ITEM 2.
                                    FORM 10-Q

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

                  For the quarterly period ended March 31,1999

                                       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: 333-60991

                                AKI HOLDING CORP.
             (Exact name of registrant as specified in its charter)

       Delaware                                        74-288316
(State or other jurisdiction of                    (I.R.S. Employer
incorporation or organization                     Identification No.)

                        Commission File Number: 333-60989

                                    AKI, INC.
             (Exact name of registrant as specified in its charter)

       Delaware                                        13-3785855
(State or other jurisdiction of                    (I.R.S. Employer
incorporation or organization                     Identification No.)

      1815 East Main Street
       Chattanooga, TN                                   37404
(Address of principal executive offices)               (Zip Code)

                                 (423) 624-3301
              (Registrant's telephone number, including area code)

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

As of May 14, 1999, 1,000 shares of common stock of AKI Holding Corp.,  $.01 par
value,  were outstanding and 1,000 shares of common stock of AKI, Inc., $.01 par
value, were outstanding.

AKI Inc. meets the requirements set forth in General Instruction H(1)(a) and (b)
of Form 10-Q and is therefore filing this form with reduced disclosure format.





<PAGE>






                       AKI HOLDING CORP. AND SUBSIDIARIES

                               INDEX TO FORM 10-Q


Part I.  FINANCIAL INFORMATION

         Item 1.  Financial Statements

                  AKI Holding Corp. and Subsidiaries

                           Consolidated Condensed Balance Sheet

                           -        March 31, 1999 (unaudited)
                           -        June 30, 1998

                           Consolidated Condensed Statements of Operations

                           - Three months ended March 31, 1999 (unaudited)
                           - Three months ended March 31,1998 (unaudited)
                           - Nine months ended March 31, 1999 (unaudited)
                           - December   16,   1997    through   March  31,  1998
                             (unaudited)
                           - July   1,   1997   through    December   15,   1997
                             (Predecessor)

                           Consolidated   Condensed   Statement  of  Changes  in
                           Stockholder's Equity

                           - Nine months ended March 31, 1999 (unaudited)

                           Consolidated Condensed Statements of Cash Flows

                           - Nine  months  ended March 31,  1999  (unaudited)
                           - December   16,   1997   through   March   31,  1998
                             (unaudited)

                           - July   1,   1997   through    December   15,   1997
                             (Predecessor)

                           Notes to Consolidated Condensed Financial Statements



<PAGE>


         Item 1.  Financial Statements (continued)

                  AKI, Inc. and Subsidiaries

                           Consolidated Condensed Balance Sheet

                           - March 31, 1999 (unaudited)
                           - June 30, 1998

                           Consolidated Condensed Statements of Operations

                           - Three months ended March 31, 1999 (unaudited)
                           - Three months ended March 31, 1998 (unaudited)
                           - Nine months ended March 31, 1999 (unaudited)
                           - December   16,   1997    through   March  31,  1998
                             (unaudited)
                           - July   1,   1997   through    December   15,   1997
                             (Predecessor)

                           Consolidated   Condensed   Statement  of  Changes  in
                           Stockholder's Equity

                           - Nine months ended March 31, 1999 (unaudited)

                           Consolidated Condensed Statements of Cash Flows

                           - Nine months ended March 31, 1999 (unaudited)
                           - December   16,   1997   through   March  31,  1998
                             (unaudited)
                           - July   1,   1997   through   December   15,   1997
                             (Predecessor)

                           Notes to Consolidated Condensed Financial Statements

         Item 2. Management's Discussion and Analysis of Financial Condition and
                 Results of Operations

Part II. OTHER INFORMATION

         Item 6.  Exhibits and Reports on Form 8-K



<PAGE>
<TABLE>
<CAPTION>


                                                 AKI HOLDING CORP. AND SUBSIDIARIES
                                       (a wholly-owned subsidiary of AHC I Acquisition Corp.)
                                                CONSOLIDATED CONDENSED BALANCE SHEET
                                          (dollars in thousands, except share information)

