Back to GetFilings.com



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


(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

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 26, 2003, 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 43 holders of record, 13 of whom are
affiliates or employees of the Registrant. There is no trading market for the
Voting Common Stock.

As of March 26, 2003, 528,241 shares of the Registrant's Voting Common Stock,
par value $.01 per share were outstanding.


North Atlantic Trading Company, Inc.
2002 Form 10-K Annual Report


TABLE OF CONTENTS



PAGE

PART I
ITEM 1. BUSINESS........................................................................................................3

ITEM 2. PROPERTIES.....................................................................................................14

ITEM 3. LEGAL PROCEEDINGS..............................................................................................15

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................................19


PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS...........................................19

ITEM 6. SELECTED FINANCIAL DATA....................................................................................... 20

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................................33

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................................33

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........................33


PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................................34

ITEM 11. EXECUTIVE COMPENSATION.........................................................................................36

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.................46

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................................48

ITEM 14. CONTROLS AND PROCEDURES........................................................................................50


PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...............................................51


SIGNATURES.....................................................................................................................60




PART I

ITEM 1. BUSINESS

OVERVIEW

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

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. Since 1988, Mr. Helms has continued to
upgrade and expand the core of the management team which directs the Company
today.

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. The ZIG-ZAG brand was originally
introduced in France in 1879 by Bollore, a major French industrial concern. 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.

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

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 has agreed 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 is $80 million in cash, subject to
certain closing adjustments and the assumption of certain liabilities related to
the Star Cigarette Assets.

All requisite corporate approvals for this transaction have
been obtained, including the approvals of the Star Cigarette Asset Purchase
Agreement by the respective Boards of Directors of the Company and Star, by the


3

holders of a majority of the outstanding shares of common stock of Star
Scientific and by Star Scientific as the sole stockholder of Star Tobacco.

The transaction is expected to close in the second quarter
of 2003. The closing is subject to the Company's receipt of financing and to
customary closing conditions. Contemporaneously with the signing of the Star
Cigarette Asset Purchase Agreement, the Company placed a $2 million earnest
money deposit into escrow. In the event that, on or after July 15, 2003, the
Star Cigarette Asset Purchase Agreement is terminated by either the Company or
Star and, at that time, the Company has been unable to obtain the requisite
financing for the transaction and all other conditions to closing have been
satisfied or are capable of being satisfied, then such deposit will be paid to
Star. In all other events, the deposit will either be used to satisfy a portion
of the purchase price or repaid to the Company, as applicable.

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. Through the
acquisition of the Star Cigarette Assets, the Company intends to enter the
discount cigarette market and to expand that business with a strategy tailored
to maximize profitability.

INDUSTRY AND MARKETS

The Company currently competes in two distinct markets: (1)
the smokeless tobacco market and (2) the MYO cigarette segment of the cigarette
market. The Company believes that both the smokeless tobacco market, which
includes the loose leaf chewing tobacco segment, and the MYO cigarette segment
of the cigarette market, which is composed of the premium cigarette papers
sector and the rapidly growing MYO smoking tobaccos and related products sector,
are each characterized by non-cyclical demand, relative brand loyalty,
meaningful barriers to entry, similar 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 chewing tobacco, have
a long, established tradition of use in the United States dating back to
colonial times. Currently, an estimated 7 million Americans are regular users of
smokeless tobacco products, according to the Smokeless Tobacco Council.

The smokeless tobacco market is composed of the following
five product categories:

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

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

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


4

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

o Dry snuff, which is a powdered tobacco product that 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 these categories. Further,
many of its competitors in the smokeless tobacco market offer products in more
than a single smokeless tobacco category.

According to information provided by the Smokeless Tobacco
Council, manufacturers' sales for the smokeless tobacco market were $1.1 billion
in 1990 and $2.2 billion in 2001, representing a compounded annual growth rate
of 5.9%. This growth is primarily related to the increase in manufacturers'
sales of moist snuff which have grown from $705.7 million in 1990 to $1.8
billion in 2001, representing a compounded annual sales growth rate of 8.1%, an
increase from 42.5 million pounds in 1990 to 62.4 million pounds in 2001,
representing a compounded annual volume growth rate of 3.2%. Manufacturers'
sales of chewing tobacco products were $334.0 million in 1990 and $321.8 million
in 2001, representing a compounded annual sales rate of decline of 0.3%. During
the same period, the volume of chewing tobacco products has declined from 66.9
million pounds to 44.7 million pounds, a compounded annual volume rate of
decline of 3.3%.

Loose leaf chewing tobacco, which is the second largest
product category in the smokeless tobacco market, has generally been most
popular in the Southeast, Southwest and rural Northeast and North Central
regions of the United States. 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 have become an increasingly important distribution channel for all
tobacco products, including loose leaf chewing tobacco, as their volume has
grown to approximately 23% of all tobacco sales in 2002. Convenience stores have
also grown their share of the tobacco market by increasing their sales of
tobacco products while, during the same period, food stores and drug stores have
been deemphasizing their focus on sales of tobacco products and, as a result,
their volume has declined. Among these channels of distribution, some retail
customers choose to purchase loose leaf chewing tobacco directly from
manufacturers, although most choose to purchase through wholesale distributors.

MYO Cigarettes

Although rapidly growing, the MYO cigarette segment remains
a minor component of the overall U.S. cigarette market. If viewed as a part of
that total market, sales of MYO smoking tobacco on a cigarette equivalent basis,
would represent an estimated market share of 1.4% for 2002, up from 0.6% in
1997. In 2002, according to the USDA, the U.S. cigarette market sold
approximately 415 billion cigarettes. According to industry sources, these
cigarettes were consumed by approximately 23.3% of the adult population, or
approximately 45 million persons.

The MYO cigarette segment consists of several different
products, designed to work with each other. Among these products are cigarette
papers; cigarette tubes, which are cigarette papers with a filter fashioned into
an "empty" cigarette; cigarette smoking tobacco in loose form, packaged
typically in canisters, pouches or bags; cigarette rolling machines, used to
roll cigarette papers and smoking tobacco into a cigarette; and cigarette
injector machines, used to insert the smoking tobacco into the empty cigarette
tubes.

5

Cigarette papers are sold in booklets, and come in various
size papers. Cigarette papers can also be segmented by price and quality
characteristics, for example, premium interleaved papers in contrast to discount
"flat" or non-interleaved papers.

The MYO products are typically sold through mass
merchandisers, chain and independent convenience stores, tobacco outlets, food
stores and chain and independent drug stores. Among these channels of
distribution, certain retail customers choose to purchase MYO products directly
from manufacturers, although most choose to purchase through wholesale
distributors.

PRODUCTS

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

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 A.C. Nielsen, in 2002 full-flavored products
accounted for approximately 47% of the loose leaf volume and mild flavored
products comprised an estimated 53%. 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 is ranked
second in market share in the full-flavored loose leaf chewing tobacco category,
and third overall. BEECH-NUT WINTERGREEN was introduced in 1979 and has the
largest market share of any 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.

Premium Cigarette Papers and MYO Smoking Tobaccos and Related Products

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.
These styles are the most important in terms of sales, and they accounted for
approximately 91% of the Company's unit volume in 2002. Other premium paper
products sold under the ZIG-ZAG name are Kutcorners, which are designed for
easier handrolling; 1 1/2 sized, king sized; and double-wide.

The Company's MYO smoking tobacco products include its
European blend, ZIG-ZAG Gold Standard, and its American blend, ZIG-ZAG Classic
American Blend, tobaccos. MYO related products include ZIG-ZAG cigarette tubes,
ZIG-ZAG cigarette rolling and injector machines and a complete line of ZIG-ZAG
MYO cigarette starter kits.

SALES AND MARKETING

The Company has a 112 person nationwide sales organization,
which is divided into a national accounts group, a field sales organization, a
sales training department and a sales administration staff. The sales
organization was expanded and re-organized in 2002, primarily to allow the


6

Company to more effectively provide sales coverage and to penetrate the
distribution channel of the large chain convenience stores.

The Company has focused and will continue to focus its
sales efforts on both wholesale distributors and retail merchants in the
independent large 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 will continue to expand the sales of
its smokeless tobacco and MYO products into geographic markets and retail
channels that had previously been underdeveloped. The Company currently
distributes its products through approximately 1,000 customers.

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's largest customers, COD Company and McLane
Company, accounted for approximately 13.1% and 8.7%, respectively, of its net
sales in 2002. 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.

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 (the "U.S. Distribution Agreement" and the "Canada
Distribution Agreement," respectively). Under these 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 Company also has a long-term distribution and licensing
agreement for sales of ZIG-ZAG brand premium cigarette papers in Hong Kong,
Singapore, Dubai, Oman and Jordan (the "Other Countries Distribution Agreement"
and, together with the U.S Distribution Agreement and the Canada Distribution
Agreement, the "Distribution Agreements"). Under this agreement, Bollore granted
NAOC the exclusive right to purchase premium cigarette papers bearing the
ZIG-ZAG brand name for resale in those countries. NAOC has the sole right to
determine the price and other terms upon which NAOC may resell any products
purchased from Bollore, including the right to determine the distributors of
such products within the countries noted above. The Company and Bollore are
currently in dispute as to whether the Other Countries Distribution Agreement is
renewable after March 31, 2003 based on whether or not certain minimum purchase
requirements have been satisfied. The expiration and failure to renew the Other


7

Countries Distribution Agreement would not have a material adverse effect on the
results of operations, financial position or cash flows of the Company.

The Distribution Agreements establish the purchase price
for premium cigarette papers through 2004, subject to certain adjustments to
reflect increases in the U.S. and Canadian Consumer Price Indices and to account
for material currency fluctuations. The Distribution Agreements provide that, in
order to assure each of the parties commercially reasonable profits in light of
inflationary trends and currency translation factors, prior to December 31, 2004
and each fifth-year anniversary 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.

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

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
emergency inventory in the United States at Bollore's expense.

Under the Distribution Agreements, NAOC, in agreeing to the
terms of the Distribution Agreements, has also agreed for a period of five years
after termination of such Distribution Agreements not to engage, directly or
indirectly, in the manufacturing, selling, distributing, marketing or otherwise
promoting in the countries identified above, 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 2002 and which the Company believes were exceeded in the case of the
Other Countries Distribution Agreement) 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


8

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.

TRADEMARKS AND TRADE SECRETS

NTC has numerous registered trademarks relating to its
loose leaf chewing tobacco products, including the trademarks for its BEECH-NUT,
TROPHY, HAVANA BLOSSOM and DURANGO products. These trademarks, which are
significant to NTC's business, expire periodically and are renewable for
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 in the U.S. and Canada to NAOC. The
ZIG-ZAG trademark with respect to tobacco products is owned by NAOC.

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 other countries, such as Argentina, Brazil, Columbia,
Germany, Indonesia, Italy, Mexico, and the Philippines. Management does not
believe that it is dependent on any single country source for tobacco. Pursuant
to an agreement with Lancaster Leaf Tobacco Company of Pennsylvania, a wholly
owned subsidiary of Universal Corporation ("Lancaster"), and under instructions
from NTC, 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 its
facilities. NTC generally maintains a one- to 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 other federal agencies. NTC is not
dependent upon any single supplier for those raw materials or for the supply of
its products' packaging materials.

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

Premium Cigarette Paper and MYO Smoking Tobaccos and Related 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 NAOC has a steady


9

supply of premium cigarette paper products and 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
NTC's Louisville facility and in four regional bonded public warehouses.

NAOC obtains its MYO smoking tobaccos primarily from
international sources and is not dependent on any one type of tobacco for its
blends. NAOC purchases this smoking tobacco principally through a single
purchasing agent. 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. In
addition, Bollore is currently unable to maintain the required two-month supply
of inventory of cigarette tubes and injectors in the United States. As a result,
NAOC currently has a two-month backlog of orders for certain styles of tubes. As
part of recent contract negotiations with Bollore for the cigarette tubes and
injectors, NAOC has given Bollore additional time to build the required
two-month supply of inventory in the United States. Bollore currently
anticipates that it will resolve the supply problem by the third quarter of
2003. Bollore has not experienced any problems supplying the Company with
sufficient quantities of its premium cigarette paper products and is currently
maintaining the required two-month supply of such products in the United States.
Management currently believes that the Company's other sources for its supplies
are adequate for its projected needs.

MANUFACTURING

NTC manufactures its loose leaf chewing tobacco products at
its manufacturing facility in Louisville, Kentucky, and NAOC contracts for the
manufacture of its premium cigarette papers, cigarette tubes, rolling and
injector machines and MYO smoking tobaccos. In the case of its MYO smoking
tobacco products, NAOC packages these products at its manufacturing facility in
Louisville. 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 as these activities are
vital to maintaining the high-quality brand image and operating efficiency of
its 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 standards
are strictly adhered to by each of its contract manufacturers.


10

Research and Development

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

The Company spent approximately $464,000, $487,000 and
$539,000 on its research and development and quality control efforts for the
years 2000, 2001 and 2002, 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 good condition and have
received regular maintenance and capital improvements. The facility provides
ample space to accommodate an expansion of the Company.

COMPETITION

NTC is the third largest manufacturer and marketer of loose
leaf chewing tobacco. The other three principal competitors in the loose leaf
chewing tobacco segment, which, together with NTC, generate approximately 95% of
this segment's sales, are Swedish Match, 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
during that same period. In addition, NTC's three principal competitors in the
loose leaf segment also manufacture and market moist snuff.

NAOC is the largest importer and distributor in North
America of premium cigarette papers. NAOC's two major competitors for premium
cigarette paper sales, which, together with NAOC, generate approximately 93% of
such sales, are Republic Tobacco Company and Robert Burton Associates, a
wholly-owned subsidiary of Imperial Tobacco Group plc. Although there is no
source for comprehensive industry data, the Company believes that it has
approximately a 50% share of the total market for U.S. sales of premium
cigarette paper and that Republic Tobacco's share is approximately 25% and
Robert Burton Associates' share is approximately 18%.

The Company's principal competitors in the MYO segment are
Republic Tobacco Co., in conjunction with its TOP Tobacco, L.P. subsidiary, and
Lane Ltd, an affiliate of Brown & Williamson Tobacco Company, the third largest
cigarette company in the United States. Many other companies also compete in
this segment, including Peter Stokebye International and RBJ Sales, 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


11

to its high brand recognition and the recognized quality of each of its
products, its manufacturing and operating efficiencies, and its sales, marketing
and distribution efforts.

EMPLOYEES

As of March 21, 2003, the Company employed a total of 253
full-time employees. With the exception of 90 manufacturing employees, none of
the Company's other employees are represented by unions. The manufacturing
employees, who are represented by three unions, are covered by three collective
bargaining agreements. One of these agreements, covering 85 employees will
expire in December 2004. The other two agreements, covering five employees, were
extended during 2002 and will expire in 2005.

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 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 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 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.

In 1996, Massachusetts enacted a statute which requires all
tobacco companies to disclose information regarding the ingredients and nicotine
content of their products sold in Massachusetts, which information would,
subject to certain conditions, be made publicly available. The ingredients of
NTC's products are considered by the Company to be proprietary and such
disclosure could result in the manufacture and sale of imitation products, which
could have a material adverse effect on its tobacco business. In December 1997,
the U.S. District Court for the District of Massachusetts entered a preliminary
injunction on behalf of five smokeless tobacco companies (including NTC) against
the Attorney General of Massachusetts and the Commissioner of Public Health,
barring the officials from taking any steps to enforce the ingredient-reporting
requirements of the Massachusetts statute pending a trial on the merits. In
September 2000, the District Court enjoined enforcement of provisions of the law


12

relating to ingredient reporting and issued a judgment in favor of the tobacco
companies. The United States Court of Appeals for the First Circuit upheld the
District Court's judgment on December 2, 2002.

While there are no current 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.

