhibit 4.4 to the Registrant's Annual Report on Form 10-K for the
             fiscal year ended December 31, 2002).

4.3          Class B Term Note dated November 17, 2003, issued by North Atlantic
             Trading Company, Inc. in favor of Upper Columbia Capital Company,
             LLC ("Upper Columbia") in the principal amount of Twenty Three
             Million Dollars ($23,000,000.00) (incorporated herein by reference
             to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed
             on November 24, 2003).

4.4          Class B Term Note dated July 31, 2003 (amended and restated as of
             November 17, 2003), issued by North Atlantic Trading Company, Inc.,
             in favor of 1888 Fund, Ltd. in the principal amount of Five Million
             Five Hundred Thousand Dollars ($5,500,000.00) (incorporated herein
             by reference to Exhibit 4.2 to the Registrant's Current Report on
             Form 8-K filed on November 24, 2003).

4.5          Class B Term Note dated July 31, 2003 (amended and restated as of
             November 17, 2003), issued by North Atlantic Trading Company, Inc.,
             in favor of MAGMA CDO, Ltd. in the principal amount of Five Million
             Five Hundred Thousand Dollars ($5,500,000.00) (incorporated herein
             by reference to Exhibit 4.3 to the Registrant's Current Report on
             Form 8-K filed on November 24, 2003).



                                       56
<PAGE>
EXHIBIT
NUMBER       DESCRIPTION
---------    -------------------------------------------------------------------

4.6          Class B Term Note dated July 31, 2003 (amended and restated as of
             November 17, 2003), issued by North Atlantic Trading Company, Inc.,
             in favor of Bingham CDO, L.P. in the principal amount of Five
             Million Dollars ($5,000,000.00) (incorporated herein by reference
             to Exhibit 4.4 to the Registrant's Current Report on Form 8-K filed
             on November 24, 2003).

4.7          Class B Term Note dated July 31, 2003 (amended and restated as of
             November 17, 2003), issued by North Atlantic Trading Company, Inc.,
             in favor of Stellar Funding, Ltd. in the principal amount of Three
             Million Dollars ($3,000,000.00) (incorporated herein by reference
             to Exhibit 4.5 to the Registrant's Current Report on Form 8-K filed
             on November 24, 2003).

4.8          Indenture, dated as of February 17, 2004, among North Atlantic
             Trading Company, Inc., the Guarantors listed on the signature pages
             thereto and Wells Fargo Bank Minnesota, National Association, a
             national banking association, as Trustee (incorporated herein by
             reference to Exhibit 4.10 to the Registrant's Annual Report on Form
             10-K for the fiscal year ended December 31, 2003).

4.9          Registration Rights Agreement, dated as of February 17, 2004, by
             and among North Atlantic Trading Company, Inc., the Guarantors
             listed on the signature pages thereto, Citigroup Global Markets
             Inc. and RBC Capital Markets Corporation (incorporated herein by
             reference to Exhibit 4.11 to the Registrant's Annual Report on Form
             10-K for the fiscal year ended December 31, 2003).

9.1          Amended and Restated Exchange and Stockholders' Agreement, dated as
             of February 9, 2004, by and among North Atlantic Holding Company,
             Inc., North Atlantic Trading Company, Inc. and those stockholders
             listed therein (incorporated herein by reference to Exhibit 9.1 to
             the Registrant's Annual Report on Form 10-K for the fiscal year
             ended December 31, 2003).

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 17, 1997).



                                       57
<PAGE>
EXHIBIT
NUMBER       DESCRIPTION
---------    -------------------------------------------------------------------

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 17, 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 17, 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 17, 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 10.16 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 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).

10.10++      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).



                                       58
<PAGE>
EXHIBIT
NUMBER       DESCRIPTION
---------    -------------------------------------------------------------------

10.11++      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).

10.12++      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).

10.13++      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).

10.14++      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).

10.15++      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).

10.16++      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).

10.17+       Amendment, dated October 22, 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).

10.18        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).

10.19++      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).



                                       59
<PAGE>
EXHIBIT
NUMBER       DESCRIPTION
---------    -------------------------------------------------------------------

10.20++      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).

10.21        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).

10.22++      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, 1999).

10.23++      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,
             1999).

10.24++      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,
             1999).

10.25        Amended and Restated Loan Agreement, dated as of February 17, 2004,
             by and among Bank One, NA, LaSalle Bank National Association, North
             Atlantic Trading Company, Inc., North Atlantic Holding Company,
             Inc., the subsidiaries of North Atlantic Trading Company, Inc.
             named therein and the lenders party thereto (incorporated herein by
             reference to Exhibit 10.26 to the Registrant's Annual Report on
             Form 10-K for the fiscal year ended December 31, 2003).

10.26        Amended and Restated Security Agreement, dated as of February 17,
             2004, among North Atlantic Trading Company, Inc., National Tobacco
             Company, L.P., North Atlantic Operating Company, Inc., National
             Tobacco Finance Corporation, Stoker, Inc., RBJ Sales, Inc., Fred
             Stoker & Sons, Inc., North Atlantic Cigarette Company, Inc. and
             Bank One, N.A., as agent on behalf of itself and other banks
             (incorporated herein by reference to Exhibit 10.27 to the
             Registrant's Annual Report on Form 10-K for the fiscal year ended
             December 31, 2003).

10.27        Amended and Restated Guaranty Agreement, dated as of February 17,
             2004, among National Tobacco Company, L.P., North Atlantic
             Operating Company, Inc., National Tobacco Finance Corporation,
             Stoker, Inc., RBJ Sales, Inc., Fred Stoker & Sons, Inc., North
             Atlantic Cigarette Company, Inc. and Bank One, N.A., as agent on
             behalf of itself and other banks (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, 2003).



                                       60
<PAGE>
EXHIBIT
NUMBER       DESCRIPTION
---------    -------------------------------------------------------------------

10.28        Amended and Restated Pledge Agreement, dated as of February 17,
             2004, among and North Atlantic Trading Company, Inc., National
             Tobacco Company, L.P., North Atlantic Operating Company, Inc.,
             National Tobacco Finance Corporation, Stoker, Inc., RBJ Sales,
             Inc., Fred Stoker & Sons, Inc., North Atlantic Cigarette Company,
             Inc. and Bank One, N.A., as agent on behalf of itself and other
             banks (incorporated herein by reference to Exhibit 10.29 to the
             Registrant's Annual Report on Form 10-K for the fiscal year ended
             December 31, 2003).

10.29        2005 A Amendment to the Amended and Restated Loan Agreement, made
             and entered into as of February 17, 2004, by and among Bank One, NA
             as the Agent Bank, Bank One and LaSalle Bank, National Association,
             the Company, certain of its subsidiaries and North Atlantic Holding
             Company, Inc. (incorporated herein by reference to Exhibit 99.2 to
             the Registrant's Current Report on Form 8-K filed on January 21,
             2005).

10.30++      Offer of Employment, dated March 28, 2002, between the Company and
             Robert A. Milliken, Jr. (incorporated herein by reference to
             Exhibit 1 to the Registrant's Quarterly Report on 10-Q for the
             fiscal quarter ended March 31, 2002).

10.31        Promissory Note, dated March 31, 2002, issued by David I. Brunson
             in favor of North Atlantic Trading Company, Inc. (incorporated
             herein by reference to Exhibit 10.1 to the Registrant's Quarterly
             Report on 10-Q for the fiscal quarter ended June 30, 2002).

10.32        Promissory Note, dated March 31, 2002, issued by Chris Kounnas in
             favor of North Atlantic Trading Company, Inc. (incorporated herein
             by reference to Exhibit 10.2 to the Registrant's Quarterly Report
             on 10-Q for the fiscal quarter ended June 30, 2002).

10.33        Secured Promissory Note, dated March 31, 2002, issued by Helms
             Management Corp. in favor of North Atlantic Trading Company, Inc.
             (incorporated herein by reference to Exhibit 10.3 to the
             Registrant's Quarterly Report on 10-Q for the fiscal quarter ended
             June 30, 2002).

10.34        Secured Promissory Note, dated March 31, 2002, issued by Thomas F.
             Helms, Jr. in favor of North Atlantic Trading Company, Inc.
             (incorporated herein by reference to Exhibit 10.4 to the
             Registrant's Quarterly Report on 10-Q for the fiscal quarter ended
             June 30, 2002).

10.35        Pledge and Security Agreement, dated as of March 31, 2002, between
             Thomas F. Helms, Jr., Helms Management Corp. and North Atlantic
             Trading Company, Inc. (incorporated herein by reference to Exhibit
             10.5 to the Registrant's Quarterly Report on 10-Q for the fiscal
             quarter ended June 30, 2002).

10.36++      Amendment, dated November 25, 2002, to the 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 10.38 to the Registrant's Annual
             Report on Form 10-K for the fiscal year ended December 31, 2002).



                                       61
<PAGE>
EXHIBIT
NUMBER       DESCRIPTION
---------    -------------------------------------------------------------------

10.37++      Employment Agreement dated as of November 21, 2002, between North
             Atlantic Trading Company, Inc. and James W. Dobbins (incorporated
             herein by reference to Exhibit 10.39 to the Registrant's Annual
             Report on Form 10-K for the fiscal year ended December 31, 2002).

10.38        Transfer Agreement, dated as of December 30, 2002, by and among
             Arnold Sheiffer, The Cleveland Clinic Foundation, North Atlantic
             Trading Company, Inc., and Thomas F. Helms, Jr. (incorporated
             herein by reference to Exhibit 10.40 to the Registrant's Annual
             Report on Form 10-K for the fiscal year ended December 31, 2002).

10.39        Transfer Agreement, dated as of December 30, 2002, by and among
             Arnold Sheiffer, Robert Maurice Grunder Memorial Fund, North
             Atlantic Trading Company, Inc., and Thomas F. Helms, Jr.
             (incorporated herein by reference to Exhibit 10.41 to the
             Registrant's Annual Report on Form 10-K for the fiscal year ended
             December 31, 2002).

10.40++      2002 Share Incentive Plan (incorporated herein by reference to
             Exhibit 10.42 to the Registrant's Annual Report on Form 10-K for
             the fiscal year ended December 31, 2002).

10.41++      Letter Agreement, dated November 8, 2002, between North Atlantic
             Trading Company, Inc. and Marketing Solutions USA (incorporated
             herein by reference to Exhibit 10.43 to the Registrant's Annual
             Report on Form 10-K for the fiscal year ended December 31, 2002).

10.42++      Letter Agreement, dated September 30, 2002, between North Atlantic
             Trading Company, Inc. and Jack Africk (incorporated herein by
             reference to Exhibit 10.44 to the Registrant's Annual Report on
             Form 10-K for the fiscal year ended December 31, 2002).

10.43        2003A Amendment to Loan Documents, dated as of July 31, 2003, by
             and among North Atlantic Trading Company, Inc., National Tobacco
             Company, L.P., North Atlantic Operating Company, Inc., National
             Tobacco Finance Corporation, Bank One, NA, successor to Bank One,
             Kentucky N.A., as agent bank and the various lending institutions
             named therein, Guggenheim Investment Management, LLC, as agent for
             the Class B Lenders named therein (incorporated herein by reference
             to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
             for the fiscal quarter ended June 30, 2003).



                                       62
<PAGE>
EXHIBIT
NUMBER       DESCRIPTION
---------    -------------------------------------------------------------------

10.44        2003B Amendment to Loan Documents dated as of November 17, 2003,
             among North Atlantic Trading Company, Inc., National Tobacco
             Company, L.P., North Atlantic Operating Company, Inc., National
             Tobacco Finance Corporation, Stoker, Inc., RBJ Sales, Inc. and Fred
             Stoker & Sons, Inc., the Banks defined therein, Bank One, NA, as
             agent for the Banks ("Agent Bank"), the Class B Lenders as defined
             therein and Guggenheim Investment Management, LLC, as agent for
             Class B Lenders ("Class B Loan Agent") (incorporated herein by
             reference to Exhibit 10.1 to the Registrant's Current Report on
             Form 8-K filed on November 24, 2003).

10.45        Amended and Restated Subordination Agreement dated as of November
             17, 2003, by and among North Atlantic Trading Company, Inc.,
             National Tobacco Company, L.P., North Atlantic Operating Company,
             Inc., National Tobacco Finance Corporation, Stoker, Inc., RBJ
             Sales, Inc. and Fred Stoker & Sons, Inc., the Banks defined
             therein, Bank One, NA, as agent for the Banks ("Agent Bank"), the
             Class B Lenders as defined therein and Guggenheim Investment
             Management, LLC, as agent for Class B Lenders ("Class B Loan
             Agent") (incorporated herein by reference to Exhibit 10.2 to the
             Registrant's Current Report on Form 8-K filed on November 24,
             2003).

10.46        Second Amendment to Mortgage, Security Agreement, Assignment of
             Leases, Rents and Profits, Financing Statement and Fixture Filing,
             dated as of November 17, 2003, among Bank One, NA (as "Agent Bank"
             and "Mortgagee" for the benefit of the Banks as defined in the
             2003B Amendment to Loan Agreement) and National Tobacco Company,
             L.P. (the "Mortgagor") (incorporated herein by reference to Exhibit
             10.3 to the Registrant's Current Report on Form 8-K filed on
             November 24, 2003).

10.47        Assignment of Security Interest in the United States Trademarks,
             dated November 17, 2003, issued by Stoker, Inc. in favor of Bank
             One, NA (incorporated herein by reference to Exhibit 10.4 to the
             Registrant's Current Report on Form 8-K filed on November 24,
             2003).

10.48        Assignment of Security Interest in the United States Trademarks,
             dated November 17, 2003, issued by Fred Stoker & Sons, Inc. in
             favor of Bank One, NA (incorporated herein by reference to Exhibit
             10.5 to the Registrant's Current Report on Form 8-K filed on
             November 24, 2003).

10.49        2003C Amendment to Loan Documents dated as of December 23, 2003, by
             and among the Banks as defined therein, Bank One, NA, as agent bank
             on behalf of the Banks, the Class B Lenders as defined therein,
             Guggenheim Investment Management, LLC, as agent on behalf of the
             Class B Lenders, North Atlantic Trading Company, Inc. and the
             Subsidiaries as defined therein (incorporated herein by reference
             to Exhibit 10.1 to the Registrant's Current Report on Form 8-K
             filed on December 24, 2003).

10.50++      Employment Agreement, dated December 1, 2003, between Lawrence S.
             Wexler and North Atlantic Cigarette Company, Inc. (incorporated
             herein by reference to Exhibit 10.52 to the Registrant's Annual
             Report on Form 10-K for the fiscal year ended December 31, 2003).



                                       63
<PAGE>
EXHIBIT
NUMBER       DESCRIPTION
---------    -------------------------------------------------------------------

10.51        Assignment and Assumption Agreement, dated as of February 9, 2004,
             between North Atlantic Trading Company, Inc. and North Atlantic
             Holding Company, Inc. (incorporated herein by reference to Exhibit
             10.53 to the Registrant's Annual Report on Form 10-K for the fiscal
             year ended December 31, 2003).