<S>                                                                             <C>               <C>    

                                                                                  March 31,           June 30,
                                                                                    1999                1998    
                                                                                -------------      -------------
                                                                                 (unaudited)

ASSETS
Current assets
Cash and cash equivalents..................................................     $       1,413      $        3,842
Accounts receivable, net...................................................            22,329              13,577
Inventory..................................................................             5,975               2,078
Income tax refund receivable...............................................                 -               5,155
Prepaid expenses...........................................................                71                 378
Deferred income taxes......................................................               827                 827
                                                                                -------------       -------------

   Total current assets....................................................            30,615              25,857

Property, plant and equipment..............................................            18,821              18,936
Goodwill, net..............................................................           148,953             151,842
Intangible assets..........................................................             6,742               7,289
Debt issuance costs........................................................             7,043               6,535
Deferred income taxes......................................................             2,490               3,888
Other assets...............................................................                47                 200
                                                                                -------------      --------------

   Total assets............................................................     $     214,711      $      214,547
                                                                                =============      ==============

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of capital lease obligations...............................     $         672      $          609
Current portion of other notes payable.....................................                 -               1,330
Accounts payable, trade....................................................             5,330               4,140
Accrued income taxes.......................................................               532                 100
Accrued interest...........................................................             3,041                 168
Accrued expenses...........................................................             3,598               4,464
                                                                                -------------      --------------

   Total current liabilities...............................................            13,173              10,811

Long-term portion of capital lease obligations.............................             1,527               1,489
Revolving credit line......................................................               800                   -
Senior notes...............................................................           115,000             115,000
Senior discount debentures.................................................            28,713              26,020
Deferred income taxes......................................................             2,792               4,143
                                                                                -------------      --------------

   Total liabilities.......................................................           162,005             157,463

Stockholder's equity
Common stock, $0.01 par 1,000 shares authorized;
   1,000 shares issued and outstanding at
   March 31, 1999 (unaudited) and June 30, 1998............................                 -                   -
Additional paid-in capital.................................................            78,364              78,364
Accumulated deficit........................................................            (9,623)             (5,493)
Accumulated other comprehensive loss.......................................              (305)                (57)
Carryover basis adjustment.................................................           (15,730)            (15,730)
                                                                                -------------      --------------

   Total stockholder's equity..............................................            52,706              57,084
                                                                                -------------      --------------


   Total liabilities and stockholder's equity..............................     $     214,711      $      214,547
                                                                                =============      ==============




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

</TABLE>


<PAGE>

<TABLE>
<CAPTION>



                                                 AKI HOLDING CORP. AND SUBSIDIARIES
                                       (a wholly-owned subsidiary of AHC I Acquisition Corp.)
                                           CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                                                       (dollars in thousands)


                                         Holding                             Holding                    Predecessor  
                             -----------------------------      ---------------------------------    -----------------
                              Three months   Three Months         Nine Months   December 16, 1997      July 1, 1997
                                  Ended          Ended               Ended           Through              Through
                             March 31, 1999 March 31, 1998      March 31, 1999   March 31, 1998      December 15, 1997
                             -------------- --------------      --------------   --------------      -----------------
                               (unaudited)    (unaudited)         (unaudited)      (unaudited)
<S>                            <C>             <C>                <C>               <C>                   <C>

Net sales..................    $  24,518       $ 19,191           $  68,979         $  21,982             $  35,186
Cost of goods sold.........       14,827         11,935              43,908            13,913                22,809
                               ---------       --------           ---------         ---------             ---------

   Gross profit............        9,691          7,256              25,071             8,069                12,377

Selling, general and.......
   administrative expenses.        3,924          2,699              10,333             3,182                 5,703
Amortization of goodwill and
   other intangibles.......        1,151            954               3,454             1,131                   568
                               ---------       --------           ---------         ---------             ---------

   Income from operations..        4,616          3,603              11,284             3,756                 6,106