STATE ATTORNEY GENERAL SETTLEMENT AGREEMENTS

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 other signatories to the MSA are 34 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 MYO cigarette
tobacco) has the option of either becoming a signatory to the MSA or opening,
funding and maintaining an escrow account, with subaccounts on behalf of each
settling state. The 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 into qualified
banks, on an annual basis, escrow funds based on the number of cigarettes or
cigarette equivalents, i.e., the pounds of MYO smoking tobacco, sold. The
purpose of these statutes is expressly stated to be to eliminate the cost
disadvantage the settling manufacturers have as a result of entering into the
MSA. Any company that establishes an escrow account is entitled to direct the
investment of the escrowed funds and withdraw any appreciation, but cannot
withdraw the principal for twenty-five years from the year of each annual
deposit, except to withdraw funds deposited pursuant to an individual state's
escrow statute to pay a final judgment to that state's plaintiffs in the event
of such a final judgment against that company. Either option - becoming a MSA
signatory or establishing an escrow account - is permissible under the MSA. The
STMSA has no similar provisions under the MSA.

NAOC has chosen to open and fund an MSA escrow account as
its means of compliance. As of December 31, 2002, NAOC has funded a total of
approximately $1.1 million into its account. 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, as NAOC has chosen to do, 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 that
have failed to properly establish and fund a qualifying escrow account. To date,
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


13

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.

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.

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 21 (Segment Information) to the Consolidated Financial Statements.

ITEM 2. PROPERTIES

As of December 31, 2002, the Company operated
manufacturing, distribution, office and warehouse space in the United States
with a total floor area of approximately 610,351 square feet. Of this footage,
approximately 600,000 square feet are owned and 10,351 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. NTC has one manufacturing and distribution
facility located in Louisville, Kentucky, which is also utilized by NAOC.


14

The following table describes the principal properties of
the Company as of December 31, 2002:

Square Owned or
Location Principal Use Feet Leased
-------- ------------- ---- ------

New York, NY Corporate 10,351 Leased
headquarters

Louisville, KY manufacturing, 600,000 Owned(1)
R&D, warehousing,
distribution and
administration


(1) Encumbered by a mortgage securing all obligations and liabilities under the
senior secured facilities.

ITEM 3. LEGAL PROCEEDINGS

LITIGATION WITH REPUBLIC TOBACCO

Kentucky and Illinois Complaints. On July 15, 1998, NAOC
and 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.

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.


15

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.

The Company believes it has viable defenses to the Republic
claims, however, no assurances can be given that it will prevail. If the
Company were not to prevail, management does not believe that any adverse
judgment would be material to the Company's results of operations, financial
position or cash flows.

LITIGATION RELATED TO ALLEGED PERSONAL INJURY

West Virginia Complaints. Trial of the West Virginia
complaints 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-2401). 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 allege 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, and one alleges use that covers, in part, a period when NTC did
not manufacture the product. 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


16

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

Minnesota Complaint. On September 24, 1999, 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. 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. The plaintiffs have moved the Court to reconsider its decision.

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

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


17

On May 18, 2001, the Company, in conjunction with Bollore,
conducted raids on the businesses and homes of certain defendants previously
enjoined from selling infringing or counterfeit ZIG-ZAG 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.

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 million from the civil contempt order and an
agreement to forbear from enforcing that $11 million money judgment until such
time in the future that the defendants violate the terms of the permanent
injunction. Two of the defendants 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.

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. A hearing was held on
April 10, 2002. After evidence related to this matter was discovered by
plaintiffs and upon plaintiffs' application, another hearing was held on August
1, 2002. The Court allowed the defendants three weeks to supplement the record
with additional evidence. Final arguments were held on January 22, 2003 and a
decision is pending.

California Infringing Products Litigation. On March 23,
2001, the Company participated as co-plaintiff with NAOC and Bollore in an
action entitled Bollore, S.A. v. A&A Smart Shopping (Case No. CV 01-02766 FMC
(MANx)), filed in the U.S. District Court for the Central District of
California. The plaintiffs alleged that nine distributors in California were
selling counterfeit ZIG-ZAG brand premium cigarette papers.

On May 22, 2001, the Company participated as co-plaintiff
with NAOC and Bollore in an action entitled Bollore, S.A. v. Buy-Rite Wholesale
(Case No. CV 01-4570 FMC (MAN)), filed in the U.S. District Court for the
Central District of California. The plaintiffs alleged that seven distributors
and retailers in California were selling counterfeit ZIG-ZAG brand premium
cigarette papers.

On June 5, 2002, the Court granted the plaintiffs
application to consolidate the A&A Smart Shopping and Buy Rite Wholesalecases
for trial purposes. In an effort to better manage this case for trial, the
plaintiffs settled against certain defendants, obtained judgments for damage
against most the defendants and obtained permanent injunctions against all of
the settling defendants.

A trial of the plaintiffs' claims against the remaining
defendants, in the A&A Smart Shopping case, Downey Wholesale and Fadel
El-Shahawi, Downey's principal, began October 1, 2002. On October 15, 2002,
after a two week jury trial, the jury found for the plaintiffs on all counts.
The plaintiffs were awarded a total of $2,000,000 in damages, and the jury found
that defendant Downey and the defendant Fadel El-Shahawi acted willfully and
with fraud, oppression or malice. As a result, plaintiffs were entitled to and


18

did request the Court to award them their reasonable attorney fees and expenses.
That application is pending. The verdict also allowed the Court, in its
discretion, to apply a multiple of up to three times the verdict amount in order
to adequately compensate plaintiffs and also, to award punitive damages. The
parties settled the punitive damages and multiplier portions of the case for
$500,000, of which half was paid on November 15, 2002 and the remainder will be
paid in equal monthly installments over the next two year period, commencing on
December 1, 2002. All recoveries from this litigation will be shared equally by
NAOC and Bollore. Defendants filed a new trial motion which the Court has
denied. However, the Court reduced the plaintiff's damages award to
approximately $1.7 million. On March 13, 2003, the Court denied the defendants'
motions.

On June 6, 2002, the plaintiffs moved for contempt
sanctions against JT Saniya Inc., asserting that JT Saniya had violated the
terms of the preliminary injunction issued against it by selling 38 cases of
counterfeit product. JT Saniya failed to dispute the allegations and a default
judgment of $420,369.09 was entered against JT Saniya on July 23, 2002. The
plaintiffs have entered into a settlement agreement with JT Saniya in respect of
the default judgment pursuant to which JT Saniya has paid $82,500 in full
satisfaction of the judgment.

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 STOCK AND RELATED STOCKHOLDER
MATTERS

There is no established public trading market for the
Company's Voting Common Stock, par value $.01 per share, 100% of which was owned
by 43 holders of record, 13 of whom are affiliates or employees of the Company.

There have been no dividends declared on the Voting Common
Stock. The current policy of the Company's Board of Directors is to retain any
future earnings to provide funds for the operation and expansion of the
Company's business; however, the Board of Directors will review the dividend
policy periodically to determine whether the declaration of dividends is
appropriate. The payment of dividends by the Company currently is subject to
restrictions contained in (i) the Company's senior secured credit facility, (ii)
the indenture governing the Company's outstanding senior notes and (iii) the
Company's Certificate of Incorporation relating to its preferred stock.


19

ITEM 6. SELECTED FINANCIAL DATA



Year Ended December 31,
--------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
(amounts in thousands, except per share amounts)

STATEMENT OF OPERATIONS DATA:
Net Sales(1)............................ $94,425 $89,622 $90,365 $92,162 $91,938
Net income (loss)(2).................... 5,485 (1,364) (3,200) 1,595 1,007
Net income (loss) applicable to common
shares(2)........................... 3,904 (8,109) (9,205) (3,766) (3,744)
Basic earnings per common share:
Income (loss)....................... $7.39 $(15.35) $(15.35) $(7.13) $(7.09)
Extraordinary loss.................. -- -- (1.61) -- --
Cumulative effect of change in accounting
principle........................ -- -- (0.47) -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) applicable to common shares $ 7.39 $(15.35) $(17.43) $(7.13) $(7.09)
=========== =========== =========== =========== ===========
Diluted earnings per common share:
Income (loss)....................... $ 5.87 $(15.35) $(15.35) $(7.13) $(7.09)
Extraordinary loss.................. -- -- (1.61) -- --
Cumulative effect of change in accounting
principle........................ -- -- (0.47) -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) applicable to common
shares.............................. $5.87 ($15.35) ($17.43) ($ 7.13) ($ 7.09)
=========== =========== =========== =========== ===========
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets............................ $213,594 $216,663 $227,757 $243,603 $260,307
=========== =========== =========== =========== ===========
Total debt, including current
maturities........................... 160,500 167,500 180,000 195,864 215,586
=========== =========== =========== =========== ===========
Mandatorily redeemable preferred
stock................................. 57,805 57,443 50,698 44,693 39,332
=========== =========== =========== =========== ===========


(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, 2000, 1999 and 1998. Net sales for 2001, 2000, 1999 and
1998 have been reduced by $4,126, $2,780, $2,299 and $1,143, 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 an extraordinary loss of $850
(net of income tax benefit of $521) related to the write-off of deferred
financing costs upon the refinancing of the Company's term loan and a
cumulative effect of change in accounting principle of $251 (net of income
tax benefit of $153) as a result of the adoption of Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements".


20

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

GENERAL

The Company is the third largest manufacturer and marketer
of loose leaf chewing tobacco in the United States and the largest importer and
distributor in the United States of premium cigarette papers and related
products. The Company also contracts for the manufacture of and distributes
Make-Your-Own ("MYO") smoking tobaccos and related products. The Company has two
significant wholly owned subsidiaries through which it operates: NTC, which
operates the Company's smokeless tobacco business and NAOC, which operates the
Company's premium cigarette paper and MYO cigarette business.

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,
consists of gross sales, net of cash discounts, returns, and selling and
marketing allowances.

The Company's principal operating expenses include cost of
sales, which includes the cost of raw materials used to manufacture its
products; the cost of finished products, which are purchased goods; direct
labor; federal excise taxes; 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 deferred
financing costs and other expenses, the last of which has arisen during the last
several years and has during the last two years 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.

The following factors have affected the Company's results
over the past three years.

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. 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.

o The impact of increased manufactured cigarette prices.
Management believes such price increases have resulted in higher
MYO cigarette sales. In 2002, a number of states increased their
excise taxes on cigarettes. Management expects this trend to
continue in 2003 and beyond as more states seek additional
sources of revenue to combat significant budget deficits.

o The continuing downward trend of loose leaf chewing tobacco.
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


21

that the current rate of switching has slowed significantly as
those consumers who found the moist snuff product more
attractive have 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.

The Company changed its incentive distribution program for
ZIG-ZAG premium cigarette papers, effective January 1, 2003, from a triannual
promotion to an everyday low price. This change is expected to cause buying
patterns to shift from peaks during the three promotional periods to a more even
pattern throughout the entire year, which ultimately will have a positive impact
premium cigarette paper margins due to less promotional spending. However, the
Company expects that it will take its distribution channels time to adjust to
the new program. This may result in slower sales activity for the first six to
nine months of 2003. Management believes given, the maturity of this market, the
balancing of supply and demand, the continuing recovery from the counterfeiting
activity described above, and the expected results to be achieved by expanding
and reorganizing its sales force, the Company's 2003 results in the premium
cigarette paper area will exceed those of 2002.

RESULTS OF OPERATIONS

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, 2002, 2001 and 2000.



Year Ended December 31,
------------------------------------------------------------------------------------
2002 2001 2000
------------------------- ----------------------- -----------------------
(amounts in thousands)

Net sales............................... $ 94,425 100.0% $89,622 100.0% $90,365 100.0%
Cost of sales........................... 40,973 43.4 37,697 42.1 37,797 41.8
--------- --------- --------- --------- --------- ---------
Gross profit............................ 53,452 56.6 51,925 57.9 52,568 58.2
Selling, general and
administrative expenses.............. 24,065 25.5 23,372 26.1 23,586 26.3
Amortization of goodwill................ -- -- 5,490 6.1 5,490 6.1
--------- --------- --------- --------- --------- ---------
Operating income........................ 29,387 31.1 23,063 25.7 23,492 26.2
Interest expense, net, and deferred
financing costs....................... 18,744 19.9 19,742 22.0 22,261 24.8
Other expense........................... 1,944 2.1 2,642 2.9 1,801 2.0
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations
before income tax expense............ 8,699 9.2 679 0.8 (570) (0.6)
Income tax expense...................... 3,214 3.4 2,043 2.3 1,529 1.7
--------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary
loss and cumulative effect of
change in accounting principle....... 5,485 5.8 (1,364) (1.5) (2,099) (2.3)
Extraordinary loss...................... -- -- -- -- (850) (0.9)
Cumulative effect of change in
accounting principle................. -- -- -- -- (251) (0.3)
--------- --------- --------- --------- --------- ---------
Net income (loss)....................... $ 5,485 5.8% $(1,364) (1.5%) $(3,200) (3.6%)
========= ========= ========= ========= ========= =========


22

ADJUSTED EBITDA


Adjusted EBITDA represents net income plus interest, taxes,
depreciation, amortization and certain other charges and expenses as detailed in
the reconciliation below. Adjusted EBITDA is presented because it is a key
financial measure used by management to (i) assess the Company's ability to
service its debt and meet its capital expenditure requirements, (ii) determine
the Company' compliance with the terms of its debt instruments, (iii) internally
measure the Company's operating performance and (iv) determine the Company's
incentive compensation programs. Adjusted EBITDA is not a measure determined in
accordance with generally accepted accounting principles ("GAAP") and should not
be considered as an alternative to, or more meaningful than, net income (loss)
(as determined in accordance with GAAP), as a measure of the Company's operating
results or cash flows (as determined in accordance with GAAP) or as a measure of
the Company's liquidity. The Company's computation of Adjusted EBITDA may not be
the same as similarly titled measures presented by other companies. The table
set forth below is a reconciliation of the Company's net income (loss) to
Adjusted EBITDA for the last three fiscal years:




Year Ended December 31,
----------------------------------------------
2002 2001 2000
-------------- -------------- ----------------
(amounts in thousands)

Net income (loss) before payment of
preferred stock dividends............ $ 5,485 $ (1,364) $ (3,200)
Interest expense, net and amortization
of deferred financing fees......... 18,744 19,742 22,261
Income tax expense................... 3,214 2,043 1,529
Depreciation......................... 701 637 1,067
Amortization of goodwill............. -- 5,490 5,490
Other (income) expense............... 1,944 2,642 1,801
Unfunded pension obligation.......... 19 513 201
LIFO adjustment...................... 3,877 2,682 2,434
Stock option compensation expense.... 576 33 33
Postretirement expense............... 558 615 465
Cumulative effective of accounting
change............................ -- -- 251
Extraordinary loss, net of income
tax benefit....................... -- -- 850
--------- --------- ---------
Adjusted EBITDA......................... $35,118 $33,033 $33,182
========= ========= =========



COMPARISON OF YEAR ENDED DECEMBER 31, 2002 TO YEAR ENDED DECEMBER 31, 2001

Net Sales. For 2002, net sales were $94.4 million, an
increase of $4.8 million or 5.4% from the prior year. Net sales of the smokeless
tobacco segment decreased from $38.6 million to $35.7 million or 7.5% from the
prior year reflecting, in part, a 9.4% volume decrease. This was partially
offset by an approximate 5.0% price increase during 2002. Net sales continued 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 $51.0 million
to $58.7 million or 15.1% from the prior year. This was due to increases of $5.7
million in sales of the expanded MYO smoking tobacco and related products line,
which in management's opinion resulted from increases in prices and taxes of
manufactured cigarettes; $3.1 million in premium cigarette papers, due to a
continuing recovery from the counterfeiting activity; and $0.9 million in sales


23

to Canada, due to increased sales of premium cigarette papers. All of these
positive 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 2002, gross profit increased 2.9% to
$53.5 million from $51.9 million for the prior year while the gross profit
percentage decreased to 56.6% from 57.9%. Gross profit of the smokeless tobacco
segment decreased to $16.5 million in 2002 from $17.1 million for the prior
year, or 3.4%, due to the net sales reduction; however, the gross profit
percentage increased to 46.1% of net sales in 2002 from 44.1% of net sales for
the prior year. The primary reason for this was the reduction of the non-cash
LIFO inventory adjustment to $2.1 million in 2002 from $2.9 million for the
prior year. Disregarding this adjustment, the gross profit percentage still
increased by 0.3% to 51.9% of net sales in 2002 from 51.6% for the prior year.
Gross profit of the MYO segment increased 6.1% to $37.0 million from $34.9
million due to the continued growth in the smoking tobacco and related products
area of this segment as a result of the net sales increase described above. The
gross profit percentage decreased from 68.4% of net sales to 63.0% of net sales
due primarily to product mix (greater growth in lower margin products) and to
the increase in the non-cash LIFO inventory adjustment of $2.0 million.
Disregarding this adjustment, the gross profit percentage decreased to 66.1% of
net sales from 68.4% for the prior year, again, as the MYO smoking tobacco and
related products margin is less than that of premium cigarette papers.