10.52++      Letter Agreement, dated as of January 19, 2005, between Alvarez &
             Marsal, LLC, North Atlantic Trading Company, Inc. and North
             Atlantic Holding Company, Inc. (incorporated herein by reference to
             Exhibit 10.52 to the Registrant's Annual Report on Form 10-K for
             the fiscal year ended December 31, 2004 filed with the Securities
             and Exchange Commision on March 31, 2005).

10.53++      Letter Agreement, dated as of October 3, 2003, between Jack Africk
             and North Atlantic Trading Company, Inc. (extending Consulting
             Agreement) (incorporated herein by reference to Exhibit 10.53 to
             the Registrant's Annual Report on Form 10-K for the fiscal year
             ended December 31, 2004 filed with the Securities and Exchange
             Commission on March 31, 2005).

10.54++      Letter Agreement, dated as of October 12, 2004, between Jack Africk
             and North Atlantic Trading Company, Inc. (extending and amending
             Consulting Agreement) (incorporated herein by reference to Exhibit
             10.54 to the Registrant's Annual Report on Form 10-K for the fiscal
             year ended December 31, 2004 filed with the Securities and Exchange
             Commission on March 31, 2005).

10.55        2005B Amendment to the Amended and Restated Loan Agreement dated
             March 30, 2005, by and among JP Morgan Chase Bank, N.A. ("Morgan"),
             as successor to Bank One, NA, as Agent Bank, Morgan and LaSalle
             Bank, National Association, the Company, certain of its
             subsidiaries and North Atlantic Holding Company, Inc. (incorporated
             herein by reference to Exhibit 10.55 to the Registrant's Annual
             Report on Form 10-K for the fiscal year ended December 31, 2004
             filed with the Securities and Exchange Commission on March 31,
             2005).

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, 2004 filed with
             the Securities and Exchange Commission on March 31, 2005).

31.1*        Certification by the Chief Executive Officer


31.2*        Certification by the Chief Financial Officer


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

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


*     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.



                                       64
<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: August 19, 2005



                                        NORTH ATLANTIC TRADING COMPANY, INC.

                                        By: /s/ Douglas P. Rosefsky
                                            -----------------------------------
                                            DOUGLAS P. ROSEFSKY
                                            CHIEF EXECUTIVE OFFICER
























                                       65
<PAGE>
                                    CONTENTS

<TABLE>
<CAPTION>
                                                                                                                     PAGES
                                                                                                                     -----
<S>                                                                                                                <C>
Report of Independent Registered Public Accounting Firm                                                                F-1


Financial Statements:


      Consolidated Balance Sheets as of December 31, 2004 and 2003                                                     F-2


      Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31,
         2004, 2003 and 2002                                                                                           F-3


      Consolidated Statements of Comprehensive Income (Loss) December 31, 2004, 2003 and 2002                          F-4


      Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002                       F-5


      Consolidated Statements of Changes in Stockholders' Deficit for the years ended December 31, 2004, 2003 and
         2002                                                                                                          F-6


      Notes to Consolidated Financial Statements                                                                       F-7

</TABLE>




<PAGE>
             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


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, comprehensive income (loss), cash flows,
and changes in stockholders' deficit, after the restatement described in Note 1,
present fairly in all material respects, the financial position of North
Atlantic Trading Company, Inc. and its subsidiaries at December 31, 2004 and
2003, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004 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 the
standards of the Public Company Accounting Oversight Board (United States).
Those standards 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.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, it is probable that, absent obtaining additional capital
investment, a waiver or a refinancing, the Company will fail to meet a financial
covenant requirement for its revolving debt agreement due to its financial
performance. Not meeting this requirement would permit the lenders to demand
immediate repayment in full, which would then permit holders of the Company's
New Senior Notes to also demand immediate repayment. This matter raises
substantial doubt about the Company's ability to continue as a going concern.
Management's plans as to these matters are also described in the notes to the
financial statements. The financial statements do not include any adjustments
that might result from the outcome of the uncertainty.

As described in Note 1, the Company has restated its previously issued 2004
consolidated financial statements.


/s/ PricewaterhouseCoopers LLP

Louisville, Kentucky
March 31, 2005, except for the matter disclosed in Note 1, as to which the date
is August 11, 2005



                                      F-1
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
(dollars in thousands except share data)


<TABLE>
<CAPTION>
                                                                                                    2004
                                                                                                AS RESTATED,
                                                                                                   NOTE 1         2003
                                                                                               ------------- --------------
<S>                                                                                            <C>           <C>
                                            ASSETS


Current assets:
      Cash                                                                                     $      2,346  $        304
      Accounts receivable, net of allowances of $284 and $367 in 2004 and 2003, respectively          7,839        10,384
      Inventories                                                                                    37,959        42,257
      Income taxes receivable                                                                            --           910
      Other current assets                                                                            5,861         3,594
                                                                                               ------------- --------------
            Total current assets                                                                     54,005        57,449
      Property, plant and equipment, net                                                             10,771         8,310
      Deferred income taxes                                                                              --        22,549
      Deferred financing costs, net                                                                   9,407         5,163
      Goodwill                                                                                      128,697       128,659
      Other intangible assets, net                                                                   10,293        10,851
      Other assets                                                                                   15,526        10,663
                                                                                               ------------- --------------
            Total assets                                                                       $    228,699  $    243,644
                                                                                               ============= ==============

                             LIABILITIES AND STOCKHOLDERS' DEFICIT


Current liabilities:
      Accounts payable                                                                         $      7,005  $      5,275
      Accrued expenses                                                                                4,642         6,039
      Accrued interest expense                                                                        6,274           757
      Deferred income taxes                                                                           4,801         4,654
      Revolving credit facility                                                                      14,500         6,300
                                                                                               ------------- --------------
            Total current liabilities                                                                37,222        23,025
Notes payable and long-term debt                                                                    200,000       185,686
Deferred income taxes                                                                                 5,005         1,141
Postretirement benefits                                                                               6,061         9,333
Pension benefits and other long-term liabilities                                                      4,013         5,946
                                                                                               ------------- --------------
            Total liabilities                                                                       252,301       225,131
                                                                                               ------------- --------------

Commitments and contingencies

Preferred stock, mandatory redemption value of $0 and $65,080 in 2004 and 2003, respectively,
   issued and outstanding shares, 2,941,513.08 in 2003                                                   --        65,080
                                                                                               ------------- --------------

Stockholders' deficit:

      Common stock, voting, $.01 par value; 2004; authorized, issued and outstanding shares,
         10; $01 par value; 2003; authorized shares, 750,000; issued and outstanding shares,
         528,241                                                                                         --             5

      Common stock, nonvoting, $01 par value; authorized shares, 750,000; issued and
         outstanding shares, -0-                                                                         --            --

Additional paid-in capital                                                                           64,095         9,663
Advance to parent                                                                                    (1,961)           --
Loans to stockholders for stock purchases                                                               (99)         (168)
Accumulated other comprehensive loss                                                                 (1,351)       (1,229)
Accumulated deficit                                                                                 (84,286)      (54,838)
                                                                                               ------------- --------------
            Total stockholders' deficit                                                             (23,602)      (46,567)
                                                                                               ------------- --------------
            Total liabilities and stockholders' deficit                                        $    228,699  $    243,644
                                                                                               ============= ==============
</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, 2004, 2003 and 2002
(dollars in thousands except share data)


<TABLE>
<CAPTION>
                                                                                      2004
                                                                                  AS RESTATED,
                                                                                     NOTE 1         2003         2002
                                                                                  ------------ ------------- -------------
<S>                                                                              <C>          <C>           <C>
Net sales                                                                         $   115,320  $    101,593  $     94,425
Cost of Sales                                                                          58,617        48,616        40,973
                                                                                  ------------ ------------- -------------
      Gross profit                                                                     56,703        52,977        53,452
Selling, general and administrative expenses                                           37,031        32,589        24,065
Amortization expense                                                                      462            67            --
                                                                                  ------------ ------------- -------------
            Operating income                                                           19,210        20,321        29,387
Interest expense and financing costs                                                   24,196        19,122        18,744
Other expense (income)                                                                 (4,361)       11,129         1,944
                                                                                  ------------ ------------- -------------
      Income (loss) before income taxes                                                  (625)       (9,930)        8,699
Income tax expense (benefit)                                                           27,210        (3,689)        3,214
                                                                                  ------------ ------------- -------------
      Net income (loss)                                                               (27,835)       (6,241)        5,485
Preferred stock dividends                                                              (1,613)       (7,275)       (6,976)
Net gain on restructuring of preferred stock                                               --             --        5,395
                                                                                  ------------ ------------- -------------
      Net income (loss) applicable to common shares                               $   (29,448) $    (13,516) $      3,904
                                                                                  ============ ============= =============


                                                                                      2004
                                                                                  AS RESTATED,
                                                                                     NOTE 1         2003         2002
                                                                                  ------------ ------------- -------------

Basic earnings per common share:
      Net income (loss)                                                           $   (478.59) $     (11.82) $      10.38
      Preferred stock dividends                                                        (27.73)       (13.77)       (13.20)
      Net gain on restructuring of preferred stock                                         --             --        10.21
                                                                                  ------------ ------------- -------------
      Net income (loss) applicable to common shares                               $   (506.32) $     (25.59) $       7.39
                                                                                  ============ ============= =============

Diluted earnings per common share:
      Net income (loss)                                                           $   (478.59) $     (11.82) $       8.25
      Preferred stock dividends                                                        (27.73)       (13.77)       (10.49)
      Net gain on restructuring of preferred stock                                         --             --         8.11
                                                                                  ------------ ------------- -------------
      Net income (loss) applicable to common shares                               $   (506.32) $     (25.59) $       5.87
                                                                                  ============ ============= =============

Weighted average common shares outstanding:
      Basic                                                                            58,161       528,241       528,241
      Diluted                                                                          58,161       528,241       664,939

</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 COMPREHENSIVE INCOME (LOSS)
for the years ended December 31, 2004, 2003 and 2002
(dollars in thousands except share data)

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


<TABLE>
<CAPTION>
                                                                                      2004
                                                                                  AS RESTATED,
                                                                                     NOTE 1         2003         2002
                                                                                  ------------ ------------- -------------
<S>                                                                              <C>          <C>           <C>
Net Income (loss)                                                                 $   (27,835) $   (6,241)   $     5,485

Other comprehensive income, net of tax benefit:
Minimum pension liability, net of tax                                                    (122)       (104)          (909)
                                                                                  ------------ ------------- -------------
Comprehensive income (loss)                                                       $   (27,957) $   (6,345)   $     4,576
                                                                                  ============ ============= =============
</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 CASH FLOWS
for the years ended December 31, 2004, 2003 and 2002
(dollars in thousands)


<TABLE>
<CAPTION>
                                                                                      2004
                                                                                  AS RESTATED,
                                                                                     NOTE 1         2003         2002
                                                                                  ------------ ------------- -------------
<S>                                                                              <C>          <C>           <C>

Cash flows from operating activities:
      Net income (loss)                                                           $   (27,835) $    (6,241)  $     5,485
      Adjustments to reconcile net income (loss) to net cash provided by (used
         in) operating activities:
            Depreciation                                                                  816          589           700
            Amortization expense                                                          462           67            --
            Amortization of deferred financing costs                                    1,613        1,386         1,386
            Deferred income taxes                                                      26,560       (3,689)        2,738
            Stock compensation expense                                                    100          417           576
            Stock issued for non-cash services                                            681           --            --
            Changes in operating assets and liabilities:
                  Accounts receivable                                                   2,545       (1,827)       (1,979)
                  Inventories                                                           4,298        1,964         3,149
                  Income tax receivable                                                   910          (23)         (654)
                  Other current assets                                                 (2,267)         752        (1,755)
                  Other assets                                                         (4,766)      (1,309)         (985)
                  Accounts payable                                                      1,730        1,848           150
                  Accrued pension liabilities                                          (1,933)         366           495
                  Accrued postretirement liabilities                                   (3,272)      (1,509)          558
                  Accrued expenses and other                                            3,892        2,351        (1,479)
                                                                                  ------------ ------------- -------------
                        Net cash provided by (used in) operating activities             3,534       (4,858)        8,385
                                                                                  ------------ ------------- -------------

Cash flows from investing activities:
      Capital expenditures                                                             (3,277)      (1,561)         (625)
      Purchase of Stoker, Inc. (net of cash acquired $1,672 see Note 5)                   (38)     (21,650)           --
                                                                                  ------------ ------------- -------------
                        Net cash provided by (used in) investing activities            (3,315)     (23,211)         (625)
                                                                                  ------------ ------------- -------------
Cash flows from financing activities:
      Capital contribution from parent                                                 53,751           --            --
      Proceeds from revolving credit facility, net                                      8,200          800         5,500
      Proceeds from issuance of new senior notes                                      200,000           --            --
      Payment of old senior notes                                                    (155,000)          --            --
      Payment of financing costs                                                       (5,857)          --            --
      Payments on notes payable                                                       (30,686)          --            --
      Payments on senior term loans                                                        --           --       (12,500)
      Deferred financing costs incurred                                                    --       (3,907)           --
      Redemption of preferred stock                                                   (65,080)          --            --
      Preferred stock cash dividends                                                   (1,613)          --            --
      Advance to parent                                                                (1,961)          --            --
      Principal from long-term borrowings                                                  --       42,000            --
      Principal payments on long-term borrowings                                           --      (11,314)           --
      Consent solicitation expenses                                                        --           --        (1,219)
      Net loans to stockholders for stock purchases                                        69          (11)           30
                                                                                  ------------ ------------- -------------
                        Net cash provided by (used in) financing activities             1,823       27,568        (8,189)
                                                                                  ------------ ------------- -------------
Net increase (decrease) in cash                                                         2,042         (501)         (429)
Cash, beginning of period                                                                 304          805         1,234
                                                                                  ------------ ------------- -------------
Cash, end of period                                                               $     2,346  $       304   $       805
                                                                                  ============ ============= =============
Supplemental disclosures of cash flow information:
      Cash paid during the period for interest                                    $    16,245  $    17,911   $    17,560
                                                                                  ============ ============= =============
      Cash paid during the period for income taxes                                $     1,297  $        --   $       283
                                                                                  ============ ============= =============
</TABLE>

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

                                      F-5
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
CHANGES IN STOCKHOLDERS' DEFICIT
for the years ended December 31, 2004, 2003 and 2002
(dollars in thousands)