Other expenses (income):...
   Interest expense to.....
      stockholder(s) and affiliate     -          4,293                   -             5,032                 2,143
   Interest expense to others, net 4,258            111              12,503               131                   503
   Management fees and.....
      other, net...........          242             48                 367                48                   226
                               ---------       --------           ---------         ---------             ---------

Income (loss) before.......
   income taxes............          116           (849)             (1,586)           (1,455)                3,234

Income tax expense (benefit)         480              38                681              (125)                1,441
                              ----------   -------------       ------------      ------------------        --------


   Net income (loss).......    $    (364)      $   (887)          $  (2,267)        $  (1,330)            $   1,793
                               ==========      ========           =========         ==========            =========





























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

</TABLE>


<PAGE>
<TABLE>
<CAPTION>



                                                 AKI HOLDING CORP. AND SUBSIDIARIES
                                       (a wholly-owned subsidiary of AHC I Acquisition Corp.)
                                           CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN
                                             STOCKHOLDER'S EQUITY (dollars in thousands,
                                                      except share information)


                                                                                            Accumulated
                                                                 Additional                    Other     Carryover
                                     Common Stock                 Paid-in      Accumulated Comprehensive   Basis
                                    ---------------
                                    Shares       Dollars          Capital        Deficit       Loss       Adjustment       Total   
                                    ------       -------          -------        -------    -----------   ----------       -----
<S>                                  <C>         <C>              <C>          <C>           <C>        <C>             <C>

Balances, June 30, 1998.........     1,000       $     -          $  78,364    $  (5,493)    $   (57)   $  (15,730)     $ 57,084

Dividend to AHC I Acquisition Corp.
    (unaudited).................                                     (1,863)                                (1,863)

Net loss (unaudited)............                                     (2,267)                                (2,267)

 Other comprehensive loss, net of tax:
     Foreign currency translation
       adjusted (unaudited).....                                                    (248)                     (248)
                                                                                                          --------

Comprehensive loss (unaudited)..                                                                            (2,515)
                                   -------       -------          ---------     --------    --------    ----------      ---------
Balances, March 31, 1999 (unaudited) 1,000       $     -          $  78,364     $ (9,623)   $   (305)   $  (15,730)     $  52,706
                                   =======       =======          =========     ========    ========    ==========      =========










































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

</TABLE>


<PAGE>

<TABLE>
<CAPTION>
                                                 AKI HOLDING CORP. AND SUBSIDIARIES
                                       (a wholly-owned subsidiary of AHC I Acquisition Corp.)
                                           CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                                       (dollars in thousands)


                                                       Holding                 Holding            Predecessor 
                                                   --------------          --------------      -----------------
                                                     Nine Months          December 16, 1997      July 1, 1997
                                                        Ended                  Through              Through
                                                   March 31, 1999          March 31, 1998      December 15, 1997
                                                   --------------          --------------      -----------------
                                                     (unaudited)             (unaudited)
<S>                                                <C>                     <C>                 <C>    

Cash flows from operating activities
   Net income (loss).............................    $  (2,267)              $  (1,330)           $   1,793
   Adjustments to reconcile net income (loss) to
     net cash provided by operating activities:
     Depreciation and amortization of goodwill...
       and other intangibles.....................        6,561                   2,007                2,456
     Amortization of debt discount...............        2,693                      44                  233
     Amortization of debt issuance costs.........          528                   1,119                  101
     Deferred income taxes.......................           47                    (141)                (460)
     Other.......................................         (248)                    (76)                 (18)
     Changes in operating assets and liabilities:
       Accounts receivable.......................       (8,752)                 (6,329)               1,153
       Inventory.................................       (3,897)                    350                   69
       Prepaid expenses, deferred charges
         and other assets........................         (595)                   (429)                 (62)
       Income taxes..............................        5,587                       -                  699
       Accounts payable and accrued expenses.....        3,197                  (4,809)              (1,036)
                                                     ---------               ---------            ---------

       Net cash provided by (used in)
           operating activities..................        2,854                  (9,594)               4,928
                                                     ---------               ----------           ---------