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 2002, though currency rates were generally
not favorable to the U.S. dollar in comparison to the Euro, the Company's
inventory position benefited economically by utilizing prior short-term forward
currency contracts. For 2003, as the Euro has remained strong against the U.S.
dollar, the Company projects that its currency strategy will result in an
increase in cost of goods sold; however, this increase will be exceeded by a
reduction in promotional spending associated with the new everyday low price
program. Given management's view of the currency market, no contracts are
presently being utilized.

Selling, General and Administrative Expenses. Selling,
general and administrative expenses for 2002 increased 3.0% to $24.1 million
from the prior year's $23.4 million. This increase was due primarily to
compensation expenses related to hiring additional staff in connection with the
re-organization of the Company's sales force.

Amortization of Goodwill. Amortization of goodwill was
eliminated for 2002 compared to an expense of $5.5 million for the corresponding
period of the prior year. Effective January 1, 2002, the Company ceased
amortizing goodwill in accordance with FASB Statement 142.

Net Interest Expense and Deferred Financing Costs. Interest
expense and deferred financing costs decreased to $18.7 million in 2002 from
$19.7 million for the prior year. This decrease was the result of a lower
average term loan balance coupled with a low average interest rate environment.

Other Expense. Other expense decreased to $1.9 million in
2002 from $2.6 million for the prior year. Other expense consists primarily of
legal, investigative and related expenses with respect to the Texas and


24

California Infringing Products Litigations involving ZIG-ZAG premium cigarette
papers which are described above under "Legal Proceedings."

Income Tax Expense. Income tax expense increased to $3.2
million in 2002 from $2.0 million for the prior year as a result of the increase
in taxable income from the prior year.

Net Income (Loss). Due to the factors described above, the
Company earned net income of $5.5 million for 2002 compared to the prior year's
net loss of $1.4 million.

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

Net Sales. For 2001, net sales were $89.6 million, a
decrease of $0.7 million or 0.8% from the prior year. Sales of the smokeless
tobacco segment decreased to $38.6 million from $39.4 million or 1.9% from the
prior year reflecting, in part, a 4.8% volume decrease, which was significantly
offset by price increases during 2001. Net sales continued 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 from moist snuff manufacturers.

Sales of the MYO segment were relatively flat to the prior
year. Even though there was an increase of $2.2 million in sales of the expanded
MYO smoking tobacco and related products line, this was partially offset by a
planned decrease of $1.0 million in sales to Canada in an effort to balance
inventory positions to projected sales levels. This was achieved, although
ZIG-ZAG's Canadian volume for the year at the consumer level increased 6.0%. In
addition, the Company believes that its U.S. sales of ZIG-ZAG premium cigarette
papers in the MYO segment were materially and adversely affected by the
counterfeiting activity that is the subject of the Texas and California
Infringing Products Litigations, described above under "Legal Proceedings". The
Company believes, based on information submitted as part of the legal process,
that net sales of its ZIG-ZAG premium cigarette papers were reduced by a minimum
of $6.5 million. In management's opinion, this had a material and adverse effect
on the Company's sales.

Gross Profits. For 2001, gross profit decreased $0.7
million or 1.3% to $51.9 million from the prior year and the gross profit
percentage decreased to 57.9% from 58.2%. Gross profit and gross profit
percentage of the smokeless tobacco segment decreased to $17.1 million or 44.1%
of net sales in 2001 from $18.1 million or 45.8% of net sales for the prior
year. The increase in the non-cash LIFO inventory adjustment accounted for $0.8
million or 88.9% of the decline. Gross profit of the MYO segment increased 1.0%
to $34.9 million from $34.5 million due to the continued growth in the smoking
tobacco and related products area of this segment, despite the adverse impact of
the counterfeiting activity described above. Gross profit percentage increased
from 67.7% of net sales to 68.4% of net sales due to the benefit of a favorable
currency strategy and to a decrease in the non-cash LIFO inventory adjustment of
$0.6 million.

Currency. Currency movements and suppliers' price increases
are the primary adjustment factors for changes in costs of goods sold. Cigarette
papers are purchased from Bollore on terms of net 45 days and are payable in
Euros. Thus, NAOC bears certain foreign exchange risks for its inventory
purchases. To minimize this risk, NAOC may utilize short-term forward currency
contracts, through which NAOC secures Euros in order to provide payment for its
monthly purchases of inventory. For 2001, currency rates were generally less
favorable to the U.S. dollar in comparison to the Euro. However, the Company was
able to benefit thorough its prior use of short-term forward currency contracts.
As a component of its risk management process, the Company continually reassess
its currency strategy. At year end, the Company had no outstanding contracts.


25

Selling, General and Administrative Expenses. Selling,
general and administrative expenses for 2001 decreased 0.9% to $23.4 million
from the prior year's $23.6 million. This decrease was due primarily to a
reduction in legal/litigation expense.

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

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

Other Expense (Income). Other expense increased to $2.6
million in 2001 from $1.8 million for the prior year. Other expense in 2001
represents legal, investigative and related expenses with respect to the Texas
and California Infringing Products Litigations involving ZIG-ZAG premium
cigarette papers which are described above under "Legal Proceedings." Other
expense in 2002 represented legal fees and other costs associated with a
proposed sale of the smokeless tobacco segment which was terminated in December
2000.

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

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

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

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

LIQUIDITY AND CAPITAL REQUIREMENTS

The Company's principal uses for cash are for working
capital, capital expenditures, debt service and its annual escrow account
deposit. The Company's principal sources of cash are from operating cash flows
and from borrowings under its senior secured credit facility. In addition, the
Company will require additional cash to complete the pending acquisition of the
Star Cigarette Assets which it expects to fund from debt and equity financing
sources.

Working capital was $32.3 million at December 31, 2002
compared to $23.1 million at December 31, 2001. This increase was primarily the
result of a reduction of $12.5 million in the current portion of long term debt,
an increase of $2.0 million in accounts receivables and an increase of $1.8
million in other current assets which were offset by an increase of $5.5 million
in the revolving credit portion of the senior secured credit facility, a
decrease of $3.2 million in inventory and a decrease of $1.0 million in accrued
liabilities. The Company funds its working capital requirements through its
operating cash flows and, if needed, bank borrowings. As of December 31, 2002,
the Company had an undrawn availability of $13.5 million under the revolving
credit portion of its senior secured credit facility.


26

On February 18, 2003, the Company entered into an asset
purchase agreement to purchase substantially all of the assets of Star
Scientific, Inc. relating to the manufacturing, marketing and distribution of
four discount cigarette brands in the United States for approximately $80
million in cash. The Company intends to finance this acquisition by offering
debt and/or equity securities. The ability to do so will depend, among other
things, on the financial performance of the Company and the availability of
funds from debt and equity financing sources. Although the Company believes it
will be able to effect such a financing, there can be no assurance that such a
financing will be obtained.

During 2002, the Company spent $625,000 in capital
expenditures. Given its current operation, the Company believes that its annual
capital expenditure requirements for 2003 will be approximately $2.0 million,
primarily for testing equipment for its research and development activities, to
expand the Company's distribution activity in Louisville which is expected to
reduce operating expenses, and for equipment to enhance and expand its
information technology capabilities. Management believes that it will be able to
fund its capital expenditure requirements.

The senior secured credit facility was initially made
available 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. The Loan Agreement initially provided for a $25 million term loan and a
$10 million revolving credit facility. 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 pursuant to which the
revolving credit facility was increased to $20 million and extended to December
31, 2003. All terms of the original Loan Agreement remain in place except for
the replacement of a fixed charge coverage covenant with an interest coverage
covenant. The Company's obligations under the Amended Loan Agreement are
guaranteed by NTC, NAOC and National Tobacco Finance Corporation. In addition,
the Company's obligations are secured by all of the Company's assets and the
Company's equity in its subsidiaries. The interest rate on borrowings under the
Amended Loan Agreement may be either based on LIBOR or the prime rate as
announced by the Agent from time to time. As of December 31, 2002, the interest
rate on borrowings under the Amended Loan Agreement was 3.77%. In addition, the
Company must pay a quarterly commitment fee of 0.5% per annum of the unused
portion of the revolving credit facility. The Company intends to replace the
existing senior secured credit facility with a new senior secured credit
facility in connection with the pending acquisition of the Star Cigarette Assets
which is expected to close during the second quarter of 2003.

On June 25, 1997, the Company issued $155.0 million of 11%
Senior Notes 2004 (the "Senior Notes"). The Senior Notes mature and are payable
on June 15, 2004. The Senior Notes bear interest at 11% per annum, payable
semiannually on June 15 and December 15. At the present time, the Company
projects that it will not have sufficient funds to effect such repayment in the
absence of a refinancing. The Company intends to refinance this debt in
connection with the pending acquisition of the Star Cigarette Assets which is
expected to close during the second quarter of 2003 and, in any event, in
advance of the maturity of the Senior Notes. The ability to do so will depend,
among other things, on the financial performance of the Company and the
availability of funds from debt and equity financing sources. Although the
Company believes it will be able to effect such a refinancing, there can be no
assurance that such a refinancing will be obtained.

The Amended Loan Agreement and the Senior Notes limit the
incurrence of additional indebtedness, dividends, transactions with affiliates,
asset sales, mergers, prepayments of indebtedness and liens and encumbrances. At
December 31, 2002, the Company was in compliance with all provisions of the Loan
Agreement and the indenture governing the Senior Notes.


27

On July 29, 2002, the Company successfully completed 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 relating to the terms of the Preferred Stock. As a result of
amendments to the Company's certificate of incorporation resulting from the
Consent Solicitation, among other things, dividends on the Company's Preferred
Stock are payable either in cash or through the issuance of additional shares of
Preferred Stock. The Company's future ability to make dividend payments in cash
will depend upon the availability of funds and whether the Company has satisfied
the "restricted payments" provision under the indenture governing the Senior
Notes. That provision has been and is currently satisfied. Additionally, the
Company has sufficient authorized and unissued shares of Preferred Stock to make
its dividend payments through the issuance of additional shares. For the
dividend payments on September 15, 2002, and December 15, 2002, the Company
chose to make this payment in kind. The Company intends to redeem the Preferred
Stock in connection with the pending acquisition of the Star Cigarette Assets
which is expected to close during the second quarter of 2003. The ability to do
so will depend, among other things, upon the financial performance of the
Company and the availability of funds from debt and equity financing sources.
Although the Company believes it will be able to effect such a redemption, there
can be no assurance that such a redemption will occur.

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.




28

The following schedule summarizes the Company's contractual
cash obligations excluding interest at December 31, 2002:



Payments Due By Period
----------------------
(in thousands)
Contractual Cash Obligations Total Less than 1 year 1-3 years 4-5 years After 5 years
----------------------------- ----- ---------------- --------- --------- -------------
(excluding interest)

Senior Notes - Principal $155,000 $ -- $155,000 $ -- --
Loan Agreement - Principal 5,500 5,500 -- -- --
Operating Leases 1,711 757 951 3 --
-------- -------- -------- ------ -----
Total Contractual Cash Obligations $162,211 $ 6,257 $155,951 $ 3 $ -
======== ======== ======== ====== =====



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 2002 was $0.6 million in respect of sales of
MYO smoking products in 2001. The Company estimates the total payments will be
$1 million in 2003 due to an increase of sales of MYO smoking products in 2002.


The Company believes that its operating cash flows,
together with its revolving credit facility, should be adequate to satisfy its
reasonably foreseeable operating capital requirements. Additionally, the
financing of the acquisition of the Star Cigarette Assets and the refinancing of
the Senior Notes and Preferred Stock, will depend upon the Company's ability to
access funds from debt and equity sources.

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 2, 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 - Upon adopting Statement 142 on January 1, 2002,
the Company ceased amortizing goodwill. Statement 142 required completion of the
first step of the transitional impairment test by June 30, 2002. In completing
the transitional impairment test for fiscal 2002, the Company reported that it
had incurred no impairment.


29

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

Contingencies - Note 17 of the Consolidated Financial
Statements 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.

Stock Options - The Company measures stock compensation
costs related to stock options on the fair value 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.

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, 2002 and 2001, 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, 2002 and
2001, the Company used discount rates of 6.75% and 7.25%, respectively, for both
the pension and postretirement plans. 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
on Moody's Aa bond index plus an adjustment upward to the next quarter
percentage point. See Note 11 to the Consolidated Financial Statements for the
full list of assumptions for the pension and postretirement plans.

RECENT ACCOUNTING PRONOUNCEMENTS

During 2001, the Emerging Issues Task Force issued: (1)
EITF No. 00-14, "Accounting for Certain Sales Incentives", addressing the
recognition, measurement and statement of earnings classification of certain
sales incentives and (2) EITF No. 00-25, "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products",
addressing the statement of earnings classification of consideration from a
vendor to an entity that purchases the vendor's products for resale. The Company
adopted EITF 00-14 and EITF 00-25 in the first quarter of 2002. As a result of
this adoption, certain expenses have been reclassified from selling, general and
administrative expenses to allowances in determining net sales and to cost of


30

goods sold for each of the years ended December 31, 2001 and 2000. Due to
adopting EITF 00-14 and EITF 00-25, for each of the years ended December 31,
2001 and 2000, net sales decreased by $4.126 million and $2.780 million,
respectively, cost of goods sold increased by $3.963 million and $4.108 million,
respectively, and selling, general and administrative expenses were reduced by
$8.089 million and $6.888 million, respectively, from the previously reported
figures. The adoption of EITF 00-14 and EITF 00-25 had no impact on the
Company's net income for either of these periods.

In June 2001, FASB issued Statement No. 141, "Business
Combinations" ("Statement 141") and Statement 142. Statement 141 requires that
all business combinations initiated after June 30, 2001 be accounted for using
the purchase method as use of the pooling-of interest method is no longer
permitted. Statement 142 requires that goodwill no longer be amortized to
earnings, but instead be reviewed at least annually for impairment using a
two-step process. The first step is a test for potential impairment, and the
second measures the amount of impairment, if any. Impairment losses that arise
from completing a transitional impairment test during 2002 are to be reported as
the cumulative effect of a change in accounting principle as of the beginning of
the year. Subsequent impairments, if any, will be classified as an operating
expense. In addition, Statement 142 specifies the types of acquired intangible
assets that are required to be recognized and reported separately from goodwill.

Upon adopting Statement 142 on January 1, 2002, the Company
ceased amortizing goodwill. Statement 142 required completion of the first step
of the transitional impairment test by June 30, 2002. In completing the
transitional impairment test for fiscal 2002, the Company reported that it had
incurred no impairment.

In August 2001, the FASB issued Statement No. 143,
"Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 requires
that obligations associated with the retirement of a tangible long-lived asset
be recorded as a liability when those obligations are incurred, with the amount
of the liability initially measured at fair value. Upon initially recognizing a
liability for an asset-retirement obligation ("ARO"), an entity must capitalize
the cost by recognizing an increase in the carrying amount of the related long
lived asset. Over time, the liability is accreted to its present value each
period, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon settlement.
SFAS 143 will be effective for financial statements for fiscal years beginning
after June 15, 2002. The Company will adopt the provisions of SFAS 143 in fiscal
2003. SFAS 143 will not have an impact on the Company's financial statements.