<TABLE>
<CAPTION>
                                                                            LOANS TO     ACCUMULATED
                                       COMMON     ADDITIONAL              STOCKHOLDERS      OTHER
                                       STOCK,      PAID-IN    ADVANCE TO   FOR STOCK    COMPREHENSIVE     ACCUMULATED
                                       VOTING      CAPITAL      PARENT     PURCHASES        LOSS            DEFICIT       TOTAL
                                     ----------   ----------   ---------   -----------    -----------     -----------  ----------
<S>                                  <C>          <C>         <C>         <C>            <C>             <C>           <C>
Beginning balance, January 1, 2002   $       5    $   9,144    $     --    $     (187)    $     (216)     $  (45,226)  $ (36,480)
Compensation expense                                    102                                                                  102
Net loans to stockholders for
   stock purchases                                                                 30                                         30
Amount related to minimum pension
   liability, net of tax of $344                                                                (909)                       (909)
Preferred stock dividend                                                                                      (6,976)     (6,976)
Net gain on restructuring of
   preferred stock                                                                                             5,395       5,395
Net income                                                                                                     5,485       5,485
                                     ----------   ----------   ---------   -----------    -----------     -----------  ----------

Ending balance, December 31, 2002            5        9,246          --          (157)        (1,125)        (41,322)    (33,353)
Compensation expense                                    417                                                                  417
Net loans to stockholders for
   stock purchases                                                                (11)                                       (11)
Amount related to minimum pension
   liability, net of tax of $64                                                                 (104)                       (104)
Preferred stock dividend                                                                                      (7,275)     (7,275)
Net loss                                                                                                      (6,241)     (6,241)
                                     ----------   ----------   ---------   -----------    -----------     -----------  ----------

Ending balance, December 31, 2003            5        9,663          --          (168)        (1,229)        (54,838)    (46,567)
Cancellation of common stock                (6)                                                                               (6)
Compensation expense                                    100                                                                  100
Transfer of stock options to
   Parent                                            (2,149)                                                              (2,149)
Transfer of warrants to Parent                       (2,410)                                                              (2,410)
Issuance of common stock                     1          681                                                                  682
Capital contribution from Parent                     58,210                                                               58,210
Net loans to stockholders for
   stock purchases                                                                 69                                         69
Amount related to minimum pension
   liability net of tax of $74                                                                  (122)                       (122)
Transactions with Parent, net                                    (1,961)                                                  (1,961)
Preferred stock dividend                                                                                      (1,613)     (1,613)
Net loss, as restated, Note 1                                                                                (27,835)    (27,835)
                                     ----------   ----------   ---------   -----------    -----------     -----------  ----------
Ending balance, December 31,                                            $
   2004, as restated, Note 1         $      --    $  64,095    $ (1,961)   $      (99)    $   (1,351)     $  (84,286)  $ (23,602)
                                     ==========   ==========   =========   ===========    ===========     ===========  ==========
</TABLE>

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

                                      F-6
<PAGE>
NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended December 31, 2004, 2003 and 2002
(dollars in thousands except share data)

1.   RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS:

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


     The following tables represent the effect of the restatement on the
     Company's 2004 Consolidated Financial Statements:

<TABLE>
<CAPTION>
                                                               AS PREVIOUSLY
                        CONSOLIDATED BALANCE SHEET               REPORTED      ADJUSTMENT    AS RESTATED
             ------------------------------------------------- ------------- ------------- -----------------
<S>                                                           <C>           <C>           <C>
             Deferred income taxes - current                   $        -    $     4,801   $        4,801
             Deferred income taxes - non-current               $        -    $     5,005   $        5,005
             Accumulated deficit                               $ (74,480)    $   (9,806)   $     (84,286)


                                                               AS PREVIOUSLY
                    CONSOLIDATED STATEMENT OF OPERATIONS         REPORTED      ADJUSTMENT    AS RESTATED
             ------------------------------------------------- ------------- ------------- -----------------

             Income tax expense                                $    17,404   $     9,806   $       27,210
             Net income (loss)                                 $  (18,029)   $   (9,806)   $     (27,835)
             Net income (loss) applicable to common shares     $  (19,642)   $   (9,806)   $     (29,448)
             Basis earnings per common share:
               Net income (loss)                               $  (309.99)   $  (168.60)   $     (478.59)
               Net income (loss) applicable to common shares   $  (337.72)   $  (168.60)   $     (506.32)
             Diluted earnings per common share:
               Net income (loss)                               $  (309.99)   $  (168.60)   $     (478.59)
               Net income (loss) applicable to common shares   $  (337.72)   $  (168.60)   $     (506.32)



              CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME   AS PREVIOUSLY
                                  (LOSS)                         REPORTED      ADJUSTMENT    AS RESTATED
             --------------------------------------------------------------- ------------- -----------------

             Net income (loss)                                 $ (18,029)    $   (9,806)   $     (27,835)
             Comprehensive income (loss)                       $ (18,151)    $   (9,806)   $     (27,957)


                                                               AS PREVIOUSLY
                   CONSOLIDATED STATEMENT OF CASH FLOWS          REPORTED      ADJUSTMENT    AS RESTATED
             ------------------------------------------------- ------------- ------------- -----------------

             Net income (loss)                                 $ (18,029)    $   (9,806)   $     (27,835)
             Deferred income taxes                             $   16,754    $     9,806   $       26,560


                                                               AS PREVIOUSLY
                     CHANGES IN STOCKHOLDERS' DEFICIT            REPORTED      ADJUSTMENT    AS RESTATED
             ------------------------------------------------- ------------- ------------- -----------------

             Net loss - Accumulated deficit                    $ (18,029)    $   (9,806)   $     (27,835)
             Ending balance - Accumulated deficit              $ (74,480)    $   (9,806)   $     (84,286)
             Ending balance - Total                            $ (13,796)    $   (9,806)   $     (23,602)

</TABLE>

                                      F-7
<PAGE>
2.    ORGANIZATION:

      The Company manufactures and distributes tobacco and related products
      through its smokeless tobacco, make-your-own, and premium manufactured
      cigarettes operating segments. The smokeless tobacco segment manufactures
      and distributes smokeless tobacco products under the BEECH-NUT, DURANGO,
      TROPHY, HAVANA Blossom, STOKER, OUR PRIDE and other brand names. The
      make-your-own segment imports and distributes premium cigarette papers and
      related products, and manufactures smoking tobaccos under the ZIG-ZAG,
      STOKER NO. 2, OLD HILLSIDE and other brand names. The premium cigarette
      segment contract manufactures and distributes premium manufactured
      cigarettes through wholesale distributors in selected areas of the United
      States.

      National Tobacco Company, L.P. ("NTC"), 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 to the Corporation,
      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") which owned exclusive rights to market and
      distribute Zig-Zag premium cigarette papers in the United States and
      Canada and also owned outright the trademarks for tobacco products bearing
      the Zig-Zag name. 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.

      On April 10, 2003, North Atlantic Cigarette Company, Inc. was formed to
      contract manufacture and distribute premium manufactured cigarettes.

      On November 17, 2003, the Company purchased all of the common stock of
      Stoker, Inc. ("Stoker"). See Note 5, "Acquisition of Business". Stoker is
      the parent of the wholly-owned subsidiaries, Fred Stoker & Sons, Inc. and
      RBJ Sales, Inc.

      On February 9, 2004, the Company consummated a holding company
      reorganization whereby North Atlantic Holding Company, Inc., a Delaware
      corporation (the "Parent"), became the parent company of the Company. The
      holding company reorganization was effected pursuant to an Agreement and
      Plan of Merger (the "Merger Agreement"), dated February 9, 2004, among the
      Company, the Parent and NATC Merger Sub, Inc., a Delaware corporation and
      a direct wholly-owned subsidiary of the Parent ("Merger Sub").

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

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

      Subsequently, the Parent issued 49,523 shares of NAHC Common Stock upon
      the exercise of certain warrants pursuant to a Warrant Agreement (the
      "Warrant Agreement"), dated June 25, 1997, between the Parent (as assignee


                                      F-8
<PAGE>
      to the Company's rights and obligations under the Warrant Agreement) and
      The Bank of New York, as warrant agent (as successor to the United States
      Trust Company of New York). As of December 31, 2004, (i) 588,758 shares of
      NAHC Common Stock were issued and outstanding; and (ii) ten (10) shares of
      Company Common Stock were issued and outstanding.

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

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

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

3.    LIQUIDITY

      As discussed in the Notes Payable and Long-Term Debt footnote, the
      Company's New Credit Agreement requires the Company to meet certain
      financial tests, including a minimum fixed charge coverage ratio.
      Management's forecasts for 2005 indicate that it is likely that the
      Company will fail to meet the minimum fixed charge coverage ratio covenant
      at June 30, 2005 without obtaining an additional capital investment, a
      waiver from its lenders, or a refinancing of such debt. Not meeting this
      requirement would permit the lenders to demand immediate repayment in
      full, which would then permit holders of the Company's New Senior Notes to
      also demand immediate repayment.

      Although there can be no assurance, the Company believes that it will be
      able to successfully negotiate new senior secured financing on reasonably
      acceptable terms, refinance out the existing lenders, and avoid a default
      under the New Credit Agreement. Further, management has begun a process to
      review its core operations and identify and implement opportunities to
      significantly improve operational and financial performance and its
      internal cash generating capabilities.

4.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

      CONSOLIDATION: The consolidated financial statements include the accounts
      of the Company and its wholly-owned subsidiaries. All significant
      intercompany transactions have been eliminated.

      REVENUE RECOGNITION: The Company recognizes revenues and the related costs
      upon transfer of title and risk of loss to the customer. The Company
      classifies customer rebates as sales deductions in accordance with the
      requirements of Emerging Issues Task Force Issue No. 01-09 and classifies
      inbound freight costs incurred as a component of cost of goods sold in
      accordance with the requirements of Emerging Issues Task Force Issue No.
      001-10.

      SHIPPING COSTS: The Company records shipping costs incurred as a component
      of selling, general and administrative expenses. Shipping costs incurred
      were $3,419, $2,790, and $2,583 in 2004, 2003, and 2002, respectively.

      RESEARCH AND DEVELOPMENT COSTS: Research and development costs are
      expensed as incurred. These expenses, classified as selling and
      administrative expenses, were $521 in 2004, $577 in 2003, and $539 in
      2002.

                                      F-9
<PAGE>
      CASH AND CASH EQUIVALENTS: The Company considers any highly liquid
      investments with a maturity of three months or less from the date of
      purchase to be cash equivalents.

      INVENTORIES: Inventories are stated at the lower of cost or market. Cost
      is determined using the last-in, first-out ("LIFO") method for
      approximately 96% of the inventories. Leaf tobacco is presented in current
      assets in accordance with standard industry practice, notwithstanding the
      fact that such tobaccos are carried longer than one year for the purpose
      of curing.

      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 improvements 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 AND OTHER INTANGIBLE ASSETS: The Company follows the provisions
      of the Statement of Financial Accounting Standards No. 142, "Goodwill and
      Other Intangible Assets" ("SFAS No. 142").

      Under SFAS No. 142, goodwill is no longer to be amortized but reviewed for
      impairment annually or more frequently if certain indicators arise, using
      a two-step approach. The net goodwill balances attributable to each of the
      Company's reporting units are tested for impairment by comparing the fair
      value of each reporting unit to its carrying value as of December 31 each
      year. Fair value was determined by using the valuation technique of
      calculating the present value of estimated expected future cash flows
      (using a discount rate commensurate with the risks involved) with
      consideration given to multiples of operating results. The Company has
      reported that no impairment of goodwill has been incurred as of December
      31, 2004.

      DEFERRED FINANCING COSTS: Deferred financing costs are amortized over the
      terms of the related debt obligations using the effective 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, including
      point of sale materials, are expensed as incurred and amounted to $3,147,
      $2,658, and $911 for the years ending December 31, 2004, 2003 and 2002,
      respectively.

      FINANCIAL INSTRUMENTS: The Company has adopted Statement of Financial
      Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
      Instruments and Hedging Activities". 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. No forward contracts were
      utilized in 2004.

      STOCK-BASED COMPENSATION: The Company measures stock compensation costs
      related to the stock options described in Note 17 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 compensation cost for
      stock options to be recognized based on the fair value of stock options
      granted.

      COMPUTATION OF EARNINGS PER COMMON SHARE: Basic earnings per common share
      is computed by dividing the net income (loss) applicable to common shares
      by the weighted average number of common shares outstanding during the
      period.

      Diluted earnings per share is computed by dividing the net income (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: 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


                                      F-10
<PAGE>
      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 21, the Company 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.

      Forty-six states, certain U.S. territories and the District of Columbia
      are parties to the Master Settlement Agreement ("MSA") and the Smokeless
      Tobacco Master Settlement Agreement ("STMSA"). To the Company's knowledge,
      the signatories to the MSA include 49 cigarette manufacturers and/or
      distributors and the only other signatory to the STMSA is US Smokeless
      Tobacco Company. 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 sub-accounts 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 entering into
      the MSA. 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.

      The Company has chosen to open and fund an MSA escrow account as its means
      of compliance. It is management's opinion, due to the possibility of
      future federal or state regulations, though none have to date been
      enacted, that entering into one or both of the settlement agreements or
      establishing and maintaining an escrow account would not necessarily
      prevent future regulations from having a material adverse effect on the
      results of operations, financial position and cash flows of the Company.

      Various states have enacted or proposed complementary legislation intended
      to curb the activity of certain manufacturers and importers of cigarettes
      that are selling into MSA states without signing the MSA or who have
      failed to properly establish and fund a qualifying escrow account. To the
      best of the Company's knowledge, no such statute has been enacted which
      could inadvertently and negatively impact the Company, which has been and
      is currently fully compliant with all applicable laws, regulations and
      statutes, but there can be no assurance that the enactment of any such
      complementary legislation in the future will not have a material adverse
      effect on the results of operations, financial position or cash flows of
      the Company.

      Pursuant to the MSA escrow account statutes, in order to be compliant with
      the MSA escrow requirements, 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, 2004, the Company has recorded
      approximately $13,171 in Other assets. This amount is comprised of
      approximately $9,428 which represents amounts on deposit plus
      approximately $21 interest earned thereon and approximately $3,721
      pertaining to amounts to be deposited by April 15, 2005 relating to 2004
      sales. During 2004, approximately $4,228 was deposited into a qualifying
      escrow account. 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


                                      F-11
<PAGE>
      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 Company's significant estimates include those
      affecting the valuation and useful lives of property, plant and equipment
      and goodwill and other intangible assets, assumptions used in determining
      pension and postretirement benefit obligations, accrued and deferred
      income taxes and litigation contingencies.

      CONCENTRATION OF CREDIT RISK: At December 31, 2004 and 2003, the Company
      had bank deposits, including MSA escrows, in excess of federally insured
      limits of approximately $11.9 million and $8.7 million, respectively.

      The Company sells its products to distributors and retail establishments
      throughout the United States. A single customer accounted for 16.5%, 19.9%
      and 13.1% of the Company's revenues in 2004, 2003 and 2002, respectively.
      The Company performs periodic credit evaluations of its customers and
      generally does not require collateral on trade receivables. As of December
      31, 2004, Cod Company, Inc., the Company's largest customer, accounted for
      12.7% of the outstanding accounts receivable balances. Historically, the
      Company has not experienced significant credit losses.