   Cash flows from investing activities
     Purchases of equipment......................       (2,430)                   (255)                (807)
     Payments for acquisitions, net of cash
       acquired..................................            -                (134,153)                   -
                                                     ---------               ----------           ---------

         Net cash used in investing activities...       (2,430)               (134,408)                (807)
                                                     ---------               ---------            ---------

   Cash flows from financing activities
       Payments under capital leases for equipment        (460)                   (165)                (249)
     Net proceeds (repayments) on line of credit.          800                  (5,100)               2,362
     Proceeds from issuance of senior increasing
       rate notes, net of offering costs.........            -                 119,735                    -
     Proceeds from issuance  of common stock.....            -                  76,000                    -
     Redemption of preferred stock...............            -                  (8,678)                   -
     Repayment of loans payable to stockholder...            -                 (36,649)              (1,851)
     Repayment of other notes payable............       (1,330)                    (25)                 (50)
     Dividends paid on preferred stock...........            -                    (128)                (155)
     Dividend paid to AHC I Acquisition Corp.....       (1,863)                      -                    -
                                                     ----------              ---------            ---------

       Net cash provided by (used in) financing
         activities..............................       (2,853)                144,990                   57
                                                     ---------               ---------            ---------

   Net increases (decrease) in cash and cash 
         equivalents.............................       (2,429)                    988                4,178
   Cash and cash equivalents, beginning of period        3,842                       -                  303
                                                     ---------               ---------            ---------

   Cash and cash equivalents, end of period......    $   1,413               $     988            $   4,481
                                                     =========               =========            =========


   Supplemental information
     Cash paid (received) during the period for:
       Interest to stockholder(s)................    $       -               $   3,296            $   1,146
       Interest, other...........................        6,498                      68                  459
       Income taxes..............................       (4,953)                     15                1,222

   Significant non-cash activities
     Assets acquired under capital lease.........    $     561               $       -            $       -

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


                       AKI HOLDING CORP. AND SUBSIDIARIES
             (a wholly owned subsidiary of AHC I Acquisition Corp.)
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                (dollars in thousands, except share information)



1.   BASIS OF PRESENTATION

         On November 4, 1993, Arcade Holding Corporation (the "Predecessor") was
     organized  for the  purpose of  acquiring  all the  issued and  outstanding
     capital stock of Arcade,  Inc. Arcade,  Inc.  manufacturers and distributes
     cosmetics sampling products from its Chattanooga, Tennessee facilities, and
     distributes products in Europe through its French subsidiary, Arcade Europe
     S.A.R.L.  This  acquisition  was  accounted  for as a purchase  transaction
     whereby the purchase cost was allocated to the fair value of the net assets
     acquired.

     Acquisition of Arcade Holding Corporation

         DLJ Merchant  Banking  Partners II, L.P. and certain related  investors
     (collectively,  "DLJMBII") and certain members of the Predecessor organized
     AHC I  Acquisition  Corp.  ("Acquisition  Corp.")  and AHC I  Merger  Corp.
     ("Merger  Corp.") for purposes of acquiring the  Predecessor.  Merger Corp.
     was organized as a  wholly-owned  subsidiary of  Acquisition  Corp. and was
     initially  capitalized by Acquisition Corp. with an equity  contribution of
     $78,363,  comprised of $76,000 of cash and $2,363 of non-cash consideration
     in the form of an option to purchase Senior  Preferred Stock of Acquisition
     Corp.  Immediately following this equity contribution,  Merger Corp. issued
     $123,500 of Senior Increasing Rate Notes ("Bridge Notes") to an entity that
     has an  ownership  interest in  Acquisition  Corp.  The Bridge  Notes had a
     stated  maturity of December 15, 1998 and had an interest rate equal to the
     greater of (i) 10% per annum and (ii) a daily  floating  rate of prime plus
     2.25%  plus an  additional  percentage  amount  equal to (a) 1.0%  from and
     including  the interest  payment date on June 15, 1998 or (b) 1.5% from and
     including  the interest  payment date on September  15, 1998.  Merger Corp.
     received  cash  proceeds from the issuance of the Bridge Notes of $119,735,
     net of $3,765 of associated  debt issuance costs paid to an entity that has
     an ownership interest in Acquisition Corp.