On January 1, 2002, the Company adopted FASB Statement No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("Statement 144"). Statement 144 develops a single accounting model for
long-lived assets to be disposed of by sale, and addresses significant
implementation issues related to previous guidance. Statement 144 requires that
long-lived assets to be disposed of by sale be measured at the lower of their
carrying amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. Statement 144 also broadens the
reporting of discontinued operations by potentially qualifying more disposal
transactions for discontinued operations reporting. The adoption of Statement
144 did not have an impact on the Company's financial statements.

In April 2002, the FASB issued Statement No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections." This Statement eliminates the automatic
classification of gain or loss on extinguishment of debt as an extraordinary
item of income and requires that such gain or loss be evaluated for
extraordinary classification under the criteria of Accounting Principles Board


31

No. 30, "Reporting Results of Operations." This Statement also requires
sales-leaseback accounting for certain lease modifications that have economic
effects that are similar to sales-leaseback transactions, and makes various
other technical corrections to existing pronouncements. This Statement will be
effective for the Company for the year ending December 31, 2003. The adoption of
the Statement is not expected to have an impact on the Company's financial
statements.

In July 2002, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 sets
forth various modifications to existing accounting guidance which prescribes the
conditions which must be met in order for costs associated with contract
terminations, facility consolidations, employee relocations and terminations to
be accrued and recorded as liabilities in financial statements. The provisions
of SFAS 146, as related to exit or disposal activities will be effective for
fiscal 2003. SFAS 146 does not at present have an impact on the Company's
financial statements.

In December 2002, the FASB issued SFAS No. 148, "Accounting
for Stock-Based Compensation-Transition and Disclosure" ("SFAS 148"). SFAS 148
amends SFAS 123 providing alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. SFAS 148 also amends the disclosure requirements of SFAS 123 and
requires additional disclosures in annual and interim financial statements
regarding the method of accounting for stock-based employee compensation and the
effect of the method used on financial results. The Company accounts for
stock-based compensation in accordance with SFAS No. 123. Therefore, SFAS 148
does not have an impact on the Company's financial statements.

In January 2003, the Financial Accounting Standards Board
issued Financial Accounting Standards Board Interpretation No. 46, Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46). FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective
immediately for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. FIN 46 does not have an impact
on the Company's financial statements.

FORWARD-LOOKING STATEMENTS

The Company cautions the reader that certain statements
contained in the Management's Discussion and Analysis of Financial Condition and
Results of Operations section as well as elsewhere in this Form 10-K are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are not guarantees of
future performance. They involve risks, uncertainties and other important
factors, including the risks discussed below. The Company's actual future
results, performance or achievement of results may differ materially from any
such results, performance or achievement implied by these statements. Among the
factors that could affect the Company's actual results and could cause results
to differ from those anticipated in the forward-looking statements contained
herein is the Company's ability to implement its business strategy successfully,
which may be dependent on business, financial, and other factors beyond the
Company's control, including, among others, federal, state and/or local
regulations and taxes, competitive pressures, prevailing changes in consumer
preferences, consumer acceptance of new product introductions and other
marketing initiatives, market acceptance of the Company's current distribution
program for ZIG-ZAG premium cigarette papers, access to sufficient quantities of


32

raw material or inventory to meet any sudden increase in demand, disruption to
historical wholesale ordering patterns, product liability litigation, the
inability to raise financing for the acquisition of the Star Cigarette Assets
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 senior secured credit facility. The Company's
credit facility bears interest at rates which vary with changes in (i) LIBOR or
(ii) a rate of interest announced from time to time by the lender under the
senior secured credit facility. The Company does not speculate on the future
direction of interest rates. As of December 31, 2002, $5.5 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 position, results of operations or cash
flows would not be significant.

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

NAOC regularly reviews its 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, 2002, NAOC had no outstanding forward
currency contracts.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's Consolidated Financial Statements and Notes
to Consolidated Financial Statements, and the report of PricewaterhouseCoopers
LLP, independent accountants, with respect thereto, referred to in the Index to
Financial Statements and the Financial Statement Schedules of the Company
contained in Item 15(a), appear on pages F-1 through F-39 of this Form 10-K and
are incorporated herein by reference thereto. Information required by schedules
called for under Regulation S-X is either not applicable or is included in the
Consolidated Financial Statements or Notes thereto.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.


33

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

BOARD OF DIRECTORS AND EXECUTIVE OFFICERS

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



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

Thomas F. Helms, Jr..................... 62 Chief Executive Officer and Chairman of the Board
David I. Brunson........................ 52 President, Chief Financial Officer, Treasurer and Director
Robert A. Milliken, Jr.................. 46 President and Chief Operating Officer - National Tobacco Company, L.P.
James W. Dobbins........................ 43 Senior Vice President--General Counsel
James M. Murray......................... 42 Senior Vice President--Sales & Marketing - National Tobacco Company, L.P.
Jack Africk*............................ 74 Director
Marc S. Cooper*......................... 41 Director
Geoffrey J. F. Gorman* ................. 46 Director



- ----------------------------------------
* Audit committee members.


Thomas F. Helms, Jr. Thomas F. Helms, Jr. has been Chief
Executive Officer, Chairman of the Board and the sole member of the
Administration Committee of the Company since June 1997. He currently serves as
Chairman of the Board of each of the Company's corporate subsidiaries. He has
been Chief Executive Officer and President of NTC and National Tobacco Finance
Corporation since 1988 and has held the same office with NAOC and International
Flavors & Technology, Inc., a wholly owned non-operating subsidiary of the
Company, since October 1997. Mr. Helms also served as President and Chief
Executive Officer of Culbro Corporation's smokeless tobacco division from 1983
until shortly prior to its sale to American Maize-Products Company in March
1986. From 1979 to 1982, Mr. Helms was General Manager of the Etherea Cosmetics
and Designer Fragrances Division of Revlon, Inc. Prior to that time, Mr. Helms
was employed in marketing and sales positions in various divisions of Revlon
Consumer Products Corporation.

David I. Brunson. David I. Brunson has been President of
the Company since April 2002, Chief Financial Officer and a Director of the
Company since June 1997. From April 1997 to April 2002, he served as the
Executive Vice President--Finance and Administration. He has held the same
offices with NTC and NTFC (since April 1997), NAOC (since October and June 1997,
respectively) and IFT (since October 1997). In December 1998, Mr. Brunson was
also appointed to the offices of Treasurer and Secretary of the Company and
Secretary of IFT. Mr. Brunson relinquished his position as Secretary of the
Company in April 2002. In addition, he currently holds the offices of Treasurer
and Assistant Secretary with each of the Company's subsidiaries (other than
IFT). Mr. Brunson has also served as a member of the Board of the Directors of
each of the Company's corporate subsidiaries since October 1997 (or, in the case
of NAOC, since June 1997). Prior to joining the Company, from November 1992
until April 1997, he was employed as a Managing Director at Societe Generale, an
investment bank, where he established and was President of Societe Generale
Investment Corporation. From July 1979 until November 1992, he was employed at


34

The First National Bank of Chicago, lastly as a Managing Director in the
Investment Banking Division.

Robert A. Milliken, Jr.--Robert A Milliken, Jr. has been
the President of National Tobacco Company, L.P. and Chief Operating Officer
since April 2002. Prior to joining the Company, he was associated with Willard
Bishop Consulting, a private organization providing business consulting services
to convenience store and supermarket companies from April 2001 until March 2002.
He has served in senior management positions in several large convenience store
chains, including ARCO Products Company and BP Amoco.

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. 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, Senior Vice President, General
Counsel and Secretary.


James M. Murray -- James M. Murray has been the Senior Vice
President -- Sales and Marketing of National Tobacco Company, L.P. since
November 2001. Prior to that time he was Senior Vice President --Marketing of
National Tobacco from October 1999 to November 2001. Mr. Murray served in
marketing positions with Brachs Confections from February 1995 until October
1999.

Jack Africk. Jack Africk has been a Director of the Company
since October 1997 and has been serving as a consultant to the Company since
January 1999. From January through December 1998 he served as President and
Chief Operating Officer of the Company and each of its subsidiaries (other than
IFT). From February to December 1998, Mr. Africk was also a Director of each of
the Company's corporate subsidiaries. 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 which he founded. Prior to his tenure with
Barington Capital Group, Mr. Cooper spent three years as a partner of Scharf
Brothers, a private merchant banking firm. Currently, Mr. Cooper serves as a
director of Thinking Tools, Inc. and Precache, Inc.

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. From 1985 to 1996 he was a Managing Partner at Ardshiel,
Inc., an investment bank, where he organized and led 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


35

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.

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

ELECTION OF DIRECTORS

Pursuant to the terms of an Exchange and Stockholders'
Agreement, dated as of June 25, 1997, among the Company and certain of the
stockholders of the Company (the "Stockholders' Agreement"), Mr. Helms has the
right to vote a number of shares of common stock in respect of the election of
directors sufficient to elect all of the directors of the Company. Each director
is to serve until the next annual meeting of shareholders (or written consent in
lieu thereof) and until his successor is elected and duly qualified.

ITEM 11. EXECUTIVE COMPENSATION

The following table summarizes the compensation paid by the
Company as well as certain other compensation paid or accrued, to the executives
listed below for the fiscal years ended December 31, 2000, 2001 and 2002 (each
person appearing in the table is referred to as a "Named Executive"):













36

SUMMARY COMPENSATION TABLE



Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards Payouts
------ -------
Other
Annual Restricted Securities
Compen- Stock Underlying LTIP All Other
Salary Bonus sation Awards(s) Options/ Payouts Compen-
Name and Principal Position Year ($) ($) ($) ($) SARs (#) ($) sation($)
- --------------------------- ---- --- --- --- --- -------- --- ---------

Thomas F. Helms, Jr. ............. 2002 $725,000 $ - - - - - $ 106,705 (1)
Chairman of the Board and 2001 525,000 400,000 - - - - 106,797 (2)
Chief Executive Officer 2000 525,000 400,000 - - - - 102,758 (3)

David I. Brunson.................. 2002 600,000 - - - - - 94,005 (4)
President, Chief Financial 2001 425,000 300,000 - - - - 78,712 (5)
Officer and Treasurer 2000 406,538 200,000 - - - - 37,174 (6)

Robert A. Milliken, Jr............ 2002 262,500 - - - - - 108,096 (7)
President and Chief 2001 - - - - - - -
Operating Officer - 2000 - - - - - - -
National Tobacco Company, L.P.

James W. Dobbins.................. 2002 211,538 - - - - - 10,985 (8)
Senior Vice President-- 2001 197,596 25,000 - - - - 9,242 (9)
General Counsel 2000 179,327 20,000 - - - - 6,101 (10)

James M. Murray................... 2002 205,000 - - - - - 15,731 (11)
Senior Vice President-- 2001 183,481 35,000 - - - - 10,745 (12)
Sales & Marketing - 2000 164,289 30,000 - - - - 40,388 (13)
National Tobacco Company, L.P.



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

(1) 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.

(2) Includes insurance premiums of $41,917 paid by the Company with respect to
term life and disability insurance, contributions by the Company of $6,803
to a defined contribution plan, $50,000 as compensation for estate and tax
planning activities and $8,077 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 $6,803
to a defined contribution plan, $50,000 as compensation for estate and tax
planning activities and $4,038 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
$12,000 to a defined contribution plan, $35,000 as compensation for estate
and tax planning activities and $34,615 for miscellaneous payments.

(5) Includes insurance premiums of $12,390 paid by the Company with respect to
term life and disability insurance, contributions by the Company of $6,803
to a defined contribution plan, $35,000 as compensation for estate and tax
planning activities and $24,519 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 $6,803
to a defined contribution plan and $17,981 for miscellaneous payments.

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

(8) Includes contributions by the Company of $7,177 to a defined contribution
plan and $3,808 for miscellaneous payments.


37

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

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

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

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

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


OPTION/SAR GRANTS LAST FISCAL YEAR

The following table provides information on stock options
granted in 2002 to each of the named executive officers and the potential
realizable value of such options:



Number Of
Securities % of Total Options Exercise or
Underlying Options Granted to Employees Base Price Expiration Grant Date
Name Granted in Fiscal Year ($)/Sh Date Present Value
---- ------- -------------- ------ ---- -------------

David I. Brunson(1) 2,096 6 $ 18.19 June 2007 $ 13.49
David I. Brunson(2) 8,000 22 $ 90.00 Nov. 2012 $ 67.25
Robert A. Milliken, Jr.(3) 7,915 22 $ 90.00 April 2012 $ 67.25
James W. Dobbins(4) 2,000 6 $ 90.00 Nov. 2012 $ 67.25
James M. Murray(4) 2,000 6 $ 90.00 Nov. 2012 $ 67.25



(1) These stock options were granted on November 21, 2002 and
immediately vested on that date.

(2) These stock options were granted on November 21, 2002, 4,000 of such
options will vest on November 21, 2003 and 4,000 of such options
will vest on November 21, 2004.

(3) These stock options were granted as of April 1, 2002, and vest in
equal installments over four years, with the first 1,979 shares
vesting on April 1, 2003 and the last 1,978 shares vesting on April
1, 2006.

(4) These stock options were granted on November 21, 2002 and will vest
in equal installments over a four year period, with the initial
vesting occurring on November 21, 2003.





38

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 our common stock during 2002, and
the unexercised options held and the value thereof at that date, for each of the
named executive officers.



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

David I. Brunson -- -- 33,024 8,000 $ 2,371,453 $ -0-

Robert A. Milliken, Jr. -- -- -- 7,915 -- -0-

James W. Dobbins -- -- 1,500 500 $ 107,715 $ 35,905
2,000 -0-

James M. Murray -- -- 1,500 500 $ 107,715 $ 35,905
2,000 -0-


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.

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 $525,000, which is
reviewed annually, plus a bonus in accordance with the Company's 1999 Executive
Plan. In 2002, Mr. Helms salary was increased to $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,
disability and pension benefits and other perquisites. The Helms Employment


39

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

David I. Brunson, 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 receives an annual base salary
of $600,000, which is 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 paid to Mr. Brunson during the preceding two years) for the
remainder of the term of employment. Any options or shares of restricted stock
granted to Mr. Brunson vest in full as of the date of such termination. In
addition, Mr. Brunson would also have the option to require the Company to
repurchase at fair market value all or a portion of his shares of the Company's
common stock. In the event of his termination within twelve months following the
occurrence of a change of control of the Company, Mr. Brunson will receive a
lump sum cash payment equal to three times the sum of (a) his current annual
base salary and (b) the highest bonus paid to Mr. Brunson pursuant to the 1999
Executive Plan during the preceding two years. If Mr. Brunson's employment is
terminated for any other reason, he will receive his accrued and unpaid salary
and bonus to the date of termination.

Mr. Brunson received signing and stay bonuses, each in the
amount of $300,000, upon the execution of the Brunson Employment Agreement and
on February 28, 1999, respectively. In addition, Mr. Brunson receives various
other benefits, including life insurance and medical, disability, pension
benefits, club memberships, stock options and reimbursements of certain
expenses. The Brunson Employment Agreement includes a non-compete provision for
a minimum of twelve months following the termination of Mr. Brunson's employment
and for any subsequent period during which severance is paid to Mr. Brunson.

Pursuant to a non-qualified stock option agreement, Mr.
Brunson was granted options to purchase 30,928 shares of Common Stock of the
Company. One-third of these options 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.

ROBERT A. MILLIKEN, JR.

Robert A. Milliken, Jr., President and Chief Operating
Officer of National Tobacco Company, L.P., 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


40

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, as well as stock option to purchase 7,915 shares of Common Stock at
an exercise price of $90 per share.

JAMES W. DOBBINS

James W. Dobbins, the Senior Vice President, General
Counsel and Secretary of the Company, has a employment agreement with the
company, dated November 21, 2002 (the "Dobbins Agreement"), pursuant to which
Mr. Dobbins is paid $220,000, 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. 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 the prior year.