      ACCOUNTS RECEIVABLE: Accounts receivables are recognized at their net
      realizable value. All accounts receivable are trade related and are
      recorded at the invoiced amount and do not bear interest. The Company
      maintains allowances for doubtful accounts receivable for estimated
      uncollectible invoices resulting from the customer's inability to pay
      (bankruptcy, out of business, etc., i.e. "bad debts" which result in
      write-offs). The activity of allowance for doubtful accounts during 2004,
      2003 and 2002 is as follows (in thousands):


<TABLE>
<CAPTION>
                                                         2004         2003           2002
                                                     ------------ ------------- -------------
<S>                                                 <C>          <C>           <C>
Balance at beginning of period                       $      367   $       448   $       350
Provision (reduction) for doubtful accounts                (67)           121            96
Charge offs, net                                           (16)         (202)             2
                                                     ------------ ------------- -------------
Balance at end of period                             $      284   $       367   $       448
                                                     ============ ============= =============
</TABLE>

      OTHER EXPENSE (INCOME): Other Income of $4.4 million in 2004 represents
      principally $4.5 million associated with the reduction in the judgment
      rendered against the Company in connection with the litigation with
      Republic Tobacco, Inc. as described in Note 21, "Contingency" under
      "Kentucky and Illinois Complaints." Other expense of $11.1 million in 2003
      represents $7.4 million associated with the judgment rendered against the
      Company in connection with the litigation with Republic Tobacco, Inc. and
      $3.3 million associated with the termination of the Star Cigarette Asset
      Purchase Agreement, as described in Note 24, "Terminated Asset Purchase
      Agreement". Other expense of $1.9 million in 2002 consists primarily of
      legal, investigative and related expenses with respect to the infringement
      activities involving Zig-Zag premium cigarette papers.


5.    ACQUISITION OF BUSINESS:

      On November 17, 2003, the Company acquired the common stock of Stoker.
      Stoker, headquartered in Dresden, Tennessee, manufactures and markets
      smokeless tobacco and make-your-own ("MYO") tobacco and related products
      under various brand names. This acquisition was expected to significantly
      increase net sales and cash flows. The Company also believed that gross
      margins would improve as a result of the increased net sales coupled with
      the elimination of certain costs related to Stoker's historical operations
      and the consolidation of facilities and functions.

      The purchase price of $22.5 million in cash was financed with borrowings
      under the credit facility in existence at that time. The acquisition has
      been accounted for under the purchase method, and the results of Stoker
      have been included in the Company's consolidated results from the date of
      acquisition.

      The aggregate purchase price consists of (in thousands):



Cash                                               $     22,500
Transaction costs                                           822
                                                   -------------
Total aggregate purchase price                     $     23,322
                                                   =============


                                      F-12
<PAGE>
      The following summarizes the final purchase price of the assets acquired
      and liabilities assumed at the date of acquisition (in thousands):



Cash                                                       $      1,672
Accounts receivable                                                 906
Inventories                                                       3,403
Property, plant and equipment                                     2,180
Other intangible assets                                           9,922
Other assets and restricted escrow funds                          6,514
Accounts payable                                                   (559)
Pension plan liability                                             (750)
Accrued expenses                                                 (2,012)
Income taxes payable                                             (1,845)
Deferred income taxes                                            (1,249)
                                                           -------------

                                                                 18,182
Goodwill                                                          5,140
                                                           -------------

Aggregate purchase price                                   $     23,322
                                                           =============

      In connection with the other intangible assets relating to the Stoker
      acquisition, see Note 9.

      The unaudited pro forma combined historical results, as if Stoker had been
      acquired at the beginning of fiscal 2003 and 2002, respectively, are
      estimated to be:


                                                2003           2002
                                           -------------- --------------

Net sales                                  $     126,162  $     121,407
Net income (loss)                          $      (4,186) $       7,795
Earnings per share-
      Basic                                $       (7.92) $       14.76
      Assuming dilution                    $       (7.92) $       11.72

      The pro forma results are not necessarily indicative of what actually
      would have occurred if the acquisition had been completed as of the
      beginning of each fiscal period presented, nor are they necessarily
      indicative of future consolidated results.

      As part of an employment agreement between the Company and the former
      President of Stoker, the Company agreed to pay $300 per annum for a period
      of three years relating to employee non-competition.

      On November 17, 2003, Stoker terminated its employee defined benefit plan.
      As part of the stock purchase agreement, the shareholders of Stoker agreed
      to fund $750 in a restricted escrow account to fund future payments to
      current and retired Stoker employees.

6.    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.

            LONG-TERM DEBT: The fair value of the Company's long-term debt is
            estimated based on the quoted market prices for the same or similar
            issues or on the current rates offered to the Company for debt of
            the same remaining maturities. As of December 31, 2004 and 2003, the
            fair market value of the Company's debt was $169.0 million and
            $155.0 million, respectively.


                                      F-13
<PAGE>
7.    INVENTORIES:

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

                                                       2004         2003
                                                   ------------ -------------

Raw materials and work in process                  $      4,246 $      5,996
Leaf tobacco                                              7,878        8,274
Finished goods - loose leaf tobacco                       3,069        6,018
Finished goods - MYO products                             8,539        6,323
Other                                                     2,163        1,350
                                                   ------------ -------------
                                                         25,895       27,961
LIFO reserve                                             12,064       14,296
                                                   ------------ -------------
                                                   $     37,959 $     42,257
                                                   ============ =============

      During 2004 and 2003, inventory quantities were reduced. This reduction
      resulted in a liquidation of LIFO inventory quantities carried at lower
      costs prevailing in prior years as compared with the cost of 2004 and 2003
      purchases, the effect of which increased cost of goods sold and decreased
      net income by approximately $1.7million and $1.9 million, respectively.

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

      The Company recorded an inventory valuation allowance of $218 as of
      December 31, 2003.

8.    PROPERTY, PLANT AND EQUIPMENT:

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


                                           2004          2003
                                      -------------- -------------

Land                                  $         654  $        654
Buildings and improvements                    4,282         4,363
Machinery and equipment                      12,194         9,250
Furniture and fixtures                        3,920         3,164
                                      -------------- -------------
                                             21,050        17,431
Accumulated depreciation                    (10,279)       (9,121)
                                      -------------- -------------
                                      $      10,771  $      8,310
                                      ============== =============


9.    GOODWILL AND OTHER INTANGIBLE ASSETS:

      Goodwill at December 31 consists of (in thousands):

<TABLE>
<CAPTION>
                                                                                       2004          2003
                                                                                 -------------- ---------------
<S>                                                                             <C>            <C>
NTC goodwill, net of accumulated amortization of $4,500 at December 31, 2004
   and 2003                                                                      $      27,450  $      27,450
NAOC goodwill, net of accumulated amortization of $21,175 at December 31, 2004
   and 2003                                                                             96,107         96,107
Stoker goodwill (see Note 5)                                                             5,140          5,102
                                                                                 -------------- ---------------
                                                                                 $     128,697  $     128,659
                                                                                 ============== ===============
</TABLE>

<TABLE>
<CAPTION>
                                                                      PREMIUM
                                                                    MANUFACTURED
                                         SMOKELESS       MYO         CIGARETTES       TOTAL
                                       ------------- ----------- ---------------- -------------
<S>                                   <C>           <C>         <C>              <C>
Balance as of January 1, 2004          $    30,674   $    97,985 $            --  $    128,659
Goodwill addition                                1            37              --            38
                                       ------------- ----------- ---------------- -------------
Balance as of December 31, 2004        $    30,675   $    98,022 $            --  $    128,697
                                       ============= =========== ================ =============
</TABLE>

                                      F-14
<PAGE>
      The following table summarizes information about the Company's allocation
      of other intangible assets. Other intangibles, all of which relate to the
      purchase of Stoker, consist of (in thousands):


<TABLE>
<CAPTION>
                                                             AS OF DECEMBER 31, 2004
                                                          -----------------------------
                                                             GROSS
                                                           CARRYING      ACCUMULATED
                                                            AMOUNT       AMORTIZATION
                                                          ------------ ----------------
<S>                                                       <C>          <C>
Unamortized indefinite life intangible assets
      Trade names                                         $      8,500 $            --
      Formulas                                                      51              --
                                                          ------------ ----------------
Total                                                     $      8,551 $            --
                                                          ============ ================

Amortized intangible assets:
      Customer list (useful life of 10 years)             $      1,400 $           157
      Non-compete agreement (useful life of 3 years)               900             401
                                                          ------------ ----------------
Total                                                     $      2,300 $           558
                                                          ============ ================
</TABLE>

      The Company amortizes the non-competition agreement over its life of 3
      years. Amortization expense for other intangibles was approximately $462
      for the year ending December 31, 2004. Estimated future amortization
      expense is $440 for the year ending December 31, 2005, $390 for the year
      ending December 31, 2006, and $140 for the years ending December 31, 2007,
      2008 and 2009.


10.   OTHER ASSETS:

      Other assets at December 31, 2004 and 2003 includes loans and accrued
      interest to the principal shareholder of $1,487 and $1,559, respectively,
      amounts related to the MSA escrow account of $13,171 and $8,282,
      respectively, and other miscellaneous deposits of $868 and $822,
      respectively.

11.   DEFERRED FINANCING COSTS:

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

<TABLE>
<CAPTION>
                                                                                          2004         2003
                                                                                      ------------ ------------
<S>                                                                                   <C>          <C>
Deferred financing costs, net of accumulated amortization of $1,229 and $8,917 at                        5,163
   December 31, 2004 and 2003, respectively                                           $     9,407  $
                                                                                      ============ ============
</TABLE>

      During 2004, the Company recorded a write-off of deferred financing cost
      of approximately $1.6 million relating to the extinguishment of the Senior
      Notes.

12.   NOTES PAYABLE AND LONG-TERM DEBT:

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


                                               2004            2003
                                          -------------- ---------------

New Senior Notes                          $     200,000  $           --
Old Senior Notes                                     --         155,000
Notes payable                                        --          30,686
                                          -------------- ---------------
                                          $     200,000  $      185,686
                                          ============== ===============


      On June 25, 1997, the Company issued $155.0 million aggregate principal
      amount of 11% Senior Notes due 2004 (the "Notes") which were called for
      redemption on April 2, 2004 in connection with the refinancing. The Notes
      are unsecured senior obligations of the Company which were scheduled to
      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.

      At December 31, 2003, the Company was operating under a Loan Agreement
      (the "Loan Agreement"), dated December 31, 2000, with Bank One, Kentucky,
      NA. as Agent (the "Agent"), and the banks named therein, which provided
      for a $25.0 million term loan and a $10.0 million revolving credit
      facility. The Term Loan was payable in eight (8) quarterly installments of
      $3,125 million each plus accrued interest, which commenced on March 31,
      2001. Both the term loan and the revolving credit facility matured on


                                      F-15
<PAGE>
      December 31, 2002, at which time the term loan was paid in full. On
      December 31, 2002, the Company entered into an Amended Loan Agreement (the
      "Amended Loan Agreement") with Bank One in which the revolving credit
      facility was increased to $20 million and extended to December 31, 2003.
      During 2003, the Amended Loan Agreement was amended to reduce the
      revolving credit facility to $15.0 million and to extend the maturity to
      March 31, 2004. The unused portion of revolving credit facility at
      December 31, 2003 amounted to $8.7 million. The Company paid a commitment
      fee of 0.50% per annum on a quarterly basis on the unused balance of the
      revolving credit facility. The outstanding amount relating to the
      revolving credit facility as of December 31, 2003 has been classified as a
      current liability in the Consolidated Balance Sheet. All terms of the
      original Loan Agreement remained in place except for the replacement of a
      Fixed Charge Coverage Covenant with an Interest Coverage Covenant. The
      Company's obligations under the Loan Agreement were guaranteed by National
      Tobacco, NAOC and NTFC. In addition, the Company's obligations were
      collateralized by all of the Company's assets and the Company's equity in
      its subsidiaries. The interest rate on borrowings under the Amended Loan
      Agreement was based, at the Company's option, on either LIBOR or the prime
      rate as announced by the Agent from time to time. At December 31, 2003,
      the Notes Payable outstanding under the Tranche B term loan portion
      consisted of $7.7 million incurred to finance the posting of a $7.7
      million judgment bond (including accrued interest and fees) in connection
      with the litigation with Republic Tobacco (See Note 21, Contingencies) and
      $23.0 million to finance the acquisition of Stoker (See Note 5,
      Acquisition of Business). At December 31, 2003, the interest rate on
      borrowings under the Amended Loan Agreement was 5.15%.

      The Loan Agreement and the Notes included cross default provisions and
      limited the incurrence of additional indebtedness, dividends, transactions
      with affiliates, asset sales, acquisitions, mergers, prepayments of
      indebtedness, liens and encumbrances, and other matters. At December 31,
      2003, the Company was in compliance with all provisions of the Amended
      Loan Agreement and Notes.

      At December 31, 2003, the Notes and Notes Payable were reclassified as
      noncurrent liabilities in the Consolidated Balance Sheet, reflecting the
      Company's intention and ability to refinance the Amended Loan Agreement
      and Senior Notes, as described above.

      On February 17, 2004, the Company consummated the refinancing of its
      existing debt and preferred stock. The refinancing consisted principally
      of (1) the offering and sale of $200.0 million principal amount of senior
      notes (the "New Senior Notes") by the Company, (2) the entering into of an
      amended and restated loan agreement that provides a $50.0 million senior
      secured revolving credit facility to the Company and (3) the concurrent
      sale of $97.0 million aggregate principal amount at maturity of senior
      discount notes of North Atlantic Holding Company, Inc. (the "Parent").

      The New Senior Notes are senior unsecured obligations of the Company,
      which has no independent assets or operations, mature on March 1, 2012 and
      are guaranteed jointly, severally, fully and unconditionally on a senior
      unsecured basis by all of the Company's existing and certain of its future
      subsidiaries. The New Senior Notes bear interest at the rate of 9 1/4% per
      annum from the date of issuance, or from the most recent date to which
      interest has been paid or provided for, and is payable semiannually on
      March 1 and September 1 of each year. The Company is not required to make
      mandatory redemptions or sinking fund payments prior to the maturity of
      the Notes. The Company or Parent may, from time to time seek to retire all
      or a portion of the New Senior Notes through cash purchases and/or
      exchanges for other securities in open market purchases, privately
      negotiated transactions or otherwise.

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


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

      2008                                                    104.625%
      2009                                                    102.313%
      2010 and thereafter                                     100.000%

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


                                      F-16
<PAGE>
      In addition, at any time prior to March 1, 2007, the Company may, at its
      option, redeem up to 35% of the aggregate principal amount of the New
      Senior Notes with the net cash proceeds of one or more equity offerings by
      the Company or Parent, at its option, subject to certain conditions, at a
      redemption price equal to 109.250% of the principal amount thereof, plus
      accrued and unpaid interest thereon, if any, to the date of redemption.

      The New Senior Notes limit the incurrence of additional indebtedness, the
      payment of dividends, entering into transactions with affiliates, asset
      sales, engaging in mergers or acquisitions, creating liens or other
      encumbrances on assets, and other matters. At December 31, 2004, the
      Company was in compliance with all provisions of the New Senior Notes.