         On December 15, 1997, Merger Corp. acquired all of the equity interests
     of the Predecessor (the  "Acquisition")  for a total cost of $197,730 which
     consisted of $138,634 cash paid for equity interests and direct acquisition
     costs,  $2,363  in  non-cash  consideration  in the  form of an  option  to
     purchase Senior  Preferred Stock of Acquisition  Corp. used to retire 1,370
     options of the Predecessor and the assumption of $56,733 in debt, preferred
     stock and related accrued interest and dividends, including a capital lease
     obligation.  Included in the cost of the acquisition was $19,342 related to
     the purchase and retirement of 11,201 options of the Predecessor and $2,022
     paid for acquisition  expenses to an entity that has an ownership  interest
     in Acquisition Corp. Merger Corp. then merged with and into the Predecessor
     and the combined entity assumed the name AKI, Inc.  ("AKI").  Subsequent to
     the Acquisition,  Acquisition  Corp.  contributed $1 of cash and all of its
     ownership interest in AKI to AKI Holding Corp. ("Holding").

         The  Acquisition  was  accounted  for  using  the  purchase  method  of
     accounting. In accordance with the consensus reached by the Emerging Issues
     Task Force of the  Financial  Accounting  Standards  Board in Issue  88-16,
     "Basis of Leveraged  Buyout  Transactions,"  the purchase price  allocation
     required  an  adjustment  for  the  continuing  interest   attributable  to
     management's   ownership  interest  in  the  Predecessor  carried  over  in
     connection with the Acquisition.  As a result, a reduction in stockholder's
     equity of $15,730 was recorded which represents the difference  between the
     fair  value  of  the  Predecessor's  assets  and  the  related  book  value
     attributable to the interest of the continuing  shareholders' investment in
     the Predecessor.  The remaining purchase price has been allocated to assets
     and  liabilities  based upon  estimates of their  respective  fair value as
     determined  by  management  and  third-party  appraisals  and  goodwill  of
     approximately  $153,929.  Goodwill is being  amortized  on a  straight-line
     basis over 40 years.

         In connection with the Acquisition,  AKI repaid the outstanding balance
     and related interest of the Predecessor's loans payable to a shareholder of
     $37,374,  the outstanding balance and related interest of the Predecessor's
     line of credit of $6,278 and the outstanding  balance and related dividends
     on the Predecessor's preferred stock of $8,806.



<PAGE>


                       AKI HOLDING CORP. AND SUBSIDIARIES
             (a wholly owned subsidiary of AHC I Acquisition Corp.)
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                (dollars in thousands, except share information)

1.   BASIS OF PRESENTATION (Continued)

     Acquisition  of  fragrance   sampling  business  of  Minnesota  Mining  and
     Manufacturing Company

         On June 22,  1998,  AKI  acquired the  fragrance  sampling  business of
     Minnesota Mining and Manufacturing  Company ("3M") for approximately $7,250
     in  cash  and  the  assumption  of  liabilities   totaling  $182  (the  "3M
     Acquisition"). The only tangible assets acquired were approximately $143 of
     equipment.  The  acquisition was accounted for using the purchase method of
     accounting and result in the recognition of intangible assets,  primarily a
     non-compete  agreement,  totaling  $7,289  which are being  amortized  on a
     straight-line basis over a period of 10 years.

     Refinancing of Bridge Notes

         On June 25,  1998,  AKI  completed a private  placement  of $115,000 of
     Senior Notes (the "Notes"). The Notes are general, unsecured obligations of
     AKI and bear interest at 10.5% per annum, payable  semi-annually on January
     1 and July 1. The Notes mature on July 1, 2008.  The placement of the Notes
     yielded AKI net proceeds of $109,502 after deducting  offering  expenses of
     $5,498,  including certain costs that were incurred  subsequent to June 30,
     1998. These offering expenses also include $3,450 of underwriting fees paid
     to an affiliate of the stockholder.  The Notes contain customary  covenants
     including  restrictions  on the  declaration  and payment of dividends  and
     limitations on the incurrence of additional indebtedness.