RETIREMENT PLAN

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



Annual Benefits at Retirement with
Years of Credited Service(1)
Average
Compensation 10 15 20 25 30 35
------------ ---------- ---------- ---------- ---------- ---------- ----------

$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




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

(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


41

specified person is not and cannot readily be separately or individually
calculated by the actuaries for the Retirement Plan. Benefits under the
Retirement Plan are based upon application of a formula to the specified average
compensation and years of credited service at normal retirement age.
Compensation covered by the Retirement Plan consists of the average annual
salary during any five consecutive calendar years in the last ten years of an
employee's service, which affords the highest salary, or, if employed for less
than five years, the average annual salary for the years employed. The benefits
are not subject to any deduction for social security payments. Estimated
credited years of service under the Retirement Plan for the Named Executives are
as follows: Thomas F. Helms, Jr., 15 years; David I. Brunson, 5 years; Robert A.
Milliken, Jr., 0 years; James W. Dobbins, 3 years; and James M. Murray, 3 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 EBITDA performance, subject to approval
of the Board of Directors. In addition, the Board of Directors can make
discretionary bonus payments to one or more participants in the 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 EBITDA performance as well as the individual performance of
participants, subject to approval of Executive Management. If the Company's
annual EBITDA performance is not achieved, Executive Management, subject to
approval of the Board of Directors, can make discretionary bonus payments. Under
the Discretionary Plan, Executive Management, subject to approval of the Board
of Directors, may provide discretionary bonus payments to employees who are not
participants in any other bonus plan established by the Company based on
individual levels of performance. In addition, the Board of Directors may, from
time to time, pay discretionary bonuses outside of the above mentioned plans.

1997 SHARE INCENTIVE PLAN

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

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 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.


42

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


43

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.


44

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 the Company.

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"). The 2002 Plan has terms that are substantially identical to the
terms of the 1997 Share Incentive Plan. The Company 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
granted, was terminated by the Board of Directors in connection with the
adoption of the 2002 Share Incentive Plan.















45

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

The table below sets forth certain information regarding
the beneficial ownership of Common Stock as of March 26, 2002 by (i) each person
or entity who beneficially owns five percent or more of the Common Stock, (ii)
each Director and Named Executive of the Company and (iii) all Directors and
executive officers of the Company as a group. Unless otherwise indicated, each
beneficial owner's address is c/o North Atlantic Trading Company, Inc., 257 Park
Avenue South, 7th Floor, New York, New York 10010-7304.



Percent Owned(a)
-----------------------------------------
Before Exercise After Exercise
Beneficial Owner Number of Shares of Warrants of Warrants
---------------- ---------------- ------------- -------------

Thomas F. Helms, Jr. (b)......................... 492,251 93.2% 83.2%
Helms Management Corp.
David I. Brunson(c).............................. 260,610 46.4 41.7
Herbert Morris(d)................................ 37,990 7.2 6.4
Flowing Velvet Productions, Inc.
3 Points of View
Warwick, New York 10990
Maurice R. Langston(d)........................... 37,038 7.0 6.3
Langston Enterprises, Inc.
Alan R. Minsterketter(d)......................... 27,613 5.2 4.7
Alan M. Inc.
Jack Africk(e)................................... 21,212 4.0 3.5
Marc S. Cooper(f)................................ 3,000 * *
Peter J. Solomon Company Limited
DIRECTORS AND EXECUTIVE OFFICERS
AS A GROUP (8 PERSONS)....................... 546,237 93.8% 84.6%


- ------------------------------
* Less than 1%.

(a) The percentages assume, in the column entitled "Before Exercise of
Warrants," that none of the outstanding warrants to purchase an aggregate
of 63,490 shares of Common Stock at an exercise price of $.01 per share
issued in connection with the recapitalization undertaken simultaneously
with the 1997 Acquisition are exercised and, 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 268,800 shares of Common Stock, which
represents approximately 50.9% of the outstanding shares assuming that
none of the outstanding warrants are exercised, or 45.4% of the
outstanding shares assuming that all such warrants are exercised. Of the
268,800 shares owned by Helms Management Corp., 218,800 shares are subject
to a voting trust agreement pursuant to which Mr. Helms and David I.
Brunson exercise certain voting powers and which may result in each of
them being deemed a beneficial owner of such shares. See "Voting Trust
Agreement." Because of Mr. Helms' ability to vote an additional 148,346
shares of Common Stock held by members of the Company's management in
respect of the election of the Company's directors pursuant to the
Stockholders' Agreement, he may be deemed to be the beneficial owner of
such additional shares. See "Stockholders' Agreement." In connection with
the transfer of 32,115 shares of Common Stock held by certain
stockholders, the transferees of such shares granted Helms Management Corp
the right to vote such shares with respect to any and all matters
submitted to a vote of the stockholders of the Company and, consequently,
Mr. Helms may be deemed to be the beneficial owner of such shares. In
addition, Mr. Helms may be deemed the beneficial owner of 37,990 shares
that are subject to a voting agreement between Helms Management Corp. and
Flowing Velvet Productions, Inc., and an additional 5,000 shares held by
an outside investor that are subject to the voting agreement. See "Voting
Agreement."

46

(c) Includes (i) 2,250 shares of Common Stock owned by Mr. Brunson, (ii)
33,024 shares subject to currently exercisable stock options held by Mr.
Brunson and (iii) 218,800 shares owned by Helms Management Corp. that are
subject to a voting trust agreement pursuant to which Mr. Brunson
exercises certain voting powers and which may result in his being deemed a
beneficial owner of such additional shares. See "Voting Trust Agreement."
In addition, Mr. Brunson has the right to acquire 6,536 shares currently
owned by Helms Management Corp.

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

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

(f) Reflects a warrant issued to the corporation listed below the name of such
natural person currently exercisable for 3,000 shares of Common Stock of
the Company. Such person is a Managing Director of the corporation.



EQUITY COMPENSATION PLAN INFORMATION


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))
- ------------- ------------------- ------------------- ------------------------
(a) (b) (c)

Equity compensation plans
approved by security holders(1) 61,856 $ 18.19 --

Equity compensation plans
not approved by security
holders (2) 33,415 $ 90.00 16,585
------------ ------------ ------------
TOTAL 95,371 $ 43.33 16,585
============ ============ ============


- -----------------------
(1) Relates to the Company's 1997 Share Incentive Plan

(2) Relates to the Company's 2002 Share Incentive Plan. See the "2002 Share
Incentive Plan" above for a description of the plan.

STOCKHOLDERS' AGREEMENT

The Company and certain stockholders of the Company are
parties to the Stockholders' Agreement, setting forth among other things, the
manner in which directors of the Company are to be selected. See "Directors and
Executive Officers of the Registrant--Election of Directors." The Stockholders'
Agreement also sets forth certain restrictions on the transfer of shares of
Common Stock by existing stockholders and on the acquisition by existing
stockholders of investments in competitors of Bollore. In addition, the
Stockholders' Agreement provides the existing stockholders with certain
"tag-along" rights to participate ratably in sales of Common Stock to third
parties and requires existing stockholders to participate ratably in certain
sales of Common Stock to third parties. Subject to the terms of all applicable
debt agreements of the Company and its subsidiaries and to the rights of holders


47

of the Company's preferred stock, the Stockholders' Agreement provides that the
Company may maintain insurance on the lives of the members of its management
officers and, in the event of the death of any such person, for the mandatory
repurchase by the Company of all of such person's Common Stock at the fair
market value thereof (which will be determined by an independent investment
banking firm if the parties cannot otherwise agree upon such value) to the
extent of available insurance proceeds, and the optional repurchase of
additional shares of such person's Common Stock at such fair market value to the
extent of available cash. Subject to the terms of all applicable debt agreements
of the Company and its subsidiaries, and to the rights of holders of the
Company's preferred stock, the Company also has the right to repurchase the
shares of Common Stock held by members of management if their employment
terminates, in the event of certain bankruptcy proceedings relating to such
persons or upon an involuntary transfer of their shares by court order or
otherwise in each case at the fair market value of such shares.

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

VOTING TRUST AGREEMENTS

Thomas F. Helms, Jr. and David I. Brunson are voting
trustees under a Voting Trust Agreement with Helms Management Corp. Helms
Management Corp. owns 268,800 shares of Common Stock in the Company, 218,800 of
which are subject to the Voting Trust Agreement. Pursuant to the Voting Trust
Agreement, and subject to certain limitations, the voting trustees have the
power to vote the shares subject to the Voting Trust Agreement in connection
with the election of directors and any other matters. The voting trustees may be
removed at any time by the holders of the voting trust certificate and replaced
with a successor. As voting trustees under the Voting Trust Agreement, Messrs.
Helms and Brunson are entitled to three votes and one vote, respectively. Unless
terminated by the certificate holder, the Voting Trust Agreement will terminate
on December 17, 2012.

VOTING 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.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On March 24, 1998, David I. Brunson, 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.

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


48

$886,686.30, representing the principal on the notes discussed above, plus an
additional loan by the Company in the amount of $766,686.30 to cover certain
income tax liabilities of Helms Management Corp. resulting from the conversion
of LLC to a "C" corporation in connection with the Acquisition. Upon execution
of the $886,686.30 note, the prior notes issued by Mr. Helms were cancelled. On
March 31, 2002, Helms Management Corp. issued a promissory note to the Company
in the amount of $958,499.02 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 conversion of LLC. 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 $475,071.30
representing the principal amounts on the notes discussed above, plus accrued
interest of $25,071.30. Upon execution of the $475,071.30 note, 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. As of December 31, 2002, the
aggregate amount outstanding, including accrued interest, under the above notes
was approximately $1,488,000.

Kent Helms and Thomas F. Helms, III, sons of Thomas F.
Helms, Jr., are employed by the Company respectively. During 2002, Kent Helms,
Manager-Sales Training & Development, received aggregate compensation of $72,906
and Thomas F. Helms, III, Manager-Marketing, received aggregate compensation of
$83,180 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
2003. 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 2003, Mr. Africk will receive $100,000 pursuant to the terms of his present
agreement.

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 will terminate unless extended on December 31, 2003.

Marc S. Cooper is a Managing Director of Peter J. Solomon
Company Limited ("PJSC"), an investment banking and financial advisory firm. In
June 2001, the Company engaged PJSC to render general financial and strategic
advisory services through May 1, 2004. As compensation therefore, the Company
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 purchase of the Star Cigarette Assets. The


49

term of the contract will expire on March 31, 2003, and the Company paid Peter
J. Solomon Company a total of $250,000, $150,000 of which was paid in 2002.

ITEM 14. CONTROLS AND PROCEDURES

(a) We maintain disclosure controls and procedures that are
designed to ensure that information required to be disclosed in our filings
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the periods specified in the rules and forms of the Securities
and Exchange Commission. Such information is accumulated and communicated to our
management, including our principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosure. Our management, including the principal executive officer and the
principal financial officer, recognizes that any set of controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives.

Within 90 days prior to the filing date of this annual
report on Form 10-K, we have carried out an evaluation, under the supervision
and with the participation of our management, including our principal executive
officer and our principal financial officer, of the effectiveness of the design
and operation of our disclosure controls and procedures. Based on such
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective.

(b) There have been no significant changes in our internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of their evaluation in connection with the
preparation of this annual report on Form 10-K. However, the Company is in the
process of enhancing internal controls relating to its cash management
activities.








50

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1) Financial Statements and Financial Statement
Schedules

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:



PAGE

Report of Independent Accountants............................................................................. F-1
Consolidated Balance Sheets as of December 31, 2002 and 2001.................................................. F-2
Consolidated Statements of Operations and Other Comprehensive Income (Loss) for the years ended December 31,
2002, 2001, and 2000.................................................................................... F-3
Consolidated Statements of Cash Flows for the
years ended December 31, 2002, 2001, and 2000........................................................... F-5
Consolidated Statements of Changes in Stockholders' Deficit for the
years ended December 31, 2002, 2001, and 2000........................................................... 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) See the list of exhibits set forth under Item 15(c)
below.

(b) Reports on Form 8-K

None.

(c) Exhibits







51

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

2 -- 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).

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.

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).

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).


52

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

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).

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

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


53

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

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

4.4* -- 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.

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

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

9.3* -- Amendment No. 1 to Voting Trust Agreement, dated as of
August 18, 1999, among Thomas F. Helms, Jr. and David I.
Brunson, as voting trustees, and Helms Management Corp.

9.4* -- Amendment No. 2 to Voting Trust Agreement, dated as of
September 22, 1999, among Thomas F. Helms, Jr. and David
I. Brunson, as voting trustees, and Helms Management
Corp.

9.5* -- Amendment No. 3 to Voting Trust Agreement, dated as of
July 7, 2000, among Thomas F. Helms, Jr. and David I.
Brunson, as voting trustees, and Helms Management Corp.

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).


54

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

10.10++ -- 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).


55

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

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

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

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

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

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

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

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

10.18+ -- Amendment, dated October 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).

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


56

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

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

10.21 -- 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).

10.22 -- 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).

10.23++ -- 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).

10.24++ -- 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).

10.25++ -- 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).

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

10.27* -- Amendment, dated as of December 31, 2002, to Loan
Agreement, by and among North Atlantic Trading Company,
Inc., National Tobacco Company, L.P., North Atlantic
Operating Company, Inc., National Tobacco Finance
Corporation and Bank One, Kentucky N.A., as agent bank
and the various lending institutions named therein.


57

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

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

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

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

10.31++ -- 2001 Share Incentive Plan of North Atlantic Trading
Company, Inc. (incorporated by reference to Exhibit
10.36 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 2001).

10.32++ -- 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).

10.33 -- 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).

10.34 -- 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).

10.35 -- 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).

10.36 -- 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).


58

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

10.37 -- 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).

10.38++* -- 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.

10.39++* -- Employment Agreement dated as of November 21, 2002,
between North Atlantic Trading Company, Inc. and James
W. Dobbins.

10.40* -- 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.

10.41* -- 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.

10.42++* -- 2002 Share Incentive Plan

10.43++* -- Letter Agreement, dated November 8, 2002, between North
Atlantic Trading Company, Inc. and Marketing Solutions
USA.

10.44++* -- Letter Agreement, dated September 20, 2002, between
North Atlantic Trading Company, Inc. and Jack Africk.

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

99.1* -- 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.

99.2* -- 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.


* 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.


59

SIGNATURES

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

Date: March 31, 2003

NORTH ATLANTIC TRADING COMPANY, INC.

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


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



SIGNATURE TITLE DATE
--------- ----- ----

/s/ Thomas F. Helms, Jr. Chairman of the Board March 31, 2003
- ------------------------------- and Chief Executive Officer
Thomas F. Helms, Jr. (Principal Executive Officer)


/s/ David I. Brunson Director, President, Chief Financial Officer and March 31, 2003
- ------------------------------- Treasurer (Principal Financial and Accounting
David I. Brunson Officer)


/s/ Jack Africk Director March 31, 2003
- -------------------------------
Jack Africk


/s/ Marc S. Cooper Director March 31, 2003
- -------------------------------
Marc S. Cooper


/s/ Geoffrey J.F. Gorman Director March 31, 2003
- -------------------------------
Geoffrey J.F. Gorman






60

CERTIFICATION

PURSUANT TO RULE 13A-14 AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Thomas F. Helms, Jr., certify that:

1. I have reviewed this annual report on Form 10-K of North Atlantic
Trading Company, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:

a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this annual report is being prepared;

b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this annual report (the "Evaluation
Date"); and

c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):

a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in the
registrant's internal controls; and

b) Any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

Date: March 31, 2003

/s/ Thomas F. Helms, Jr.
-------------------------------
Thomas F. Helms, Jr.
Chief Executive Officer

CERTIFICATIONS
PURSUANT TO RULE 13A-14 AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, David I. Brunson, certify that:

1. I have reviewed this annual report on Form 10-K of North Atlantic
Trading Company, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:

a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this annual report is being prepared;

b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this annual report (the "Evaluation
Date"); and

c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):

a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in the
registrant's internal controls; and

b) Any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.