      In connection with the refinancing, the Company also amended and restated
      the existing credit facility, resulting in a new $50.0 million (reducing
      to $40.0 million in August 2005) senior revolving credit facility with
      Bank One, N.A. as agent (the "Agent Bank") and La Salle Bank, National
      Association. The credit agreement (the "New Credit Agreement") governing
      the new senior revolving credit facility includes a letter of credit
      sublimit of $25.0 million and terminates three years from the closing
      date. The Company will use the new senior revolving credit facility for
      working capital and general corporate purposes. On January 19, 2005, the
      New Credit Agreement was amended to reduce the revolving credit facility
      to $35.0 million.

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

      Each advance under the New Credit Agreement will bear interest at variable
      rates based, at the Company's option, on either the prime rate plus 1% or
      LIBOR plus 3%. At December 31, 2004, the interest rate on borrowings under
      the New Credit Agreement was 5.18% The New Credit Agreement provides for
      voluntary prepayment, subject to certain exceptions, of loans. In
      addition, without the prior written consent of the Agent Bank, the Company
      will not allow a Change in Control (as defined in the New Credit
      Agreement), the sale of any material part of its assets and the assets of
      its subsidiaries on a consolidated basis or, subject to certain
      exceptions, the issuance of equity or debt.

      Under the New Credit Agreement, the Company is required to pay the lenders
      a closing fee equal to 1.25% of the aggregate commitments, payable on the
      closing date, and an annual commitment fee in variable amounts ranging
      from 0.50% to 0.65% of the difference between the commitment amount and
      the average usage of the facility, payable on a quarterly basis. The
      Company is also required to pay to the lenders, letter of credit fees
      equal to 3.00% per annum multiplied by the maximum amount available from
      time to time to be drawn under such letter of credit issued under the New
      Credit Agreement and to the lender issuing a letter of credit a fronting
      fee of 0.125% per annum multiplied by the aggregate face amount of letters
      of credit outstanding during a fiscal quarter plus other customary
      administrative, amendment, payment and negotiation charges in connection
      with such letters of credit.

      The New Credit Agreement requires the Company and its subsidiaries to meet
      certain financial tests, including a minimum fixed charge coverage ratio,
      and a minimum consolidated adjusted EBITDA. The New Credit Agreement also
      contains covenants, which among other things, limit the incurrence of
      additional indebtedness, dividends, transactions with affiliates, asset
      sales, acquisitions, mergers, prepayments of other indebtedness, liens and
      encumbrances and other matters customarily restricted in such agreements.
      In addition, the New Credit Agreement requires that certain members of
      Executive Management remain active in the day-to-day operation and
      management of the Company and its subsidiaries during the term of the
      facility.

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

      As of December 31, 2004 the Company would have failed to meet its original
      required minimum fixed charge coverage ratio for the period then ended due
      to its operating results in 2004. This would have represented an event of
      default under the terms of the New Credit Agreement. This covenant,
      however, was eliminated pursuant to the March 30, 2005 amendment to the
      New Credit Agreement.

      On March 30, 2005, the New Credit Agreement was amended. This amendment
      modifies the fixed charge coverage ratio covenant, which now only applies
      to quarters ending June 30, 2005 and thereafter, and the minimum
      consolidated adjusted EBITDA covenant, which now only applies to quarters
      ending from June 30, 2004 through March 31, 2005. The fixed charge


                                      F-17
<PAGE>
      coverage ratio definition was also amended to include any future cash
      equity contributions to the Company. In addition, the Amendment changes
      the New Credit Agreement maturity date from February 28, 2007 to January
      31, 2006.

      Concurrently with the offering of the New Senior Notes, the Parent issued
      $97.0 million aggregate principal amount at maturity ($60.0 million in
      gross proceeds) of its senior unsecured discount notes due 2014 (the
      "Senior Discount Notes"). Proceeds of approximately $53.8 million from
      this issuance were used to make a capital contribution to the Company. The
      accreted value of these notes is $66.6 million at December 31, 2004. The
      Senior Discount Notes are Parent's senior obligations and are unsecured,
      ranking equally in right of payment to all of Parent's future
      unsubordinated obligations and senior in right of payment to any
      obligations that are by their terms subordinated to the Senior Discount
      Notes, and will be effectively subordinated to any secured obligations of
      Parent to the extent of the assets securing those obligations. The Senior
      Discount Notes are not guaranteed by the Company or any of its
      subsidiaries and are structurally subordinated to all of the Company and
      its subsidiaries' obligations, including the New Senior Notes. The Company
      or Parent from time to time may seek to retire all or a portion of the
      Senior Discount Notes through cash purchases and/or exchanges for other
      securities in open market purchases, privately negotiated transaction, or
      otherwise.

      Looking forward, due to the lower than anticipated operating performance
      of the Company's core business and increased net expenses resulting from
      the Company's developmental activities relating to Zig-Zag Premium
      Cigarettes, the Company currently anticipates that it will not likely meet
      the fixed charge coverage ratio test contained in the New Credit Agreement
      for the rolling four quarter periods ending June 30, 2005 and thereafter
      without the contribution of additional equity into the Company. In the
      event that such covenant is breached, the Company would be in default
      under the New Credit Agreement, pursuant to which the lenders would have
      all rights and remedies available to them at that time, including the
      right to accelerate payment of all obligations thereunder. Such
      acceleration would trigger an event of-default under the indentures
      governing the New Senior Notes and the Senior Discount Notes, allowing an
      acceleration of the obligations thereunder. In the event of an
      acceleration of its obligations under either the New Credit Agreement or
      New Senior Notes, the Company would not be able to satisfy its obligations
      and would likely be required to seek protection from its creditors under
      applicable laws. Although there can be no assurance, the Company believes
      that it will be able to successfully negotiate new senior secured
      financing on reasonably acceptable terms, refinance out the existing
      lenders and avoid a default under the New Credit Agreement.


13.   INCOME TAXES:

      The income tax provision (benefit) for the years ended December 31, 2004,
      2003, and 2002 consists of the following components (in thousands):

                                          2004
                                      AS RESTATED,
                                         NOTE 1        2003        2002
                                      ------------ ----------- -----------

Deferred
      Federal                         $    25,380  $   (3,301) $    2,876
      State and local                       1,830        (388)        338
                                      ------------ ----------- -----------
                                      $    27,210  $   (3,689) $    3,214
                                      ============ =========== ===========


      Deferred tax assets and liabilities at December 31, 2004 and 2003 consist
      of (in thousands):

<TABLE>
<CAPTION>
                                                2004 AS RESTATED, NOTE 1             2003
                                               --------------------------- -------------------------
                                                  ASSETS      LIABILITIES      ASSETS    LIABILITIES
                                               ------------   ------------ ------------ ------------
<S>                                           <C>            <C>          <C>          <C>
Inventory                                      $        --    $     4,801  $        --  $     4,654
Property, plant and equipment                           --            979           --        1,141
Goodwill and other intangible assets                 7,617         5,005        10,223        3,851
Accrued pension and postretirement costs             3,364            --         5,630           --
Minimum pension liability                              614            --           540           --
NOL carryforward                                    13,419            --         8,051           --
Other                                                2,506            --         1,956           --
                                               ------------   ------------ ------------ ------------
Sub-total                                           27,520        10,785        26,400        9,646
Valuation allowance                                (26,541)           --            --           --
                                               ------------   ------------ ------------ ------------
Deferred income taxes                          $       979    $   10,785   $    26,400  $     9,646
                                               ============   ============ ============ ============
</TABLE>

                                      F-18
<PAGE>
      At December 31, 2004 the Company had NOL carryforwards for income tax
      purposes of approximately $34.0 million which expire in the years
      beginning in 2012.

      The Company has determined that at December 31, 2004, its ability to
      realize future benefits of net deferred tax assets does not meet the "more
      likely than not" criteria in SFAS No. 109, "Accounting for Income Taxes";
      therefore, a valuation allowance of $26.5 million has been recorded.

      Reconciliation of the federal statutory rate and the effective income tax
      rate for the years ended December 31, 2004, 2003, and 2002 is as follows:


                                             2004
                                         AS RESTATED,
                                            NOTE 1        2003       2002
                                         ------------- ---------- -----------

Federal statutory rate                         35.0%      35.0%      35.0%
State taxes                                     1.9        3.5        3.0
Permanent differences                         (17.0)      (0.8%)      0.5%
Valuation                                  (4,380.4)        --         --
Other                                            --        (0.6)     (1.6)
                                         ------------- ---------- -----------
Effective income tax rate                  (4,360.6%)     37.1%      36.9%
                                         ============= ========== ===========

14.   PENSION AND POSTRETIREMENT BENEFIT PLANS:

      The Company has two 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.

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

      Effective September 30, 2004, the Company terminated its postretirement
      benefit plan for its salaried employees. Accordingly, the Company
      recognized a reduction in the postretirement benefit plan liability of
      $3,811.

      The following tables provide a reconciliation of the changes in the plans'
      benefit obligations and fair value of assets for the years ended December
      31, 2004 and 2003 and a statement of the funded status as of December 31
      (in thousands):

<TABLE>
<CAPTION>
                                                                                  POSTRETIREMENT
                                                         PENSION BENEFITS             BENEFITS
                                                    ------------------------- -------------------------
                                                        2004         2003         2004         2003
                                                    ------------ ------------ ------------ ------------
<S>                                                <C>          <C>          <C>          <C>
Reconciliation of benefit obligation:
      Benefit obligation at January 1               $    15,298  $    12,737  $    14,298  $     9,351
      Service cost                                          161          552          238          728
      Interest cost                                         783          803          460          807
      Actuarial loss                                        368        1,772        1,742        3,847
      Curtailment of salaried benefits                   (1,386)          --       (7,843)          --
      Benefits paid                                        (696)        (566)        (267)        (435)
                                                    ------------ ------------ ------------ ------------
Benefit obligation at December 31                   $    14,528  $    15,298  $     8,628  $    14,298
                                                    ============ ============ ============ ============

Reconciliation of fair value of plan assets:
      Fair value of plan assets at January 1        $     9,433  $     6,956  $        --           --
      Actual return on plan assets                        1,268        1,643           --           --
      Employer contributions                              1,700        1,400          267          435
      Benefit paid                                         (696)        (566)        (267)        (435)
                                                    ------------ ------------ ------------ ------------
Fair value of plan assets at December 31            $    11,705  $     9,433  $        --  $        --
                                                    ============ ============ ============ ============


                                      F-19
<PAGE>
Funded status:
      Funded status at December 31                  $    (2,823) $    (5,865) $    (8,628) $   (14,318)
      Unrecognized prior service cost                        --            6                        --
      Unrecognized net actuarial loss                     1,476        3,032        2,567        4,985
                                                    ------------ ------------ ------------ ------------
Net amount recognized                               $    (1,347) $    (2,827) $    (6,061) $    (9,333)
                                                    ============ ============ ============ ============
</TABLE>

The asset allocation for the Company's defined benefit plans as of December 31,
2004 and 2003, and the target allocation for 2005, by asset category, follows:

                                                             PERCENTAGE OF
                                           TARGET            PLAN ASSETS AT
                                         ALLOCATION             DECEMBER
                                        --------------  -----------------------
                                            2005           2004         2003
                                        --------------  ----------   ----------
Asset category:
Equity securities                             70.0%         71.3%       67.0%
Debt Securities                               30.0%         28.7%       33.0%
Cash                                           0.0%          0.0%        0.0%
                                        --------------  ----------   ----------
Total                                        100.0%        100.0%      100.0%
                                        ==============  ==========   ==========

      Equity securities included no shares of the Company's common stock at
      December 31, 2004 or 2003.

      The Company's investment philosophy is to earn a reasonable return without
      subjecting plan assets to undue risk. The Company uses one management firm
      to manage plan assets, which are invested in high quality equity and debt
      securities. The Company's investment objective is to provide long-term
      growth of capital as well as current income.

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

<TABLE>
<CAPTION>
                                                                                POSTRETIREMENT
                                                        PENSION BENEFITS           BENEFITS
                                                  ------------------------ ------------------------
                                                      2004        2003        2004         2003
                                                  ----------- ------------ ----------- ------------
<S>                                                <C>          <C>          <C>          <C>
Accrued benefit cost                              $   (1,347) $   (2,827)  $   (6,061) $   (9,333)
Minimum pension liability                             (1,965)     (1,769)          --          --
Deferred tax asset                                       614         540           --          --
Accumulated other comprehensive income                 1,351       1,229           --          --
                                                  ----------- ------------ ----------- ------------
Net amount recognized                             $   (1,347) $   (2,827)  $   (6,061) $   (9,333)
                                                  =========== ============ =========== ============
</TABLE>

      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
                                         ------------------------------- --------------------------------
                                            2004       2003       2002       2004        2003      2002
                                         ---------- ---------- --------- ------------ ---------- --------
<S>                                     <C>        <C>        <C>       <C>          <C>        <C>
Service cost                             $     161  $     552  $     550 $      238   $      728 $    421
Interest cost                                  782        803        803        460          808      473
Expected return on plan assets                (850)      (582)      (658)        --           --       --
Amortization of gains and losses               121         85         --         133         408       --
Curtailment of salaried benefits                --         --         --      (3,811)         --       --
                                         ---------- ---------- --------- ------------ ---------- --------
Net periodic benefit cost                $     214  $     858  $     695 $    (3,080) $    1,944 $    894
                                         ========== ========== ========= ============ ========== ========
</TABLE>

      The Company is required to make assumptions regarding such variables as
      the expected long-term rate of return on plan assets and the discount rate
      applied to determine service cost and interest cost. The rate of return on
      assets used is determined based upon analysis of the plans' historical
      performance relative to the overall markets and mix of assets. The
      assumptions listed below represents Management's review of relevant market
      conditions and have been adjusted, as appropriate. The weighted average
      assumptions used in the measurement of the Company's benefit obligation
      are as follows:

                                      F-20
<PAGE>
<TABLE>
<CAPTION>
                                                  PENSION BENEFITS           POSTRETIREMENT BENEFITS
                                         ------------------------------- --------------------------------
                                            2004       2003       2002       2004        2003      2002
                                         ---------- ---------- --------- ------------ ---------- --------
<S>                                     <C>        <C>        <C>       <C>          <C>        <C>
Discount rate                                5.50%      5.50%     6.75%     5.75%       6.25%      6.75%
Expected return on plan assets               8.50%      8.50%     8.50%       --          --         --
Rate of compensation increase                 N/A       4.00%     4.00%       --          --         --

</TABLE>

      For measurement purposes of the postretirement benefits, the assumed
      health care cost trend rate for participants under age 65 as of December
      31, 2004, 2003 and 2002 was 11.0%, 12.0% and 12.0%, respectively, and for
      participants age 65 and over the rate was 11.0%, 12.0% and 12.0%,
      respectively. The health care cost trend rate was assumed to decline
      gradually to 5.5% for pre-age 65 and for post-age 65 costs over 6 years.