         Contemporaneous  with the Notes offering,  Holding  completed a private
     offering of $50,000 of Senior Discount Debentures (the  "Debentures").  The
     Debentures do not accrue or pay interest until July 1, 2003 and were issued
     with an  original  issuance  discount  of $24,038.  The  original  issuance
     discount  is  being  accreted  from  issuance  through  July 1,  2003 at an
     effective rate of 13.5% per annum.  After July 1, 2003, the Debentures will
     accrue  interest  at a rate of  13.5%  per  annum,  payable  semi-annually,
     commencing   January  1,  2004.  The  Debentures  are  general,   unsecured
     obligations of Holding and mature on July 1, 2009.

         With the  proceeds  of the  Debentures  offering,  Holding  contributed
     $22,499 of cash to AKI.  No  additional  shares were issued to Holding as a
     result of this  contribution.  On June 25, 1998, AKI used the proceeds from
     the  contribution  from  Holding,  together  with the proceeds of the Notes
     offering,  to repay the Bridge Notes,  without penalty  (collectively,  the
     "Refinancing").  In  conjunction  with  the  Refinancing,  AKI  recorded  a
     non-cash interest charge of $1,795 for the unamortized  portion of the debt
     issuance costs associated with the Bridge Notes.

      Interim financial statements

         The interim consolidated condensed balance sheet at March 31, 1999, the
     interim consolidated  condensed statement of operations for the period from
     December  16,  1997  through  March  31,  1998,  the  interim  consolidated
     condensed  statement  of  operations  for the period  from  January 1, 1998
     through March 31, 1998, the interim  consolidated  condensed  statements of
     operations  for the three and nine months ended March 31, 1999, the interim
     consolidated condensed statement of cash flows for the period from December
     16,  1997  through  March 31,  1998,  the  interim  consolidated  condensed
     statement  of cash flows for the nine  months  ended March 31, 1999 and the
     interim consolidated condensed statement of changes in stockholder's equity
     for the nine  months  ended  March  31,  1999 are  unaudited,  and  certain
     information and footnote  disclosure related thereto,  normally included in
     the financial  statements  prepared in accordance  with generally  accepted
     accounting principles, have been omitted. In the opinion of management, the
     unaudited interim consolidated condensed financial statements were prepared
     following  the same  policies and  procedures  used in  preparation  of the
     audited financial statements and all adjustments, consisting only of normal
     recurring adjustments to fairly present the financial position,  results of
     operations  and  cash  flows  with  respect  to  the  interim  consolidated
     condensed  financial  statements,   have  been  included.  The  results  of
     operations for the interim  periods are not  necessarily  indicative of the
     results for the entire year.


<PAGE>


                       AKI HOLDING CORP. AND SUBSIDIARIES
             (a wholly owned subsidiary of AHC I Acquisition Corp.)
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                (dollars in thousands, except share information)

1.   BASIS OF PRESENTATION (Continued)

         The accompanying  unaudited interim  consolidated  condensed  financial
     statements  as of March 31,  1999 and for the three  and nine  months  then
     ended and for the period  from  January  1, 1998  through  March 31,  1998,
     present the financial  position and results of operations of Holding on the
     basis of accounting  described above and,  accordingly,  are not comparable
     with the  audited  financial  statements  for the period  from July 1, 1997
     through December 15, 1997.