Date: March 31, 2003

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


C O N T E N T S



PAGES

Report of Independent Accountants F-1


Financial Statements:

Consolidated Balance Sheets as of December 31,
2002 and 2001 F-2

Consolidated Statements of Operations and Other Comprehensive Income (Loss)
for the years ended December 31, 2002, 2001 and 2000 F-3

Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 F-5

Consolidated Statements of Changes in Stockholders' Deficit for
the years ended December 31, 2002, 2001 and 2000 F-6

Notes to Consolidated Financial Statements F-7





REPORT OF INDEPENDENT ACCOUNTANTS


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

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, other comprehensive income (loss), cash
flows, and changes in stockholders' deficit present fairly, in all material
respects, the financial position of North Atlantic Trading Company, Inc. and
Subsidiaries (the Company) at December 31, 2002 and 2001 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, effective
January 1, 2002 the Company adopted the provisions of the Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 142 "Goodwill
and Other Intangible Assets" and effective January 1, 2000, changed its method
of accounting for revenue recognition as a result of the adoption of Staff
Accounting Bulletin No. 101, "Revenue Recognition".



/s/ PricewaterhouseCoopers LLP

New York, New York

March 28, 2003




F-1

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
(dollars in thousands except share data)
- --------------------------------------------------------------------------------



ASSETS 2002 2001
------------------ ------------------

Current assets:
Cash $ 805 $ 1,234
Accounts receivable, net of allowances of $446 and $350 in 2002 and
2001, respectively 7,651 5,672
Inventories 40,818 43,967
Income taxes receivable 887 233
Other current assets 3,457 1,702
------------------ ------------------
Total current assets 53,618 52,808
Property, plant and equipment, net 5,158 5,233
Deferred income taxes 24,916 28,319
Deferred financing costs 2,642 4,028
Goodwill 123,557 123,557
Other assets 3,703 2,718
------------------ ------------------
Total assets $ 213,594 $ 216,663
================== ==================

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 2,868 $ 2,718
Accrued expenses 2,429 3,434
Deferred income taxes 10,552 11,085
Revolving Credit Facility 5,500 --
Current portion of notes payable and long-term debt -- 12,500
------------------ ------------------
Total current liabilities 21,349 29,737
Notes payable and long-term debt 155,000 155,000
Other long-term liabilities 12,793 10,963
------------------ ------------------
Total liabilities 189,142 195,700
------------------ ------------------
Commitments and contingencies

Preferred stock, net of unamortized discount of $0 in 2002 and $918 in 2001;
mandatory redemption value of $57,805 in 2002 and $58,051
in 2001 57,805 57,443
------------------ ------------------
Stockholders' deficit:
Common stock, voting, $.01 par value; authorized shares, 750,000;
issued and outstanding shares, 528,241 5 5
Common stock, nonvoting, $.01 par value; authorized shares, 750,000;
issued and outstanding shares, -0-
Additional paid-in capital 9,246 9,144
Loans to stockholders for stock purchases (157) (187)
Accumulated other comprehensive loss (1,125) (216)
Accumulated deficit (41,322) (45,226)
------------------ ------------------
Total stockholders' deficit (33,353) (36,480)
------------------ ------------------
Total liabilities and stockholders' deficit $ 213,594 $ 216,663
================== ==================


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

F-2

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 2002, 2001 and 2000
(dollars in thousands except share data)
- --------------------------------------------------------------------------------



2002 2001 2000
----------------- ---------------- ----------------

Net sales $ 94,425 $ 89,622 $ 90,365
Cost of sales 40,973 37,697 37,797
----------------- ---------------- ----------------
Gross profit 53,452 51,925 52,568
Selling, general and administrative expenses 24,065 23,372 23,586
Amortization of Goodwill - 5,490 5,490
----------------- ---------------- ----------------
Operating income 29,387 23,063 23,492
Interest expense and financing costs 18,744 19,742 22,261
Other expense 1,944 2,642 1,801
----------------- ---------------- ----------------
Income (loss) from continuing operations before income tax 8,699 679 (570)
Income tax expense 3,214 2,043 1,529
----------------- ---------------- ----------------
Income (loss) before extraordinary loss & cumulative
effect of change in accounting principle 5,485 (1,364) (2,099)
Extraordinary loss, net of income tax benefit of $521 - - (850)
----------------- ---------------- ----------------
Income (loss) before cumulative effect of change in
accounting principle 5,485 (1,364) (2,949)
Cumulative effect of change in accounting principle,
net of income tax benefit of $153 - - (251)
----------------- ---------------- ----------------
Net income (loss) 5,485 (1,364) (3,200)
Preferred stock dividends (6,976) (6,745) (6,005)
Net gain on restructuring of preferred stock 5,395 - -
----------------- ---------------- ----------------
Net income (loss) applicable to common shares 3,904 (8,109) (9,205)
Add back: goodwill amortization expense, net of tax - 4,088 4,088
----------------- ---------------- ----------------
Adjusted net income (loss) applicable to common shares $ 3,904 $ (4,021) $(5,117)
================= ================ ================





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


F-3

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
for the years ended December 31, 2002, 2001 and 2000
(dollars in thousands except share data)
- --------------------------------------------------------------------------------



2002 2001 2000
----------------- ---------------- ----------------

Basic earnings per common share:
Income (loss) before extraordinary loss &
cumulative effect of change in accounting principle $ 10.38 $ (2.58) $ (3.98)
Extraordinary loss, net of income tax benefit - - (1.61)
Cumulative effect of change in accounting principle,
net of income tax benefit - - (0.47)
Preferred stock dividends (13.20) (12.77) (11.37)
Net gain on restructuring of preferred stock 10.21 - -
----------------- ---------------- ----------------
Net income (loss) 7.39 (15.35) (17.43)
Add back: goodwill amortization expense, net of tax - 7.74 7.74
----------------- ---------------- ----------------
Adjusted net income (loss) $ 7.39 $ (7.61) $ (9.69)
================= ================ ================
Diluted earnings per common share:
Income (loss) before extraordinary loss &
cumulative effect of change in accounting principle $ 8.25 $ (2.58) $ (3.98)
Extraordinary loss, net of income tax benefit - - (1.61)
Cumulative effect of change in accounting principle,
net of income tax benefit - - (0.47)
Preferred stock dividends (10.49) (12.77) (11.37)
Net gain on restructuring of preferred stock 8.11 - -
----------------- ---------------- ----------------
Net income (loss) 5.87 (15.35) (17.43)
Add back: goodwill amortization expense, net of tax - 7.74 7.74
----------------- ---------------- ----------------
Adjusted net income (loss) $ 5.87 $ (7.61) $ (9.69)
================= ================ ================

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


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



Net income (loss) $ 5,485 $ (1,364) $ (3,200)
Other comprehensive income, net of tax benefit:
Net change related to cash flow hedges:
Cumulative effect of accounting change - 28 -
Reclassification to net income - (28) -
Minimum pension liability, net of tax (909) (216) -
----------------- ---------------- ----------------
Comprehensive income (loss) $ 4,576 $ (1,580) $ (3,200)
================= ================ ================



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

F-4

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 2002, 2001 and 2000
(dollars in thousands)
- --------------------------------------------------------------------------------



2002 2001 2000
---------------- ---------------- ---------------

Cash flows from operating activities:
Net income (loss) $ 5,485 $ (1,364) $ (3,200)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Extraordinary loss - - 1,371
Depreciation 700 637 1,067
Amortization of goodwill - 5,490 5,490
Amortization of deferred financing costs 1,386 1,332 2,275
Deferred income taxes 2,738 2,043 855
Change in accrued pension liabilities 495 513 201
Change in accrued postretirement liabilities 558 615 465
Compensation expense 576 33 33
Changes in operating assets and liabilities:
Accounts receivable (1,979) (1,490) 802
Inventories 3,149 5,205 4,327
Income tax receivable (654) - (58)
Other current assets (1,755) 368 (382)
Other assets (985) (1,039) (396)
Accounts payable 150 264 2,140
Accrued expenses and other (1,479) 280 (102)
---------------- ---------------- ---------------
Net cash provided by operating activities 8,385 12,887 14,888
---------------- ---------------- ---------------
Cash flows from investing activities:
Capital expenditures (625) (603) (456)
---------------- ---------------- ---------------
Net cash used in investing activities (625) (603) (456)
---------------- ---------------- ---------------
Cash flows from financing activities:
Payments on senior term loans (12,500) (12,500) (15,864)
Proceeds from revolving credit facility 5,500 - -
Consent Solicitation expenses (1,219) - -
Net loans to stockholders for stock purchases 30 (3) -
---------------- ---------------- ---------------
Net cash used in financing activities (8,189) (12,503) (15,864)
---------------- ---------------- ---------------
Net increase (decrease) in cash (429) (219) (1,432)
Cash, beginning of period 1,234 1,453 2,885
---------------- ---------------- ---------------
Cash, end of period $ 805 $ 1,234 $ 1,453
================ ================ ===============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 17,560 $ 18,466 $ 20,737
================ ================ ===============
Cash paid during the period for income taxes $ 283 - -
================ ================ ===============


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


F-5

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
for the years ended December 31, 2002, 2001 and 2000
(dollars in thousands)
- --------------------------------------------------------------------------------



LOANS TO ACCUMULATED
COMMON ADDITIONAL STOCKHOLDERS OTHER TOTAL
STOCK, PAID-IN FOR STOCK COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
VOTING CAPITAL PURCHASES LOSS DEFICIT DEFICIT
--------- ----------- ------------- --------------- ---------------- ---------------

Beginning balance, January 1, 2000 $ 5 $ 9,078 $ (184) $ - $ (27,912) $ (19,013)

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

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

Compensation expense - 33 - - - 33
Net loans to stockholders for stock purchases - - (3) - - (3)
Amount related to minimum pension liability,
net of tax of $132 - - - (216) - (216)
Preferred stock dividend - - - - (6,745) (6,745)
Net loss - - - - (1,364) (1,364)
--------- ----------- ------------- --------------- ---------------- ---------------

Ending balance, December 31, 2001 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)
========= =========== ============= =============== ================ ===============




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



F-6

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

1. ORGANIZATION:

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

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

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

On May 19, 1997, certain members of management and holders of membership
interests in the Holding Company formed a corporation named North
Atlantic Trading Company, Inc. (the "Corporation"). On June 25, 1997, the
Corporation acquired the membership interests in the Holding Company and
the Holding Company transferred all of its assets 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"). 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 February 11, 2000, the Company entered into a definitive Asset
Purchase Agreement with Swedish Match North American, Inc. ("Swedish
Match"), under which the Company agreed to sell certain smokeless tobacco
assets, including its chewing tobacco brands and related formulation,
technology and inventory. The transaction was challenged by the Federal
Trade Commission (the "FTC") as anti-competitive under the antitrust
laws. As a result of actions taken by the FTC, on December 22, 2000, the
Company and Swedish Match mutually agreed to terminate the Asset Purchase
Agreement. Costs of $1.8 million related to the sale, which had
previously been deferred, have been recognized in other expenses for the
year ended December 31, 2000.


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

F-7

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

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

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

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

SHIPPING COSTS: The Company records shipping costs incurred as a
component of selling, general and administrative expenses. Shipping costs
incurred were $2,583,000, $2,560,000 and $2,443,000 in 2002, 2001, and
2000, respectively.

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

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

GOODWILL: Upon adopting Statement 142 on January 1, 2002, the Company
ceased amortizing goodwill. Statement 142 required completion of the
first step of the transitional impairment test by June 30, 2002. In
completing the transitional impairment test for fiscal 2002, the Company
reported that it had incurred no impairment.


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

F-8

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

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

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

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

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

STOCK-BASED COMPENSATION: The Company measures stock compensation costs
related to the stock options described in Note 14 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.


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

F-9

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

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

The tobacco industry has experienced and is experiencing significant
product liability litigation. Most tobacco liability lawsuits have been
brought against manufacturers and sellers of cigarettes for injuries
allegedly caused by smoking or by exposure to smoke. However, several
lawsuits have been brought against manufacturers and sellers of smokeless
tobacco for injuries to health allegedly caused by use of smokeless
tobacco. Typically, such claims assert that use of smokeless tobacco is
addictive and causes oral cancer. As discussed in Note 17, 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 (the "MSA") and the
Smokeless Tobacco Master Settlement Agreement (the "STMSA"). To the
Company's knowledge, the other signatories to the MSA are 34 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.



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


F-10

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

RISKS AND UNCERTAINTIES, CONTINUED: Pursuant to the MSA and subsequent
states' statutes, a "cigarette manufacturer" (which is defined to also
include make-your-own cigarette tobacco) has the option of either
becoming a signatory to the MSA or opening, funding and maintaining an
escrow account, with subaccounts on behalf of each settling state. The
STMSA has no similar provisions. The MSA escrow accounts are governed by
states' statutes that expressly give the manufacturers the option of
opening, funding and maintaining an escrow account in lieu of becoming a
signatory to the MSA. The statutes require companies, who are not
signatories to the MSA, to deposit, on an annual basis, into qualified
banks escrow funds based on the number of cigarettes or cigarette
equivalents, i.e., the pounds of MYO tobacco, sold. The purpose of these
statutes is expressly stated to be to eliminate the cost disadvantage the
settling manufacturers have as a result of 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. NAOC has
chosen to open and fund an escrow account.

NAOC has chosen to open and fund an MSA escrow account as its means of
compliance. As of December 31, 2002, NAOC has funded a total of
approximately $1.1 million into its account. 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,
as NAOC has chosen to do, 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
that have failed to properly establish and fund a qualifying escrow
account. To date, 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, 2002, the Company has recorded
approximately $2,092,000 as an other non-current asset. During 2002,
$605,577 was deposited into a qualifying escrow account. As of December
31, 2002 the escrow balance is $1,083,982, which represents the total
deposit balance plus $29,593 interest earned thereon. The remaining


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

F-11

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

amount of approximately $1,008,000 relates to 2002 and will be deposited
by April 15, 2003. The Company is entitled to direct the investment of
the escrow funds and is allowed to withdraw any appreciation, but cannot
withdraw the principal for twenty-five years from the year of each annual
deposit, except to withdraw funds deposited pursuant to an individual
state's escrow statute to pay a final judgment to that state's plaintiffs
in the event of such a judgment against the Company.

USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities as of the
dates of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ
from those estimates. The Company's significant estimates include those
affecting the valuation and useful lives of property, plant and equipment
and goodwill, assumptions used in determining pension and postretirement
benefit obligations, accrued and deferred income taxes and litigation
contingencies.

CONCENTRATION OF CREDIT RISK: At December 31, 2002 and 2001, the Company
had bank deposits in excess of federally insured limits of approximately
$1.2 million and $2.6 million, respectively.

The Company sells its products to distributors and retail establishments
throughout the United States. A single customer accounted for 13.1%,
10.1% and 10.2% of the Company's revenues in 2002, 2001 and 2000,
respectively. The Company performs periodic credit evaluations of its
customers and generally does not require collateral on trade receivables.
Historically, the Company has not experienced significant credit losses.

ACCOUNTS RECEIVABLE: Accounts receivable are recognized at their net
realizable value. The activity of allowance for doubtful accounts during
2002 and 2001 is as follows (in thousands):



2002 2001
-------------------- --------------------

Balance at beginning of period $ 350 $ 201
Provision for doubtful accounts 96 175
Charge offs (2) (26)
-------------------- --------------------
Balance at end of period $ 446 $ 350
==================== ====================



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

F-12

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

OTHER EXPENSE: Other expense of $1.9 and $2.6 million in 2002 and 2001,
respectively, consists primarily of legal, investigative and related
expenses with respect to the infringement activities involving Zig-Zag
premium cigarette papers. Other expense of $1.8 million in 2000
represents legal fees and other costs associated with the proposed sale
of the smokeless tobacco segment, which was terminated in December 2000.