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

<TABLE>
<CAPTION>
                                                                                               2004        2003      2002
                                                                                            ----------- ---------- ----------
<S>                                                                                        <C>         <C>        <C>
Effect on total of service and interest cost components of net periodic postretirement cost $      123  $      269 $     3
Effect on the health care component of the accumulated postretirement benefit obligation    $    1,100  $    2,280 $    49

</TABLE>

      The following benefit payments, which reflect expected future service, as
      appropriate, are expected to be paid:

                                                             OTHER
                                          PENSION        POSTRETIREMENT
                                       BENEFITS U.S.      BENEFITS (U.S.
                                           PLANS             PLANS)
                                     ----------------- ------------------
                                      (IN THOUSANDS)     (IN THOUSANDS)

2005                                $             681  $             204
2006                                              736                244
2007                                              766                280
2008                                              811                330
2009                                              861                385
2010-2014                           $           5,083  $           2,851

      The Company's policy for the postretirement benefits plan is to make
      contributions equal to the benefits paid during the year. The Company
      expects to make $0.3 million of contributions to the plan in the year
      ending December 31, 2005.

      The Company also sponsors a voluntary 401(k) retirement savings plan.
      Eligible employees may elect to contribute up to 15% of their annual
      earnings subject to certain limitations. The Company match for the hourly
      employees is 100.0% of each eligible participant's contribution up to 6%
      of compensation for the plan year. The Company's matching for hourly
      employees is subject to a 3-year vesting schedule. The Company match for
      the salaried employees is 100.0% of each eligible participant's
      contribution up to 6% of compensation for the plan year. Company matching
      is immediate for salaried employees. Additional discretionary matching
      contributions by the Company are determined annually by the Board of
      Directors. Company matching contributions to this plan were approximately
      $0.5 million, $0.5 million and $0.4 million for each of the years ended
      December 31, 2004, 2003 and 2002, respectively.

15.   LEASE COMMITMENTS:

      The Company leases certain office space and vehicles for varying periods.

      The following is a schedule of future minimum lease payments for operating
      leases that had initial or remaining non-cancelable lease terms in excess
      of one year as of December 31, 2004 (in thousands):


                                                       OPERATING
                                                        LEASES
                                                     -------------

2005                                                 $      1,213
2006                                                        1,139
2007                                                          932
2008                                                          510
2009                                                          312
2010 and beyond                                             1,486
                                                     -------------
Total minimum lease payments                         $      5,592
                                                     =============

                                      F-21
<PAGE>
      Lease expense for the years ended December 31, 2004, 2003 and 2002 was
      $1,081, $840 and $786, respectively.

16.   MANDATORILY REDEEMABLE PREFERRED STOCK

      On July 1, 2002 the Company commenced a consent solicitation (the "Consent
      Solicitation") from registered holders of its 12% Senior Exchange
      Payment-in-Kind Preferred Stock, par value $0.01 per share ("Preferred
      Stock"), for certain amendments to the certificate of incorporation of the
      Company which would amend the terms of the Preferred Stock. The proposed
      amendments required the consent of the holders of a majority of the issued
      and outstanding shares of common stock of the Company and the consent of
      the holders of a majority of the issued and outstanding shares of
      Preferred Stock. A consent by the holders of a majority of the Company's
      outstanding common stock was executed on June 28, 2002. On July 29, 2002,
      the Consent Solicitation was successfully completed, with the Company
      receiving consents from the holders of more than 99% of the outstanding
      shares of Preferred Stock.

      The amendments to the Preferred Stock, among other things: (i) accelerated
      the mandatory redemption date of the Preferred Stock from June 15, 2007 to
      June 15, 2005, which will require the Company to redeem the Preferred
      Stock at an earlier date, (ii) reduced the liquidation preference from
      $25.00 to $22.00 per share, which will lower the Company's cost of
      redeeming the Preferred Stock and will lower the amount of dividends
      payable thereon (which dividends are equal to 12% of the liquidation
      preference per annum), (iii) eliminated any redemption premium, which will
      lower the Company's potential cost of redeeming the Preferred Stock prior
      to June 15, 2005, (iv) reduced the repurchase price that the Company must
      offer the holders of Preferred Stock upon a change of control from 101% to
      100% of the liquidation preference, which will lower the Company's
      potential cost of any such repurchase obligation, (v) permitted future
      dividends to be paid through the issuance of additional shares of
      preferred stock, which will provide the Company with greater flexibility
      in financing its operations, and (vi) included a definition for the term
      "Permitted Investments", which definition was inadvertently omitted from
      the Certificate of Designation pursuant to which the Preferred Stock was
      created.

      As consideration for these amendments, the Company paid each registered
      holder of Preferred Stock that consented thereto $0.40 per share in cash.
      A total of approximately $985 in consent fees were paid. The Company paid
      an additional amount of approximately $236 in legal and other fees related
      to the Consent Solicitation. As a result of the Consent Solicitation the
      Company recognized a gain of $5.4 million.

      For the preferred stock dividend payments on September 15, 2002, December
      15, 2002, March 15, 2003, June 15, 2003, September 15, 2003 and December
      15, 2003, the Company chose to make this payment in kind. For the
      preferred stock dividend payment due on March 15, 2004 the Company chose
      to make this payment in cash.

      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.

      On March 18, 2004, in connection with the refinancing of its existing
      debt, the Company redeemed all outstanding shares of the preferred stock,
      at the applicable redemption price equal to the liquidation preference of
      the preferred stock ($22.00 per share), plus an amount in cash equal to
      all accumulated and unpaid dividends for a total of $65,080.

17.   SHARE INCENTIVE PLANS:

      As of December 31, 2003, the Company had two share incentive plans
      covering certain key employees which provided for the granting of options
      to purchase common stock of the Company and other stock related benefits.
      Pursuant to the reorganization on February 9, 2004, as described in Note
      2, each of the 539,235 issued and outstanding shares of voting common
      stock of the Company were converted into the right to receive one share of
      common stock of the Parent. In connection therewith, the liability of
      $2,149 relating to the share incentive plans was transferred to the
      Parent.


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

                                      F-22
<PAGE>
<TABLE>
<CAPTION>
                                                             FOR THE YEAR ENDED DECEMBER 31, 2004
                                                                     AS RESTATED, NOTE 1
                                                        ---------------------------------------------
                                                            INCOME          SHARES        PER SHARE
                                                         (NUMERATOR)     (DENOMINATOR)      AMOUNT
                                                        -------------- ----------------- ------------
<S>                                                     <C>            <C>               <C>
Net loss                                                $     (27,835)
Less: Preferred stock dividends                                (1,613)
                                                        --------------
Basic and diluted:
      Net loss available to common stockholders         $     (29,448)           58,161  $   (506.32)
                                                        ==============


                                                             FOR THE YEAR ENDED DECEMBER 31, 2003
                                                        ---------------------------------------------
                                                            INCOME          SHARES        PER SHARE
                                                         (NUMERATOR)     (DENOMINATOR)      AMOUNT
                                                        -------------- ----------------- ------------

Net income                                              $      (6,241)
Less: Preferred stock dividends                                 7,275
                                                        --------------
Basic:
      Net income available to common stockholders       $     (13,516)         528,241   $    (25.59)
                                                        ==============


                                                             FOR THE YEAR ENDED DECEMBER 31, 2002
                                                        ---------------------------------------------
                                                            INCOME          SHARES        PER SHARE
                                                         (NUMERATOR)     (DENOMINATOR)      AMOUNT
                                                        -------------- ----------------- ------------

Net income                                              $       5,485
Less: Preferred stock dividends                                (6,976)
Plus: Net gain on restructuring of preferred stock              5,395
                                                        --------------
Basic:
      Net loss available to common stockholders         $       3,904          528,241  $      7.39
                                                        ==============

Diluted:
      Net loss available to common stockholders         $       3,904          664,939  $      5.87
                                                        ==============
</TABLE>


The calculations above are based on the weighted average number of shares of
common stock outstanding during the year. For the year ended December 31, 2003,
common equivalent shares from stock options of 93,271 are excluded from the
computations as their effect is antidilutive. For the year ended December 31,
2003, warrants of 63,490 are excluded from the computations as their effect is
antidilutive.

19.   FOURTH QUARTER ADJUSTMENT:

      The fourth quarters of 2004, 2003 and 2002 included adjustments to
      increase the LIFO expense and decrease pre-tax income by approximately
      $2.1 million, $1.9 million and $0.4 million, respectively. The fourth
      quarter of 2004 also included adjustments to decrease
      pension/post-retirement benefit expense by approximately ($0.2) million.
      The fourth quarter of 2003 also included adjustments to increase the post
      retirement benefits expense by approximately $1.1 million, as a result of
      year-end actuarial computations.

20.   SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):

      All amounts are in thousands except net income (loss) per share.

<TABLE>
<CAPTION>
                    -----------------------------------------------------------------------------------------
                                                             QUARTER
                    -----------------------------------------------------------------------------------------
                          1ST              2ND               3RD         4TH AS REPORTED   4TH AS RESTATED
                    --------------- ----------------- ----------------- ----------------- -------------------
<S>                <C>             <C>               <C>               <C>                <C>
2004
Net sales           $    22,105     $        37,207   $        30,741   $          25,267 $          25,267
Gross profit              9,853              20,140            16,966               9,744             9,744
Net income (loss)        (7,245)              1,974             7,174             (21,545)          (31,351)
Basic net income
   (loss) per share      (30.98)         197,400.00        717,400.00      (2,154,500.00)     (3,135,100.00)
Diluted net income
   (loss) per share      (30.98)         197,400.00        717,400.00      (2,154,500.00)     (3,135,100.00)


2003
Net sales           $    14,249     $        30,251   $        28,718   $          28,375 $          28,375
Gross profit              6,549              17,496            16,882              12,049            12,049
Net income (loss)        (5,164)            (11,822)              232               3,237             3,237
Basic net income
   (loss) per share       (9.78)             (22.38)             0.44                6.13              6.13
Diluted net income
   (loss) per share       (9.78)             (22.38)             0.38                6.13              6.13

</TABLE>
                                      F-23
<PAGE>
21.   CONTINGENCIES:

      LITIGATION WITH REPUBLIC TOBACCO

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

      On June 30, 1998, Republic Tobacco filed a complaint against the Company,
      NAOC and NTC in the U.S. District Court of the Northern District of
      Illinois (the "Illinois Complaint") and served it on the Company after the
      institution of the Kentucky action. In the Illinois Complaint, Republic
      Tobacco seeks declaratory relief with respect to the Company's claims. In
      addition, the Illinois Complaint alleges that certain actions taken by 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 alleged that the Company has unlawfully monopolized and attempted
      to monopolize the market on a national and regional basis for premium
      cigarette papers. Republic sought unspecified compensatory damages,
      injunctive relief and attorneys fees and costs.

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

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

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

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

                                      F-24
<PAGE>
      On September 1, 2004, the Court of Appeals issued its ruling affirming the
      finding of liability against the Company for defamation, but reducing the
      amount of the damage award to $3.0 million. The Court of Appeals also
      affirmed the dismissal of the Company's antitrust claim against Republic
      and the dismissal of Republic's motion to re-instate the original jury
      award of $18.8 million. As a result of these rulings, in October 2004 the
      Company received approximately $4.5 million relating to the cash bond it
      had posted with the Court in 2003. This amount was included in Other
      income during 2004.

      The Company has also applied to the Court of Appeals for an order awarding
      the Company approximately $1.0 million for the difference in the expense
      of the original bond of $18.8 million and the subsequent reduced bond of
      $7.0 million, on the one hand, and the lesser expense the Company would
      have incurred to bond the final $3.0 million judgment, on the other hand.
      On November 30, 2004, the Court of Appeals ruled that the application for
      costs should be directed to the District Court. On December 17, 2004, the
      Company filed this motion with the District Court. That motion has been
      fully briefed and the parties are waiting for the Court to rule.

      LITIGATION RELATED TO COUNTERFEITING

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

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

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

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

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


                                      F-25
<PAGE>
      Pursuant to the U.S. Distribution Agreement and a related agreement
      between Bollore and the Company, 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.

      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. On June 27,
      2003, the Court found Import Warehouse and Mr. Bhatia in contempt of court
      for violating an existing injunction barring those parties from
      distributing infringing ZIG-ZAG cigarette paper products. The Court
      requested that the Company and Bollore (the Company's co-plaintiff in the
      case) file a submission detailing the damages incurred. The Company and
      Bollore filed their submission on July 25, 2003 which reported and
      requested damages of $2.4 million.

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

      LITIGATION RELATED TO ALLEGED PERSONAL INJURY

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

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

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

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

      All of the West Virginia smokeless tobacco actions have been consolidated
      before the West Virginia Mass Litigation Panel for discovery and trial of
      certain issues. Trial of these matters was planned in two phases. In the
      initial phase, a trial was to be held to determine whether tobacco
      products, including all forms of smokeless tobacco, cigarettes, cigars and


                                      F-26
<PAGE>
      pipe and roll-your-own tobacco, can cause certain specified diseases or
      conditions. In the second phase, individual plaintiffs would attempt to
      prove that they were in fact injured by tobacco products. Fact and expert
      discovery in these cases has closed, however, in the cigarette cases the
      Court has allowed additional discovery.

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

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

      The trial court has now vacated the initial trial plan in its entirety
      because of concerns that its provisions violated the dictates of the
      United States Supreme Court's decision in State Farm Mutual Automobile
      Insurance Company v. Campbell, 538 U.S. 408 (2003). A new trial plan has
      not yet been implemented with regard to the consolidated claims against
      the cigarette manufacturer defendants. The West Virginia Supreme Court has
      accepted review of the case management order and the plaintiffs filed
      their brief on March 24, 2005. The claims against the smokeless tobacco
      manufacturer defendants remain severed and indefinitely stayed.

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

      In addition to the above described legal proceedings, the Company is
      subject to other litigation in the ordinary course of its business. The
      Company does not believe that any of these other proceedings will have a
      material adverse effect on the results of operations, financial position
      or cash flows of the Company.

      OTHER EMPLOYMENT MATTERS

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

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


                                      F-27
<PAGE>
      quarter of 2005, the Company expects to record approximately $1.1 million
      relating to the resignation of Mr. Brunson. Any options or shares of
      restricted stock granted to Mr. Brunson vest in full as of the date of
      such termination.


22.   PARENT-ONLY FINANCIAL INFORMATION:

      The Company is a holding company with no independent operations and no
      independent 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 Company's subsidiaries are wholly-owned and guarantee the New
      Senior Notes of the Company on a full, unconditional, and joint and
      several basis and any other subsidiaries of the Company other than the
      guarantors are minor. Within the New Senior Notes there are no significant
      restrictions on the ability of the Company to obtain funds from its
      subsidiaries by dividend or loan. Separate financial statements of the
      subsidiaries are not required and have not been included in these
      financial statements.

