The story goes that brothers Friedrich and Heinrich Kapp were making pipes in their shop on Dublin's Grafton Street when Charles Peterson came in and told them he knew he could make a better pipe than the ones they were producing.

It was 1965 and the Kapps, from Nurnberg, Germany, had only recently set up in business. Peterson, a stonemason from Latvia, came into the shop armed with a example of what he considered a better model of pipe.

Peterson suggested that the three men go into business together and a partnership was agreed there and then. The company was named Kapp & Peterson. Peterson patented his pipe and ownership of this was at the core of the company's success.

Until the 1970s the Kapp & Peterson manufacturing plant was in the building on St Stephen's Green which used to house the restaurant, Whites on the Green. At one stage there were two Kapp & Peterson shops on Grafton Street, as well as one on Bachelors Walk. It also had an outlet in London. In the 1950s there was an outlet which used its name on New York's Madison Avenue, and there is still a Peterson shop in Munich.

The firm was still owned by descendants of the original owners until the 1960s, when it became part of Tennant and Ruttle sweet distributors, being quoted on the Dublin Stock Exchange under the name Peterson Tennent. The company was taken over by James Crean in the 1970s, and the Kapp & Peterson element, which Crean was not interested in, was subsequently the subject of a management buyout.

In 1992, Mr Tom Palmer bought the company with a number of other investors, and in 1995 he and his brother, Brian, bought out the other investors. What attracted him to the company, Mr Palmer says, was the strength of the brand.

In its heyday in the 1960s and 1970s, Kapp & Peterson was making 8,000 to 10,000 pipes per week. Sales dropped to as low as 2,000 but have started climbing again. They are now at around 3,000 per week.

"The problem now is that we can't fill the demand," says Mr Palmer. The production process is a semi-skilled one and increasing capacity is not so easily done. Currently many of the production staff are working large amounts of overtime.

The company exports more than 90 per cent of its sales. The three biggest markets are the US, Germany and the UK, but the countries of eastern europe - "traditional pipe-smoking nations" - are providing new markets as are Russia and China. The company sells to 30 different countries around the world, and its products are stocked by department stores such as Harrods of London and Bloomingdales of New York.

Mr Palmer says the US market has bottomed out and may even be improving. Many of the world's most enthusiastic pipe collectors are in the US and the market is a good one for the annual "limited edition" pipes which the company produces.

"In the niche tobacco world, this company is known to everyone," says Mr Palmer. In all the markets into which Peterson sells, the brand is among the top three available.

Mr Palmer's idea for developing his company is to expand the pipe manufacturing business while at the same time using the brand name to market its cigars and pipe tobacco.

Hand-rolled pure tobacco cigars are made for Peterson in the Dominican Republic, shipped to a (properly humidified) bonded warehouse here, and then exported around the world. The cheapest cigar is £5 (€6.35), so they are very much a luxury item. (More than £3.50 of the sales price is tax). The most expensive cigars, the Churchhills, cost £9 each.

Pipe tobacco is blended for Petersons by Murray & Sons of Belfast, which is part of the Rothmans group but which has been in existence for more than 100 years. This end of the business has also been expanding in recent years.

The pipes, which are now made in the company's premises in Sallynoggin, Co Dublin, range in price from £40 to £600, though the bulk of those sold are in the £40 to £150 price range.

Given the cost of the items it sells, Mr Palmer sees his company as very much in the business of selling gift items. While 10 years ago 90 per cent of the customers who came into its Grafton Street shop were buying for themselves, the breakdown is now 50-50 between smokers and those buying gifts for others.

"This has affected how we present and package our products," says Mr Palmer. "We are bringing in new gift sets, with say a cigar and cognac, or pipe tobacco and whiskey. Sets that make sense."

There are now 43 people working for the company. The pipe making process itself is interesting to see. Most of the pipes are made from the root of the brier tree, which grows wild in Mediterrean countries. The best wood comes from Morocco, where nomads collect it and sell it on to agents.

Some of the workers at the Sallynoggin plant are second-generation Peterson pipe makers. The basic elements are the briar wood and hardened rubber from Italy, which is used for the mouth pieces. Gold and silver is used for finishing the more expensive pipes.

Petersons also sells meerschaum pipes. Meerschaum is a chalk-like deposit. A particularly white meerschaum comes from Turkey. Petersons also uses a smoked yellow meerschaum, which comes from Somalia.

It is without a doubt an international business and Mr Palmer has mixed feelings about all the travel involved. On the day he was interviewed by The Irish Times he was preparing for his first trip to Moscow. However, overall he seems pleased with how business is developing, and with the products he finds himself producing: A non-smoker before he bought into the company, he now smokes both cigars and the pipe.

The Sallynoggin plant has a display room which is dominated by a large photograph of the late Mr Jack Lynch, pipe in hand. The late Mr Erskine Childers was another Petersons pipe smoker, as was Kruger of South Africa, according to Mr Palmer.

"Most of the cowboys you see in old cowboy and western films are smoking Peterson pipes," he says.

The display includes one of Peterson's own pipes, which is engraved: "When this is stolen, please return to 55 Grafton Street".

When rather than if.