RECLASSIFICATION: Certain prior year amounts have been reclassified to
conform with the current year presentation.

3. FAIR VALUE OF FINANCIAL INSTRUMENTS:

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

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

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

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


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

F-13

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

4. INVENTORIES:

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



2002 2001
--------------------- --------------------

Raw materials and work in process $ 3,111 $ 2,125
Leaf tobacco 10,328 12,404
Finished goods - loose leaf tobacco 4,174 2,431
Finished goods - MYO products 4,722 4,694
Other 728 681
--------------------- --------------------
23,063 22,335
LIFO reserve 17,755 21,632
--------------------- --------------------
$ 40,818 $ 43,967
===================== ====================



The reduction of LIFO inventory quantities decreased net income of the
Company by approximately $2.4 million and $1.7 million for the years
ended December 31, 2002 and 2001, respectively.

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









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

F-14

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

5. PROPERTY, PLANT AND EQUIPMENT:

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



2002 2001
--------------------- --------------------

Land $ 654 $ 654
Buildings and improvements 3,888 3,745
Machinery and equipment 6,864 6,652
Furniture and fixtures 2,419 2,149
--------------------- --------------------
13,825 13,200
Accumulated depreciation (8,667) (7,967)
--------------------- --------------------
$ 5,158 $ 5,233
===================== ====================



6. GOODWILL:

Goodwill at December 31 consists of (in thousands):



2002 2001
------------------- ------------------

NTC goodwill, net of accumulated amortization of $4,500
at December 31, 2002 and 2001 $ 27,450 $ 27,450

NAOC goodwill, net of accumulated amortization of $21,175
at December 31, 2002 and 2001 96,107 96,107
------------------- ------------------

$ 123,557 $ 123,557
=================== ==================




7. OTHER ASSETS:

Other assets at December 31, 2002 and 2001 includes loans and accrued
interest to the principal shareholder of $1,488 and $1,413, respectively,
and amounts related to the MSA escrow account of $2,092 and $1,219,
respectively. The latter is described in Note 2.


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

F-15

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

8. DEFERRED FINANCING COSTS:

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



2002 2001
------------------- ------------------

Deferred financing costs, net of accumulated amortization of
$7,532 and $6,146 at December 31, 2002 and 2001,
respectively $ 2,642 $ 4,028
=================== ==================


9. NOTES PAYABLE AND LONG-TERM DEBT:

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

2002 2001
--------------------- --------------------

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

155,000 167,500
Less current portion - 12,500
--------------------- --------------------

$ 155,000 $ 155,000
===================== ====================


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

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

The Company is currently 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 million term loan and a $10 million revolving credit facility. The
Term Loan was payable in eight (8) quarterly installments of $3,125,000
each plus accrued interest, which commenced on March 31, 2001. Both the
term loan and the revolving credit facility matured on December 31, 2002,


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

F-16

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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. All terms of
the original Loan Agreement remain 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 are guaranteed by the
"Partnership", NAOC and NTFC. In addition, the Company's obligations are
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 may be either based on LIBOR or the prime rate as announced by
the Agent from time to time. As of December 31, 2002, the interest rate
on borrowings under the Amended Loan Agreement was 3.77%. In addition,
the Company must pay a quarterly commitment fee of 0.5% per annum of the
unused portion of the revolving credit facility.

The Loan Agreement and the Senior Notes limit 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, 2002, the Company was in
compliance with all provisions of the Amended Loan Agreement and Senior
Notes.

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


Through December 31, 2003 $ -
Through December 31, 2004 155,000
Through December 31, 2005 -
---------------------

$ 155,000
=====================


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

F-17

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

10. INCOME TAXES:

The income tax provision for the years ended December 31, 2002, 2001 and
2000 consists of the following components (in thousands):



2002 2001 2000
---------------------- ---------------------- ---------------------

Deferred:
Federal $ 2,876 $ 1,828 $ 839
State and local 338 215 16
---------------------- ---------------------- ---------------------

$ 3,214 $ 2,043 $ 855
====================== ====================== =====================











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

F-18

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

10. INCOME TAXES, CONTINUED:

Deferred tax assets and liabilities at December 31, 2002 and 2001 consist
of (in thousands):



2002 2001
--------------------------------- ---------------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
--------------------------------- ---------------------------------

Inventory $ 7,855 $ 9,542
Property, plant and equipment $ 319 $ 821
Goodwill 2,697 1,543
Intangible assets 12,676 15,535
Accrued pension and postretirement costs 3,739 3,839
Minimum pension liability 476 132
NOL carryforward 6,406 6,802
Other 1,300 1,190
--------------------------------- ---------------------------------

Deferred income taxes $ 24,916 $ 10,552 $ 28,319 $ 11,085
================================= =================================


At December 31, 2002, the Company had NOL carryforwards for income tax
purposes of $16.9 million which expire in the years beginning in 2012.

The Company has determined that at December 31, 2002 its ability to
realize future benefits of net deferred tax assets meets the "more likely
than not" criteria in SFAS No. 109, "Accounting for Income Taxes";
therefore, no valuation allowance has been recorded.

Reconciliation of the federal statutory rate and the effective income tax
rate for the years ended December 31, 2002, 2001 and 2000 is as follows:



2002 2001 2000
---------------------- ---------------------- ------------------

Federal statutory rate 35.0% 35.0% (35.0)%
State taxes 3.0 24.3 3.2
Goodwill amortization - 241.8 70.0
Other (1.1) (0.7) (1.8)
---------------------- ---------------------- ------------------

Effective income tax rate 36.9% 300.4% 36.4%
====================== ====================== ==================



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

F-19

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

11. 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.

The following tables provide a reconciliation of the changes in the
plans' benefit obligations and fair value of assets over the two-year
period ended December 31, 2002, and a statement of the funded status as
of December 31 (in thousands):



PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------------------------- -----------------------------------
2002 2001 2002 2001
----------------------------------- -----------------------------------

Reconciliation of benefit obligation:

Benefit obligation at January 1 $ 11,280 $ 10,163 $ 6,695 $ 5,887
Service cost 550 558 421 379
Interest cost 803 738 473 435
Actuarial loss 619 257 2,098 175
Benefit paid (515) (436) (336) (181)
----------------------------------- -----------------------------------

Benefit obligation at December 31 $ 12,737 $ 11,280 $ 9,351 $ 6,695
=================================== ===================================

Reconciliation of fair value of plan assets:
Fair value of plan assets at January 1 $ 7,729 $ 8,640
Actual return on plan assets (937) (510)
Employer contributions 679 35 $ 336 $ 181
Benefit paid (515) (436) (336) (181)
----------------------------------- -----------------------------------

Fair value of plan assets at December 31 $ 6,956 $ 7,729 $ - $ -
=================================== ===================================

Funded status:
Funded status at December 31 $ (5,781) $ (3,551) $ (9,351) $ (6,695)
Unrecognized prior service cost 7 8
Unrecognized net loss 2,408 194 1,527 (571)
----------------------------------- -----------------------------------

Net amount recognized $ (3,366) $ (3,349) $ (7,824) $ (7,266)
=================================== ===================================


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

F-20

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

11. PENSION AND POSTRETIREMENT BENEFIT PLANS, CONTINUED:

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



PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------------ ----------------------------------
2002 2001 2002 2001
------------------------------------ ----------------------------------

Accrued benefit cost $ (3,366) $ (3,349) $ (7,824) $ (7,266)
Minimum pension liability (1,601) (348) - -
Deferred tax asset 476 132 - -
Accumulated other comprehensive income 1,125 216 - -
------------------------------------ ----------------------------------

Net amount recognized $ (3,366) $ (3,349) $ (7,824) $ (7,266)
==================================== ==================================


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):



PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------------------------------- -----------------------------------------
2002 2001 2000 2002 2001 2000
----------------------------------------- -----------------------------------------

Service cost $ 550 $ 558 $ 515 $ 421 $ 379 $ 320
Interest cost 803 738 682 473 435 396
Expected return on plan assets (658) (716) (738) - - -
Amortization of gains and losses - (31) (149) - (18) (64)
----------------------------------------- -----------------------------------------

Net periodic benefit cost $ 695 $ 549 $ 310 $ 894 $ 796 $ 652
========================================= =========================================



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



PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------------------------------- -----------------------------------------
2002 2001 2000 2002 2001 2000
------------ -------------- ------------- ------------- ------------- -------------

Discount rate 6.75% 7.25% 7.50% 6.75% 7.25% 7.50%
Expected return on plan assets 8.50% 8.50% 8.50% - - -
Rate of compensation increase 4.00% 4.00% 4.00% - - -



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

F-21

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

11. PENSION AND POSTRETIREMENT BENEFIT PLANS, CONTINUED:

For measurement purposes, the assumed health care cost trend rate for
participants under age 65 as of December 31, 2002 and 2001 was 12.0% and
7.5%, respectively, and for participants age 65 and over the rate was
12.0% and 6.5%, respectively. The health care cost trend rate was assumed
to decline gradually to 5% for pre-age 65 and for post-age 65 costs over
27 years.

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



2002 2001 2000
---------------- --------------- --------------

Effect on total of service and interest cost
components of net periodic postretirement
Cost $ 3 $ 3 $ 2

Effect on the health care component of
the accumulated postretirement benefit
Obligation 49 35 32


The Company also sponsors a voluntary retirement savings plan (401(k)).
Eligible employees may elect to contribute up to 15% of their annual
earnings subject to certain limitations. Through December 31, 1998, the
Company matched 50% of each eligible participant's contribution up to 5%
of the participant's compensation for the plan year. Beginning January 1,
2002, the Company changed its matching contribution policy. The Company
match for the Hourly employees was increased to 100.0% of each eligible
participant's contribution up to 6% of compensation for the plan year.
Company matching for Hourly employees is subject to a 3 year vesting
schedule. The Company match for the Salaried employees was increased to
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 $0.4 million, $0.3
million and $0.3 million for each of the years ended December 31, 2002,
2001 and 2000.

12. LEASE COMMITMENT:

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


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

F-22

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

12. LEASE COMMITMENT, CONTINUED:

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, 2002:


Operating
(In thousands) Leases
--------------------------------------------- ------------------

2003 $ 757
2004 512
2005 368
2006 71
2007 3
2008 and beyond -
--------------------------------------------- ------------------
Total minimum lease payments $1,711
============================================= ==================

Lease expense for the years ended December 31, 2002, 2001 and 2000 was
$786, $790 and $873, respectively.


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

F-23

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

13. MANDATORILY REDEEMABLE PREFERRED STOCK, CONTINUED:

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 $984,642 in consent fees was paid. The Company paid an
additional $235,724 in legal and other fees related to the Consent
Solicitation.

The Company has recorded the Preferred Stock at its current value in the
accompanying Balance Sheet. The resulting gain, net of the consent and
other fees described above, has been recognized in the accompanying
Statements of Operations.

The Company's future ability to make dividend payments in cash will
depend upon the availability of funds and whether the Company has
satisfied the "restricted payments" provision under the Indenture
pursuant to which the Senior Notes were issued. Currently, the Company
can satisfy that provision. Additionally, the Company has sufficient
authorized and un-issued shares of Preferred Stock to make its dividend
payments through the issuance of additional shares. For the dividend
payments on September 15, 2002, and December 15, 2002, the Company chose
to make this payment in kind.

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.

14. SHARE INCENTIVE PLAN:

The Company has two share incentive plans covering certain key employees
which provide for the granting of options to purchase common stock of the
Company and other stock related benefits. As of December 31, 2002, no
benefits other than the stock options described below had been granted.


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

F-24

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

14. SHARE INCENTIVE PLAN, CONTINUED:

The total number of shares available for granting under the plans is
111,856. Stock option activity is summarized below:



WEIGHTED WEIGHTED
AVERAGE AVERAGE
INCENTIVE EXERCISE GRANT DATE
SHARES PRICE FAIR VALUE
------------------ ------------------ -----------------

Outstanding, December 31, 2000 61,760 $ 18.19 $ 26.51

Granted - - -
Exercised - - -
Forfeited - - -
------------------
Outstanding, December 31, 2001 61,760 18.19 26.51
------------------

Granted 35,511 85.76 22.97
Exercised - - -
Forfeited (2,000) (18.19) (26.51)
------------------
Outstanding, December 31, 2002 95,271 43.38 25.19
==================



Of the stock options outstanding on December 31, 2002, 60,981 were
exercisable, with an additional 34,290 becoming exercisable in 2003
through 2006. All stock options expire 10 years from the grant date. The
Company estimates that all of the stock options granted will be exercised
and that the expected life of all stock options is five years from the
date of grant. The weighted average fair value of the options was
determined as the difference between the fair value of the common stock
on the grant date and the present value of the exercise price over the
expected life of five years at a risk free interest rate of 6%, with no
assumed dividend yield.

Of the stock options described above, 47,986 include a provision under
which the Company will reimburse the employee for the difference between
their ordinary income tax liability and the liability computed using the
capital gains rate in effect upon exercise of the options. The effect of
this provision is accounted for as a variable portion of the option plan.

The Company has recorded compensation expense related to the options
based on the provisions of SFAS No. 123 under which the fixed portion of
such expense is determined as the fair value of the options on the date
of grant and amortized over the vesting period. The variable portion of
the compensation expense is remeasured on each reporting date with the
expense amount adjusted for changes in the fair value of the Company's
stock on that date. Compensation expense of $576,000, $33,000 and



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

F-25

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

14. SHARE INCENTIVE PLAN, CONTINUED:

$33,000 ($357,000, $20,000 and $20,000 net of deferred income tax
benefit) has been recognized in the Statements of Operations for the
years ended December 31, 2002, 2001 and 2000, respectively.

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



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

Net income $ 5,485
Less: Preferred stock dividends (6,976)
Plus: Net gain on restructuring of preferred stock 5,395
--------------------
Basic:

Net income available to common stockholders $ 3,904 528,241 $ 7.39
==============================================================
Diluted:

Net income available to common stockholders $ 3,904 664,939 $ 5.87
==============================================================



FOR THE YEAR ENDED DECEMBER 31, 2001
--------------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMIMATOR) AMOUNT
--------------------------------------------------------------

Net loss $ (1,364)
Less: Preferred stock dividends (6,745)
--------------------
Basic and diluted:
Net loss available to common stockholders $ (8,109) 528,241 $ (15.35)
==============================================================



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

F-26

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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


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

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

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







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

F-27

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

The calculations above are based on the weighted average number of shares
of common stock outstanding during the year. For the years ended December
31, 2001 and December 31, 2000, common equivalent shares from stock
options of 61,760 and warrants of 63,490 are excluded from the
computations as their effect is antidilutive.

16. EXTRAORDINARY LOSS:

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

17. FOURTH QUARTER ADJUSTMENT:

The fourth quarters of 2002, 2001 and 2000 include adjustments to
increase the income tax provision by approximately $1,300,000, $1,490,000
and $1,140,000, respectively, as a result of the year-end income tax
computations. The fourth quarters of 2002 and 2000 also included
adjustments to increase the LIFO expense by approximately $1.7 million
and $1.5 million, net of income tax of approximately $1.0 million and
$0.9 million, respectively.

18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):

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



QUARTER
--------------------------------------------------------------
1ST 2ND 3RD 4TH
--------------- -------------- -------------- ----------------

2002
Net sales 21,952 18,218 26,014 28,241
Gross profit 13,283 9,688 15,477 15,004
Net income (loss) (305) (2,575) 6,185 599
Basic net income (loss) per share (0.58) (4.88) 11.71 1.13
Diluted net income (loss) per share (0.58) (4.88) 9.46 0.90

2001
Net sales 22,442 16,570 23,302 27,308
Gross profit 12,935 8,575 13,386 17,029
Net income (loss) (122) (2,219) 111 (1,791)
Basic net income (loss) per share (0.58) (4.20) 0.21 (3.39)
Diluted net income (loss) per share (0.58) (4.20) 0.21 (3.39)



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

F-28

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

19. CONTINGENCIES:

Kentucky and Illinois Complaints. On July 15, 1998, NAOC and 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.