23.   SEGMENT INFORMATION:

      The Company has been historically organized on the basis of product lines
      which are comprised of three reportable segments. The smokeless tobacco
      segment manufactures smokeless tobacco products which are distributed
      primarily through wholesale and food distributors in the United States.
      The make-your-own segment imports and distributes premium cigarette
      papers, tobaccos and related products primarily through wholesale
      distributors in the United States. The premium cigarette segment
      distributes contract manufactured cigarettes through wholesale
      distributors in the United States.

      The accounting policies of 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 based on earnings
      before interest, taxes, depreciation, amortization, certain non-cash
      charges and other income and expenses (Adjusted EBITDA).

      The table below presents financial information about reported segments for
      2004, 2003 and 2002 (in thousands):

<TABLE>
<CAPTION>
                                                             PREMIUM
                          SMOKELESS                        MANUFACTURED
                           TOBACCO      MAKE-YOUR-OWN       CIGARETTES       OTHER     ELIMINATIONS       TOTAL
                        ------------- ------------------ ---------------- ----------- ---------------  -------------
<S>                    <C>           <C>                <C>              <C>         <C>              <C>
2004
Net sales               $    46,214   $          63,577  $           270  $     5,259 $          --    $    115,320
Operating income              8,022              15,204           (4,830)         814            --          19,210
Adjusted EBITDA               9,983              16,546           (4,815)       1,085            --          22,799
Assets                       62,172             275,713            2,788       34,055      (146,029)        228,699


                                                                PREMIUM
                             SMOKELESS                        MANUFACTURED
                              TOBACCO      MAKE-YOUR-OWN       CIGARETTES       OTHER     ELIMINATIONS       TOTAL
                           ------------- ------------------ ---------------- ----------- ---------------  -------------

2003
Net sales                  $    36,697   $          64,677  $            64   $   155    $        --      $    101,593
Operating income                 4,601              18,533           (2,843)       30             --            20,321
Adjusted EBITDA                 10,404              20,143           (2,825)       32             --            27,754
Assets                          72,570             277,612            2,218        --       (108,756)          243,644

2002
Net sales                  $    35,732   $          58,693  $            --   $    --    $        --      $     94,425
Operating income                 5,966              23,421               --        --             --            29,387
Adjusted EBITDA                  9,904              25,214               --        --             --            35,118
Assets                          67,951             256,756               --        --       (111,113)          213,594

</TABLE>

      A reconciliation of Adjusted EBITDA to total consolidated operating income
      for 2004, 2003 and 2002 is as follows (in thousands):


                                      F-28
<PAGE>
                                         2004          2003          2002
                                    ------------- ------------- --------------

Adjusted EBITDA                     $     22,799  $     27,754  $     35,118
Depreciation expense                        (816)         (589)         (700)
Amortization expense                        (462)          (67)           --
Incentive Pay                             (2,107)           --             --
LIFO adjustment                           (2,232)       (3,459)       (3,878)
Stock option expense                        (838)         (417)         (576)
Pension/Postretirement expense             2,866        (2,901)         (577)
                                    ------------- ------------- --------------
Operating income                    $     19,210  $     20,321  $     29,387
                                    ============= ============= ==============


24.   TERMINATED ASSET PURCHASE AGREEMENT:

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

      On July 15, 2003, the Company and Star reached a mutual agreement to
      terminate the Star Cigarette Asset Purchase Agreement. Pursuant to the
      termination agreement, Star Scientific retained a $2.0 million earnest
      money deposit that had been placed into escrow by the Company and the
      parties executed releases of any liabilities arising out of the Star
      Cigarette Asset Purchase Agreement. The Company incurred $3.3 million of
      direct costs during 2003, including the $2.0 million earnest money deposit
      referred to above, in connection with this transaction. These costs are
      included in Other Expenses in the Condensed Consolidated Statements of
      Operations.

25.   NEW ACCOUNTING STANDARDS:

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

      In December 2003, the FASB issued revised Interpretation No. 46R,
      "Consolidation of Variable Interest Entities" ("FIN 46R"). FIN 46R
      provides guidance on how to identify a variable interest entity ("VIE")
      and determine when the assets, liabilities, non-controlling interest, and
      results of operations of a VIE need to be included in a company's
      consolidated financial statements. FIN 46R also requires additional
      disclosures by primary beneficiaries and other significant variable
      interest holders. Application of FIN 46R is required for interests in
      variable interest entities for years ending after December 15, 2003. The
      Company has determined that it has no variable interest entities.
      Application of FIN 46R is required for all other types of VIE's for
      periods ending after March 15, 2004. The application of FIN 46R had no
      effect on the Company's financial statements in 2004.

      In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
      amendment of ARB No. 43, Chapter 4," to clarify the accounting for
      abnormal amounts of idle facility expense, freight, handling costs, and
      wasted material (spoilage). SFAS No. 151 requires that items be recognized
      as current-period charges regardless of whether they meet the criterion of
      "so abnormal" that was previously stated in ARB No. 43, Chapter 4. In
      addition, SFAS No. 151 requires that allocation of fixed production


                                      F-29
<PAGE>
      overheads to the costs of conversion be based on the normal capacity of
      the production facilities. The provisions of this statement shall be
      effective for inventory costs incurred during fiscal years beginning after
      June 15, 2005. The Company does not expect SFAS No. 151 to have a material
      impact on the Company's financial condition or results of operations.

      In December 2004, the FASB issued SFAS No. 152, "Accounting for Real
      Estate Time-Sharing Transactions--an amendment of FASB Statements No. 66
      and 67." This Statement amends SFAS No. 66, "Accounting for Sales of Real
      Estate," to reference the financial accounting and reporting guidance for
      real estate time-sharing transactions that is provided in American
      Institute of Certified Public Accountants ("AICPA") Statement of Position
      04-2 ("SOP 04-2"), "Accounting for Real Estate Time-Sharing Transactions."
      This Statement also amends SFAS No. 67, "Accounting for Costs and Initial
      Rental Operations of Real Estate Projects," to state that the guidance for
      (a) incidental operations and (b) costs incurred to sell real estate
      projects does not apply to real estate time-sharing transactions. The
      accounting for those operations and costs is subject to the guidance in
      SOP 04-2. The Accounting Standards Executive Committee of the AICPA issued
      SOP 04-2 to address the diversity in practice caused by a lack of guidance
      specific to real estate time-sharing transactions. SFAS No. 152 and SOP
      No. 04-2 will improve the accounting and reporting of those transactions.
      The guidance is effective for financial statements for fiscal years
      beginning after June 15, 2005, with earlier application encouraged. The
      Company currently does not participate in any real estate time-sharing
      transactions.

      In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
      Assets - an amendment of APB Opinion No. 29," to eliminate the exception
      for nonmonetary exchanges of similar productive assets and replaces it
      with a general exception for exchanges of nonmonetary assets that do not
      have commercial substance. A nonmonetary exchange has commercial substance
      if the future cash flows of the entity are expected to change
      significantly as a result of the exchange. The guidance is effective for
      nonmonetary asset exchanges occurring in fiscal periods beginning after
      June 15, 2005. The Company does not expect SFAS No. 153 to have a material
      impact on the Company's financial condition or results of operations.

      In December 2004, the FASB issued two FASB Staff Positions ("FSP")
      regarding the accounting implications of the American Jobs Creation Act of
      2004 (the "Act"). The Act provides a deduction for income from qualified
      domestic production activities, which will be phased in from 2005 through
      2010. In return, the Act also provides for a two-year phase-out of the
      existing extra-territorial income exclusion ("ETI") for foreign sales.
      Under the guidance in FSP No. FAS 109-1, "Application of FASB Statement
      109, Accounting for Income Taxes,' to the Tax Deduction on Qualified
      Production Activities Provided by the American Jobs Creation Act of 2004,"
      the deduction will be treated as a "special deduction" as described in
      FASB Statement No. 109. As such, the special deduction has no effect on
      deferred tax assets and liabilities existing at the enactment date and is
      not expected to have an impact on the Company's effective tax rate until
      fiscal year 2005. FSP No. FAS 109-2, "Accounting and Disclosure Guidance
      for the Foreign Earnings Repatriation Provision within the American Jobs
      Creation Act of 2004," is effective for 2004 and is disclosed in Note (10)
      "Income Taxes."

      In December 2003, the Medicare Prescription Drug, Improvement and
      Modernization Act of 2003 (the "Act"), which introduces a Medicare
      prescription drug benefit, as well as a federal subsidy to sponsors of
      retiree health care benefit plans that provide a benefit that is at least
      actuarially equivalent to the Medicare benefit, was enacted. In May 2004,
      the FASB issued Financial Staff Position No. 106-2, "Accounting and
      Disclosure Requirements Related to the Medicare Prescription Drug,
      Improvement and Modernization Act of 2003" ("FSP 106-2") to discuss
      certain accounting and disclosure issues raised by the Act. FSP 106-2
      addresses accounting for the federal subsidy for the sponsors of single
      employer defined benefit postretirement healthcare plans and disclosure
      requirements for plans for which the employer has not yet been able to
      determine actuarial equivalency. In January 2005, the Centers for Medicare
      and Medicaid Services released the final regulations implementing the
      Medicare Prescription Drug, Improvement, and Modernization Act of 2003.

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


                                      F-30
<PAGE>
EXHIBIT
NUMBER       DESCRIPTION
---------    -------------------------------------------------------------------

2.1          Asset Purchase Agreement, dated as of February 18, 2003, among
             North Atlantic Trading Company, Inc., Star Scientific, Inc. and
             Star Tobacco, Inc. (incorporated herein by reference to Exhibit 2.1
             to the Registrant's Current Report on Form 8-K filed on February
             19, 2003).

2.2          Termination and Release Agreement, dated as of July 15, 2003, among
             North Atlantic Trading Company, Inc., Star Scientific, Inc. and
             Star Tobacco, Inc. (incorporated herein by reference to Exhibit 2.1
             to the Registrant's Current Report on Form 8-K filed on July 17,
             2003).

2.3          Release, dated July 15, 2003, executed by North Atlantic Trading
             Company, Inc. (incorporated herein by reference to Exhibit 2.2 to
             the Registrant's Current Report on Form 8-K filed on July 17,
             2003).

2.4          Release, dated July 15, 2003, executed by Star Scientific, Inc. and
             Star Tobacco, Inc. (incorporated herein by reference to Exhibit 2.3
             to the Registrant's Current Report on Form 8-K filed on July 17,
             2003).

2.5          Stock Purchase Agreement, dated as of November 17, 2003, among
             North Atlantic Trading Company, Inc., Bobby Stoker, Ronald Stoker,
             Judith Stoker Fisher, BSF Partners, L.P., JFS Partners, L.P., and
             RBJ Machinery Co., LLC (incorporated herein by reference to Exhibit
             2.1 to the Registrant's Current Report on Form 8-K filed on
             November 24, 2003).

2.6          Agreement and Plan of Merger, dated as of February 9, 2004, among
             North Atlantic Trading Company, Inc., North Atlantic Holding
             Company, Inc., and NATC Merger Sub, Inc. (incorporated herein by
             reference to Exhibit 2.1 to the Registrant's Current Report on Form
             8-K filed on February 11, 2004).

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) the Registrant's Annual Report on Form
             10-K for the fiscal year ended December 31, 1997).

3.1(b)       Certificate of Correction to the Restated Certificate of
             Incorporation of North Atlantic Trading Company, Inc., dated as of
             June 28, 2002 (incorporated herein by reference to Exhibit 3.1(b)
             the Registrant's Annual Report on Form 10-K for the fiscal year
             ended December 31, 2002).

3.1(c)       Certificate of Amendment to the Certificate of Incorporation of
             North Atlantic Trading Company, Inc., dated July 30, 2002
             (incorporated herein by reference to Exhibit 3.1 to the
             Registrant's Current Report on Form 8-K filed on July 31, 2002).



                                   Exhibit - 1
<PAGE>
EXHIBIT
NUMBER       DESCRIPTION
---------    -------------------------------------------------------------------

3.1(d)       Certificate of Incorporation of North Atlantic Operating Company,
             Inc., filed June 9 1997 (incorporated herein by reference to
             Exhibit 3.1(b)(i) to Amendment No. 1 to Registration Statement
             (Reg. No. 333-31931) on Form S-4 filed with the Commission on
             September 3, 1997).

3.1(e)       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(f)       Second Amended and 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(g)       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(h)       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(i)       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 July
             23, 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 July 23, 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).




                                   Exhibit - 2
<PAGE>
EXHIBIT
NUMBER       DESCRIPTION
---------    -------------------------------------------------------------------

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, 1999).

4.1          Warrant to Purchase Common Stock, granted in favor of Guggenheim
             Investment Management, LLC by North Atlantic Trading Company, Inc.,
             dated September 30, 2002 (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, 2002).

4.2          Warrant to Purchase Common Stock, granted in favor of Peter J.
             Solomon Company Limited by North Atlantic Trading Company, Inc.,
             dated as of June 4, 2001 (incorporated herein by reference to
             Exhibit 4.4 to the Registrant's Annual Report on Form 10-K for the
             fiscal year ended December 31, 2002).

4.3          Class B Term Note dated November 17, 2003, issued by North Atlantic
             Trading Company, Inc. in favor of Upper Columbia Capital Company,
             LLC ("Upper Columbia") in the principal amount of Twenty Three
             Million Dollars ($23,000,000.00) (incorporated herein by reference
             to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed
             on November 24, 2003).

4.4          Class B Term Note dated July 31, 2003 (amended and restated as of
             November 17, 2003), issued by North Atlantic Trading Company, Inc.,
             in favor of 1888 Fund, Ltd. in the principal amount of Five Million
             Five Hundred Thousand Dollars ($5,500,000.00) (incorporated herein
             by reference to Exhibit 4.2 to the Registrant's Current Report on
             Form 8-K filed on November 24, 2003).

4.5          Class B Term Note dated July 31, 2003 (amended and restated as of
             November 17, 2003), issued by North Atlantic Trading Company, Inc.,
             in favor of MAGMA CDO, Ltd. in the principal amount of Five Million
             Five Hundred Thousand Dollars ($5,500,000.00) (incorporated herein
             by reference to Exhibit 4.3 to the Registrant's Current Report on
             Form 8-K filed on November 24, 2003).



                                   Exhibit - 3
<PAGE>
EXHIBIT
NUMBER       DESCRIPTION
---------    -------------------------------------------------------------------

4.6          Class B Term Note dated July 31, 2003 (amended and restated as of
             November 17, 2003), issued by North Atlantic Trading Company, Inc.,
             in favor of Bingham CDO, L.P. in the principal amount of Five
             Million Dollars ($5,000,000.00) (incorporated herein by reference
             to Exhibit 4.4 to the Registrant's Current Report on Form 8-K filed
             on November 24, 2003).

4.7          Class B Term Note dated July 31, 2003 (amended and restated as of
             November 17, 2003), issued by North Atlantic Trading Company, Inc.,
             in favor of Stellar Funding, Ltd. in the principal amount of Three
             Million Dollars ($3,000,000.00) (incorporated herein by reference
             to Exhibit 4.5 to the Registrant's Current Report on Form 8-K filed
             on November 24, 2003).