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.

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.

The Company believes it has viable defenses to the Republic claims,
however, no assurances can be given that it will prevail. If the Company
were not to prevail, management does not believe that any


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

F-29

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

19. CONTINGENCIES, CONTINUED:

adverse judgment would be material to the Company's results of
operations, financial position or cash flows.

West Virginia Complaints. Trial of the West Virginia complaints 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-2401). 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 allege 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, and one alleges use that covers, in
part, a period when NTC did not manufacture the product. 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).


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

F-30

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

19. CONTINGENCIES, CONTINUED:

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

Minnesota Complaint. On September 24, 1999, 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. 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. The plaintiffs have moved the Court to reconsider its
decision.

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

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 have negotiated
settlements with one group of defendants, including Import Warehouse Inc.


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

F-31

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

19. CONTINGENCIES, CONTINUED:

and its owner/operator Ravi Bhatia. Those settlements included a consent
injunction against distribution of infringing or counterfeit goods.
Management believes that successful prosecution of this litigation,
either by settlement or otherwise, will have a favorable impact on its
future premium cigarette paper business.

On May 18, 2001, the Company, in conjunction with Bollore, conducted
raids on the businesses and homes of certain defendants previously
enjoined from selling infringing or counterfeit ZIG-ZAG 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.

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 million from the civil contempt order and an
agreement to forbear from enforcing that $11 million money judgment until
such time in the future that the defendants violate the terms of the
permanent injunction. Two of the defendants 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.

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. A hearing was held on April 10, 2002. After evidence related to
this matter was discovered by plaintiffs and upon plaintiffs'
application, another hearing was held on August 1, 2002. The Court
allowed the defendants three weeks to supplement the record with
additional evidence. Final arguments were held on January 22, 2003 and a
decision is pending.

California Infringing Products Litigation. On March 23, 2001, the Company
participated as co-plaintiff with NAOC and Bollore in an action entitled
Bollore, S.A. v. A&A Smart Shopping (Case No. CV 01-02766 FMC (MANx)),
filed in the U.S. District Court for the Central District of California.
The plaintiffs alleged that nine distributors in California were selling
counterfeit ZIG-ZAG brand premium cigarette papers.


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

F-32

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

19. CONTINGENCIES, CONTINUED:

On May 22, 2001, the Company participated as co-plaintiff with NAOC and
Bollore in an action entitled Bollore, S.A. v. Buy-Rite Wholesale (Case
No. CV 01-4570 FMC (MAN)), filed in the U.S. District Court for the
Central District of California. The plaintiffs alleged that seven
distributors and retailers in California were selling counterfeit ZIG-ZAG
brand premium cigarette papers.

On June 5, 2002, the Court granted the plaintiffs application to
consolidate the A&A Smart Shopping and Buy Rite Wholesale cases for trial
purposes. In an effort to better manage this case for trial, the
plaintiffs settled against certain defendants, obtained judgments for
damage against most the defendants and obtained permanent injunctions
against all of the settling defendants.

A trial of the plaintiffs' claims against the remaining defendants, in
the A&A Smart Shopping case, Downey Wholesale and Fadel El-Shahawi,
Downey's principal, began October 1, 2002. On October 15, 2002, after a
two week jury trial, the jury found for the plaintiffs on all counts. The
plaintiffs were awarded a total of $2,000,000 in damages, and the jury
found that defendant Downey and the defendant Fadel El-Shahawi acted
willfully and with fraud, oppression or malice. As a result, plaintiffs
were entitled to and did request the Court to award them their reasonable
attorney fees and expenses. That application is pending. The verdict also
allowed the Court, in its discretion, to apply a multiple of up to three
times the verdict amount in order to adequately compensate plaintiffs and
also, to award punitive damages. The parties settled the punitive damages
and multiplier portions of the case for $500,000, of which half was paid
on November 15, 2002 and the remainder will be paid in equal monthly
installments over the next two year period, commencing on December 1,
2002. All recoveries from this litigation will be shared equally by NAOC
and Bollore. Defendants filed a new trial motion which the Court has
denied. However, the Court reduced the plaintiff's damages award to
approximately $1.7 million. On March 13, 2003, the Court denied the
defendants' motions.

On June 6, 2002, the plaintiffs moved for contempt sanctions against JT
Saniya Inc., asserting that JT Saniya had violated the terms of the
preliminary injunction issued against it by selling 38 cases of
counterfeit product. JT Saniya failed to dispute the allegations and a
default judgment of $420,369.09 was entered against JT Saniya on July 23,
2002. The plaintiffs have entered into a settlement agreement with JT
Saniya in respect of the default judgment pursuant to which JT Saniya has
paid $82,500 in full satisfaction of the judgment.

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 the outcome of such litigation will have a
material adverse effect on the results of operations, financial position
or cash flows of the Company.


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

F-33

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

20. PARENT-ONLY FINANCIAL INFORMATION:

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

All of the Corporation's subsidiaries are wholly-owned and guarantee the
debt of the Corporation on a full, unconditional, and joint and several
basis. Separate financial statements of the subsidiaries are not required
and have not been included in these financial statements.

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



2002 2001
--------------------- --------------------

Noncurrent assets $ 189,129 $ 195,462
Current liabilities 10,732 20,164
Noncurrent liabilities 155,000 155,000
Redeemable preferred stock 57,497 57,443


YEAR ENDED DECEMBER 31,
------------------------------------------
2002 2001
--------------------- --------------------

Equity in earnings of subsidiaries $ 24,126 $ 18,746
Income loss before gain on restructuring and preferred stock dividends 5,544 (1,308)



21. SEGMENT INFORMATION:

In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." The Company has been historically
organized on the basis of product lines which are comprised of two
reportable segments. The smokeless tobacco segment manufactures smokeless
tobacco products which are distributed primarily through wholesale and
food distributors in the United States. The make-your-own segment imports
and distributes cigarette papers, tobaccos and related products primarily
through wholesale distributors in the United States.

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


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

F-34

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

21. SEGMENT INFORMATION, CONTINUED:

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

The table below presents financial information about reported segments
for 2002, 2001 and 2000 (in thousands):



SMOKELESS ELIMINATIONS
2002 TOBACCO MAKE-YOUR-OWN AND OTHER TOTAL
- ----------------------------------------- -------------------- ------------------------ ------------------- --------------------

Net sales $ 35,732 $ 58,693 $ - $ 94,425
Operating income 5,966 23,421 29,387
Assets 67,951 256,756 (111,113) 213,594

2001
- -----------------------------------------

Net sales 38,647 50,975 - 89,622
Operating income 5,610 17,453 23,063
Assets 69,781 237,008 (90,126) 216,663

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

Net sales 39,387 50,978 - 90,365
Operating income 6,362 17,130 23,492
Assets 73,845 223,732 (69,820) 227,757




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

F-35

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

22. NEW ACCOUNTING STANDARDS:

During 2001, the Emerging Issues Task Force issued: 1) EITF No. 00-14,
"Accounting for Certain Sales Incentives", addressing the recognition,
measurement and statement of earnings classification of certain sales
incentives and 2) EITF No. 00-25, "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's
Products", addressing the statement of earnings classification of
consideration from a vendor to an entity that purchases the vendor's
products for resale. The Company adopted EITF 00-14 and EITF 00-25 in the
first quarter of 2002. As a result of this adoption, certain expenses
have been reclassified from selling, general and administrative expenses
to allowances in determining net sales and to cost of goods sold for each
of the years ended December 31, 2001 and 2000. Due to adopting EITF 00-14
and EITF 00-25, for each of the years ended December 31, 2001 and 2000,
net sales decreased by $4.126 million and $2.780 million, respectively,
cost of goods sold increased by $3.963 million and $4.108 million,
respectively, and selling, general and administrative expenses were
reduced by $8.089 million and $6.888 million, respectively, from the
previously reported figures. The adoption of EITF 00-14 and EITF 00-25
had no impact on the Company's net income for either of these periods.

In June 2001, the Financial Accounting Standards Board ("FASB"), issued
Statement No. 141, Business Combinations ("Statement 141") and Statement
No. 142," Goodwill and Other Intangible Assets" ("Statement 142").
Statement 141 requires that all business combinations initiated after
June 30, 2001 be accounted for using the purchase method as use of the
pooling-of-interest method is no longer permitted. Statement 142 requires
that goodwill no longer be amortized to earnings, but instead be reviewed
at least annually for impairment using a two-step process. The first step
is a test for potential impairment, and the second measures the amount of
impairment, if any. Impairment losses that arise from completing a
transitional impairment test during 2002 are to be reported as the
cumulative effect of a change in accounting principle as of the beginning
of the year. Subsequent impairments, if any, will be classified as an
operating expense. In addition, Statement 142 specifies the types of
acquired intangible assets that are required to be recognized and
reported separately from goodwill.

Upon adopting Statement 142 on January 1, 2002, the Company ceased
amortizing goodwill. Statement 142 required completion of the first step
of the transitional impairment test by June 30, 2002. In completing the
transitional impairment test for fiscal 2002, the Company reported that
it had incurred no impairment.

In August 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligation" ("SFAS 143"). SFAS 143 requires that obligations
associated with the retirement of a tangible long-lived asset be recorded
as a liability when those obligations are incurred, with the amount of
the liability initially measured at fair value. Upon initially
recognizing a liability for an asset-retirement obligation ("ARO"), an
entity must capitalize the cost by recognizing an increase in the
carrying amount of the related long-lived asset. Over time, the


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

F-36

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

22. NEW ACCOUNTING STANDARDS, CONTINUED:

liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon
settlement. SFAS 143 was effective for financial statements for fiscal
years beginning after June 15, 2002. The Company will adopt the
provisions of SFAS 143 in fiscal 2003. SFAS 143 will not have an impact
on the Company's financial statements.

On January 1, 2002, the Company adopted FASB Statement No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets"
("Statement 144"). Statement 144 develops a single accounting model for
long-lived assets to be disposed of by sale, and addresses significant
implementation issues related to previous guidance. Statement 144
requires that long-lived assets to be disposed of by sale be measured at
the lower of their carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations.
Statement 144 also broadens the reporting of discontinued operations by
potentially qualifying more disposal transactions for discontinued
operations reporting. The adoption of Statement 144 did not have an
impact on the Company's financial statements.

In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". This Statement eliminates the automatic
classification of gain or loss on extinguishment of debt as an
extraordinary item of income and requires that such gain or loss be
evaluated for extraordinary classification under the criteria of
Accounting Principles Board No. 30, "Reporting Results of Operations."
This Statement also requires sales-leaseback accounting for certain lease
modifications that have economic effects that are similar to
sales-leaseback transactions, and makes various other technical
corrections to existing pronouncements. This Statement will be effective
for the Company for the year ending 2003. The adoption of the Statement
is not expected to have an impact on the Company's financial statements.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 sets
forth various modifications to existing accounting guidance which
prescribes the conditions which must be met in order for costs associated
with contract terminations, facility consolidations, employee relocations
and terminations to be accrued and recorded as liabilities in financial
statements. The provisions of SFAS 146, as related to exit or disposal
activities will be effective for transactions after December 31, 2002.
SFAS 146 does not at present have an impact on the Company's financial
statements.

In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure" ("SFAS 148"). SFAS
148 amends SFAS 123 providing alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. SFAS 148 also amends the disclosure
requirements of SFAS 123 and requires additional disclosures in annual


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

F-37

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

22. NEW ACCOUNTING STANDARDS, CONTINUED:

and interim financial statements regarding the method of accounting for
stock-based employee compensation and the effect of the method used on
financial results. The Company accounts for stock-based compensation in
accordance with SFAS No. 123. Therefore, SFAS 148 does not have an impact
on the Company's financial statements.

In January 2003, the Financial Accounting Standards Board issued
Financial Accounting Standards Board Interpretation No. 46, Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46).
FIN 46 requires certain variable interest entities to be consolidated by
the primary beneficiary of the entity if the equity investors in the
entity do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support
from other parties. FIN 46 is effective immediately for all new variable
interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003,
the provisions of FIN 46 must be applied for the first interim or annual
period beginning after June 15, 2003. FIN 46 does not have an impact on
the Company's financial statements.

23. SUBSEQUENT EVENT:

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 has agreed 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 is $80 million in cash, subject to certain closing adjustments and
the assumption of certain liabilities related to the Star Cigarette
Assets.

All requisite corporate approvals for this transaction have been
obtained, including the approvals of the Star Cigarette Asset Purchase
Agreement by the respective Boards of Directors of the Company and Star,
by the holders of a majority of the outstanding shares of common stock of
Star Scientific and by Star Scientific as the sole stockholder of Star
Tobacco.

The transaction is expected to close in the second quarter of 2003. The
closing is subject to the Company's receipt of financing and to customary
closing conditions. Contemporaneously with the signing of the Star
Cigarette Asset Purchase Agreement, the Company placed a $2 million
earnest money deposit into escrow. In the event that, on or after July
15, 2003, the Star Cigarette Asset Purchase Agreement is terminated by
either the Company or Star and, at that time, the Company has been



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

F-38

NORTH ATLANTIC TRADING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

23. SUBSEQUENT EVENT, CONTINUED:

unable to obtain the requisite financing for the transaction and all
other conditions to closing have been satisfied or are capable of being
satisfied, then such deposit will be paid to Star. In all other events,
the deposit will either be used to satisfy a portion of the purchase
price or repaid to the Company, as applicable. Although the Company is
currently in the process of seeking financing for the acquisition and a
related recapitalization of the Company, there can be no assurance that
such financing will be obtained.

Through December 31, 2002, the Company has incurred approximately $1.9
million of costs relating to this acquisition. Such costs have been
deferred and are included in Other current assets in the accompanying
Consolidated Balance Sheets.

















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

F-39

EXHIBIT INDEX

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

2 -- 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).

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.

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).

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).


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

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).

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

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


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

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

4.4* -- 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.

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

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

9.3* -- Amendment No. 1 to Voting Trust Agreement, dated as of
August 18, 1999, among Thomas F. Helms, Jr. and David I.
Brunson, as voting trustees, and Helms Management Corp.

9.4* -- Amendment No. 2 to Voting Trust Agreement, dated as of
September 22, 1999, among Thomas F. Helms, Jr. and David
I. Brunson, as voting trustees, and Helms Management
Corp.

9.5* -- Amendment No. 3 to Voting Trust Agreement, dated as of
July 7, 2000, among Thomas F. Helms, Jr. and David I.
Brunson, as voting trustees, and Helms Management Corp.

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

10.10++ -- 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).


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

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

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

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

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

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

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

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

10.18+ -- Amendment, dated October 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).

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


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

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

10.21 -- 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).

10.22 -- 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).

10.23++ -- 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).

10.24++ -- 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).

10.25++ -- 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).

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

10.27* -- Amendment, dated as of December 31, 2002, to Loan
Agreement, by and among North Atlantic Trading Company,
Inc., National Tobacco Company, L.P., North Atlantic
Operating Company, Inc., National Tobacco Finance
Corporation and Bank One, Kentucky N.A., as agent bank
and the various lending institutions named therein.


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

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

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

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

10.31++ -- 2001 Share Incentive Plan of North Atlantic Trading
Company, Inc. (incorporated by reference to Exhibit
10.36 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 2001).

10.32++ -- 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).

10.33 -- 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).

10.34 -- 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).

10.35 -- 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).

10.36 -- 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).


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

10.37 -- 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).

10.38++* -- 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.

10.39++* -- Employment Agreement dated as of November 21, 2002,
between North Atlantic Trading Company, Inc. and James
W. Dobbins.

10.40* -- 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.

10.41* -- 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.

10.42++* -- 2002 Share Incentive Plan

10.43++* -- Letter Agreement, dated November 8, 2002, between North
Atlantic Trading Company, Inc. and Marketing Solutions
USA.

10.44++* -- Letter Agreement, dated September 20, 2002, between
North Atlantic Trading Company, Inc. and Jack Africk.

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

99.1* -- 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.

99.2* -- 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.


* 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.