4.8          Indenture, dated as of February 17, 2004, among North Atlantic
             Trading Company, Inc., the Guarantors listed on the signature pages
             thereto and Wells Fargo Bank Minnesota, National Association, a
             national banking association, as Trustee (incorporated herein by
             reference to Exhibit 4.10 to the Registrant's Annual Report on Form
             10-K for the fiscal year ended December 31, 2003).

4.9          Registration Rights Agreement, dated as of February 17, 2004, by
             and among North Atlantic Trading Company, Inc., the Guarantors
             listed on the signature pages thereto, Citigroup Global Markets
             Inc. and RBC Capital Markets Corporation (incorporated herein by
             reference to Exhibit 4.11 to the Registrant's Annual Report on Form
             10-K for the fiscal year ended December 31, 2003).

9.1          Amended and Restated Exchange and Stockholders' Agreement, dated as
             of February 9, 2004, by and among North Atlantic Holding Company,
             Inc., North Atlantic Trading Company, Inc. and those stockholders
             listed therein (incorporated herein by reference to Exhibit 9.1 to
             the Registrant's Annual Report on Form 10-K for the fiscal year
             ended December 31, 2003).

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 17, 1997).



                                   Exhibit - 4
<PAGE>
EXHIBIT
NUMBER       DESCRIPTION
---------    -------------------------------------------------------------------

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 17, 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 17, 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 17, 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 10.16 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 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).

10.10++      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).



                                   Exhibit - 5
<PAGE>
EXHIBIT
NUMBER       DESCRIPTION
---------    -------------------------------------------------------------------

10.11++      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).

10.12++      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).

10.13++      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).

10.14++      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).

10.15++      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).

10.16++      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).

10.17+       Amendment, dated October 22, 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).

10.18        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).

10.19++      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).



                                   Exhibit - 6
<PAGE>
EXHIBIT
NUMBER       DESCRIPTION
---------    -------------------------------------------------------------------

10.20++      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).

10.21        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).

10.22++      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, 1999).

10.23++      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,
             1999).

10.24++      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,
             1999).

10.25        Amended and Restated Loan Agreement, dated as of February 17, 2004,
             by and among Bank One, NA, LaSalle Bank National Association, North
             Atlantic Trading Company, Inc., North Atlantic Holding Company,
             Inc., the subsidiaries of North Atlantic Trading Company, Inc.
             named therein and the lenders party thereto (incorporated herein by
             reference to Exhibit 10.26 to the Registrant's Annual Report on
             Form 10-K for the fiscal year ended December 31, 2003).

10.26        Amended and Restated Security Agreement, dated as of February 17,
             2004, among North Atlantic Trading Company, Inc., National Tobacco
             Company, L.P., North Atlantic Operating Company, Inc., National
             Tobacco Finance Corporation, Stoker, Inc., RBJ Sales, Inc., Fred
             Stoker & Sons, Inc., North Atlantic Cigarette Company, Inc. and
             Bank One, N.A., as agent on behalf of itself and other banks
             (incorporated herein by reference to Exhibit 10.27 to the
             Registrant's Annual Report on Form 10-K for the fiscal year ended
             December 31, 2003).

10.27        Amended and Restated Guaranty Agreement, dated as of February 17,
             2004, among National Tobacco Company, L.P., North Atlantic
             Operating Company, Inc., National Tobacco Finance Corporation,
             Stoker, Inc., RBJ Sales, Inc., Fred Stoker & Sons, Inc., North
             Atlantic Cigarette Company, Inc. and Bank One, N.A., as agent on
             behalf of itself and other banks (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, 2003).



                                   Exhibit - 7
<PAGE>
EXHIBIT
NUMBER       DESCRIPTION
---------    -------------------------------------------------------------------

10.28        Amended and Restated Pledge Agreement, dated as of February 17,
             2004, among and North Atlantic Trading Company, Inc., National
             Tobacco Company, L.P., North Atlantic Operating Company, Inc.,
             National Tobacco Finance Corporation, Stoker, Inc., RBJ Sales,
             Inc., Fred Stoker & Sons, Inc., North Atlantic Cigarette Company,
             Inc. and Bank One, N.A., as agent on behalf of itself and other
             banks (incorporated herein by reference to Exhibit 10.29 to the
             Registrant's Annual Report on Form 10-K for the fiscal year ended
             December 31, 2003).

10.29        2005 A Amendment to the Amended and Restated Loan Agreement, made
             and entered into as of February 17, 2004, by and among Bank One, NA
             as the Agent Bank, Bank One and LaSalle Bank, National Association,
             the Company, certain of its subsidiaries and North Atlantic Holding
             Company, Inc. (incorporated herein by reference to Exhibit 99.2 to
             the Registrant's Current Report on Form 8-K filed on January 21,
             2005).

10.30++      Offer of Employment, dated March 28, 2002, between the Company and
             Robert A. Milliken, Jr. (incorporated herein by reference to
             Exhibit 1 to the Registrant's Quarterly Report on 10-Q for the
             fiscal quarter ended March 31, 2002).

10.31        Promissory Note, dated March 31, 2002, issued by David I. Brunson
             in favor of North Atlantic Trading Company, Inc. (incorporated
             herein by reference to Exhibit 10.1 to the Registrant's Quarterly
             Report on 10-Q for the fiscal quarter ended June 30, 2002).

10.32        Promissory Note, dated March 31, 2002, issued by Chris Kounnas in
             favor of North Atlantic Trading Company, Inc. (incorporated herein
             by reference to Exhibit 10.2 to the Registrant's Quarterly Report
             on 10-Q for the fiscal quarter ended June 30, 2002).

10.33        Secured Promissory Note, dated March 31, 2002, issued by Helms
             Management Corp. in favor of North Atlantic Trading Company, Inc.
             (incorporated herein by reference to Exhibit 10.3 to the
             Registrant's Quarterly Report on 10-Q for the fiscal quarter ended
             June 30, 2002).

10.34        Secured Promissory Note, dated March 31, 2002, issued by Thomas F.
             Helms, Jr. in favor of North Atlantic Trading Company, Inc.
             (incorporated herein by reference to Exhibit 10.4 to the
             Registrant's Quarterly Report on 10-Q for the fiscal quarter ended
             June 30, 2002).

10.35        Pledge and Security Agreement, dated as of March 31, 2002, between
             Thomas F. Helms, Jr., Helms Management Corp. and North Atlantic
             Trading Company, Inc. (incorporated herein by reference to Exhibit
             10.5 to the Registrant's Quarterly Report on 10-Q for the fiscal
             quarter ended June 30, 2002).

10.36++      Amendment, dated November 25, 2002, to the 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 10.38 to the Registrant's Annual
             Report on Form 10-K for the fiscal year ended December 31, 2002).



                                   Exhibit - 8
<PAGE>
EXHIBIT
NUMBER       DESCRIPTION
---------    -------------------------------------------------------------------

10.37++      Employment Agreement dated as of November 21, 2002, between North
             Atlantic Trading Company, Inc. and James W. Dobbins (incorporated
             herein by reference to Exhibit 10.39 to the Registrant's Annual
             Report on Form 10-K for the fiscal year ended December 31, 2002).

10.38        Transfer Agreement, dated as of December 30, 2002, by and among
             Arnold Sheiffer, The Cleveland Clinic Foundation, North Atlantic
             Trading Company, Inc., and Thomas F. Helms, Jr. (incorporated
             herein by reference to Exhibit 10.40 to the Registrant's Annual
             Report on Form 10-K for the fiscal year ended December 31, 2002).

10.39        Transfer Agreement, dated as of December 30, 2002, by and among
             Arnold Sheiffer, Robert Maurice Grunder Memorial Fund, North
             Atlantic Trading Company, Inc., and Thomas F. Helms, Jr.
             (incorporated herein by reference to Exhibit 10.41 to the
             Registrant's Annual Report on Form 10-K for the fiscal year ended
             December 31, 2002).

10.40++      2002 Share Incentive Plan (incorporated herein by reference to
             Exhibit 10.42 to the Registrant's Annual Report on Form 10-K for
             the fiscal year ended December 31, 2002).

10.41++      Letter Agreement, dated November 8, 2002, between North Atlantic
             Trading Company, Inc. and Marketing Solutions USA (incorporated
             herein by reference to Exhibit 10.43 to the Registrant's Annual
             Report on Form 10-K for the fiscal year ended December 31, 2002).

10.42++      Letter Agreement, dated September 30, 2002, between North Atlantic
             Trading Company, Inc. and Jack Africk (incorporated herein by
             reference to Exhibit 10.44 to the Registrant's Annual Report on
             Form 10-K for the fiscal year ended December 31, 2002).

10.43        2003A Amendment to Loan Documents, dated as of July 31, 2003, by
             and among North Atlantic Trading Company, Inc., National Tobacco
             Company, L.P., North Atlantic Operating Company, Inc., National
             Tobacco Finance Corporation, Bank One, NA, successor to Bank One,
             Kentucky N.A., as agent bank and the various lending institutions
             named therein, Guggenheim Investment Management, LLC, as agent for
             the Class B Lenders named therein (incorporated herein by reference
             to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
             for the fiscal quarter ended June 30, 2003).



                                   Exhibit - 9
<PAGE>
EXHIBIT
NUMBER       DESCRIPTION
---------    -------------------------------------------------------------------

10.44        2003B Amendment to Loan Documents dated as of November 17, 2003,
             among North Atlantic Trading Company, Inc., National Tobacco
             Company, L.P., North Atlantic Operating Company, Inc., National
             Tobacco Finance Corporation, Stoker, Inc., RBJ Sales, Inc. and Fred
             Stoker & Sons, Inc., the Banks defined therein, Bank One, NA, as
             agent for the Banks ("Agent Bank"), the Class B Lenders as defined
             therein and Guggenheim Investment Management, LLC, as agent for
             Class B Lenders ("Class B Loan Agent") (incorporated herein by
             reference to Exhibit 10.1 to the Registrant's Current Report on
             Form 8-K filed on November 24, 2003).

10.45        Amended and Restated Subordination Agreement dated as of November
             17, 2003, by and among North Atlantic Trading Company, Inc.,
             National Tobacco Company, L.P., North Atlantic Operating Company,
             Inc., National Tobacco Finance Corporation, Stoker, Inc., RBJ
             Sales, Inc. and Fred Stoker & Sons, Inc., the Banks defined
             therein, Bank One, NA, as agent for the Banks ("Agent Bank"), the
             Class B Lenders as defined therein and Guggenheim Investment
             Management, LLC, as agent for Class B Lenders ("Class B Loan
             Agent") (incorporated herein by reference to Exhibit 10.2 to the
             Registrant's Current Report on Form 8-K filed on November 24,
             2003).

10.46        Second Amendment to Mortgage, Security Agreement, Assignment of
             Leases, Rents and Profits, Financing Statement and Fixture Filing,
             dated as of November 17, 2003, among Bank One, NA (as "Agent Bank"
             and "Mortgagee" for the benefit of the Banks as defined in the
             2003B Amendment to Loan Agreement) and National Tobacco Company,
             L.P. (the "Mortgagor") (incorporated herein by reference to Exhibit
             10.3 to the Registrant's Current Report on Form 8-K filed on
             November 24, 2003).

10.47        Assignment of Security Interest in the United States Trademarks,
             dated November 17, 2003, issued by Stoker, Inc. in favor of Bank
             One, NA (incorporated herein by reference to Exhibit 10.4 to the
             Registrant's Current Report on Form 8-K filed on November 24,
             2003).

10.48        Assignment of Security Interest in the United States Trademarks,
             dated November 17, 2003, issued by Fred Stoker & Sons, Inc. in
             favor of Bank One, NA (incorporated herein by reference to Exhibit
             10.5 to the Registrant's Current Report on Form 8-K filed on
             November 24, 2003).

10.49        2003C Amendment to Loan Documents dated as of December 23, 2003, by
             and among the Banks as defined therein, Bank One, NA, as agent bank
             on behalf of the Banks, the Class B Lenders as defined therein,
             Guggenheim Investment Management, LLC, as agent on behalf of the
             Class B Lenders, North Atlantic Trading Company, Inc. and the
             Subsidiaries as defined therein (incorporated herein by reference
             to Exhibit 10.1 to the Registrant's Current Report on Form 8-K
             filed on December 24, 2003).

10.50++      Employment Agreement, dated December 1, 2003, between Lawrence S.
             Wexler and North Atlantic Cigarette Company, Inc. (incorporated
             herein by reference to Exhibit 10.52 to the Registrant's Annual
             Report on Form 10-K for the fiscal year ended December 31, 2003).



                                   Exhibit - 10
<PAGE>
EXHIBIT
NUMBER       DESCRIPTION
---------    -------------------------------------------------------------------

10.51        Assignment and Assumption Agreement, dated as of February 9, 2004,
             between North Atlantic Trading Company, Inc. and North Atlantic
             Holding Company, Inc. (incorporated herein by reference to Exhibit
             10.53 to the Registrant's Annual Report on Form 10-K for the fiscal
             year ended December 31, 2003).

10.52++      Letter Agreement, dated as of January 19, 2005, between Alvarez &
             Marsal, LLC, North Atlantic Trading Company, Inc. and North
             Atlantic Holding Company, Inc. (incorporated herein by reference to
             Exhibit 10.52 to the Registrant's Annual Report on Form 10-K for
             the fiscal year ended December 31, 2004 filed with the Securities
             and Exchange Commision on March 31, 2005).

10.53++      Letter Agreement, dated as of October 3, 2003, between Jack Africk
             and North Atlantic Trading Company, Inc. (extending Consulting
             Agreement) (incorporated herein by reference to Exhibit 10.53 to
             the Registrant's Annual Report on Form 10-K for the fiscal year
             ended December 31, 2004 filed with the Securities and Exchange
             Commission on March 31, 2005).

10.54++      Letter Agreement, dated as of October 12, 2004, between Jack Africk
             and North Atlantic Trading Company, Inc. (extending and amending
             Consulting Agreement) (incorporated herein by reference to Exhibit
             10.54 to the Registrant's Annual Report on Form 10-K for the fiscal
             year ended December 31, 2004 filed with the Securities and Exchange
             Commission on March 31, 2005).

10.55        2005B Amendment to the Amended and Restated Loan Agreement dated
             March 30, 2005, by and among JP Morgan Chase Bank, N.A. ("Morgan"),
             as successor to Bank One, NA, as Agent Bank, Morgan and LaSalle
             Bank, National Association, the Company, certain of its
             subsidiaries and North Atlantic Holding Company, Inc. (incorporated
             herein by reference to Exhibit 10.55 to the Registrant's Annual
             Report on Form 10-K for the fiscal year ended December 31, 2004
             filed with the Securities and Exchange Commission on March 31,
             2005).

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, 2004 filed with
             the Securities and Exchange Commission on March 31, 2005).

31.1*        Certification by the Chief Executive Officer


31.2*        Certification by the Chief Financial Officer


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

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


*     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.



                                   Exhibit - 11