         Unaudited pro forma results for Holding assuming the  Acquisition,  the
     3M  Acquisition  and the  Refinancing  had  occurred as of July 1, 1997 are
     presented below:

<TABLE>
<CAPTION>

                                                           Unaudited Pro Forma Results for the
                                                           -----------------------------------
                                                           Three Months           Nine Months
                                                               Ended                 Ended
                                                          March 31, 1998        March 31, 1998
                                                          --------------        --------------
               <S>                                          <C>                   <C>    
               
               Net sales.........................           $    22,374           $    65,473

               Income from operations............                 3,010                 6,568

               Interest expense..................                 4,200                12,557

               Net loss..........................                 1,174                 5,071

</TABLE>

2.       INVENTORY

         The following table details the components of inventory:

<TABLE>
<CAPTION>

                                                           March 31,1999         June 30, 1998
                                                            (unaudited)
              <S>                                           <C>                   <C>    

              Raw materials
                  Paper..........................           $       580           $       556
                  Other raw materials............                 3,437                   786
                                                            -----------           -----------

              Net raw materials..................                 4,017                 1,342
              Work in process....................                 1,958                   736
                                                            -----------           -----------

              Net inventory......................           $     5,975           $     2,078
                                                            ===========           ===========


</TABLE>



<PAGE>


                       AKI HOLDING CORP. AND SUBSIDIARIES
             (a wholly owned subsidiary of AHC I Acquisition Corp.)
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                (dollars in thousands, except share information)


3.   CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS

     The following  condensed  balance sheet at March 31, 1999  (unaudited)  and
     June  30,  1998  and  condensed   statements  of  operations,   changes  in
     stockholder  equity and cash flows for the nine months ended March 31, 1999
     (unaudited)  for  Holding  have  been  prepared  on  the  equity  basis  of
     accounting  and  should  be read in  conjunction  on with the  consolidated
     statements and notes thereto. Comparative statements of operations and cash
     flows  for the  prior  year  have  not been  provided  as  Holding  was not
     effectively formed until December 15, 1997.

                                                   BALANCE SHEET
<TABLE>
<CAPTION>

                                                                              March 31, 1999       June 30, 1998
                                                                              --------------       -------------
                                                                                (unaudited)

     <S>                                                                        <C>                <C>    

     Assets
     Cash..............................................................         $        -         $     2,201
     Investment in subsidiaries........................................             94,992              95,408
     Deferred charges..................................................              1,543               1,263
     Deferred income taxes.............................................                919                  19
                                                                                ----------         -----------

         Total assets..................................................         $   97,454         $    98,891
                                                                                ==========         ===========

     Liabilities
     Senior discount debentures........................................         $   28,713         $    26,020

     Stockholder's equity
     Common Stock, $0.01 par value, 1,000 shares authorized; 1,000 shares issued
       and outstanding at March 31, 1999 (unaudited)
       and June 30, 1998...............................................                  -                   -
     Additional paid-in capital........................................             78,364              78,364
     Accumulated deficit...............................................             (9,623)             (5,493)
                                                                                ----------         -----------

         Total stockholder's equity....................................             68,741              72,871
                                                                                ----------         -----------

         Total liabilities and stockholder's equity....................         $   97,454         $    98,891
                                                                                ==========         ===========



                                              STATEMENT OF OPERATIONS

                                                                                                    Nine Months
                                                                                                       Ended
                                                                                                  March 31, 1999
                                                                                                  --------------
                                                                                                    (unaudited)

     Equity in losses of subsidiaries..................................                            $      (416)
     Interest expense..................................................                                 (2,751)
                                                                                                   -----------

         Loss before income taxes......................................                                 (3,167)

     Income tax benefit................................................                                   (900)
                                                                                                   -----------

         Net loss......................................................                            $    (2,267)
                                                                                                   ===========

</TABLE>


<PAGE>

                       AKI HOLDING CORP. AND SUBSIDIARIES
             (a wholly owned subsidiary of AHC I Acquisition Corp.)
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                (dollars in thousands, except share information)


3.  CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS (Continued)


                                   STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY

<TABLE>
<CAPTION>
                                                                                Additional
                                                          Common Stock            Paid-in      Accumulated
                                                       -------------------
                                                       Shares       Amount        Capital        Deficit          Total
                                                       ------       ------        -------        -------          -----
     <S>                                             <C>          <C>           <C>            <C>            <C>    

     Balances, June 30, 1998.......................      1,000    $       -     $   78,364     $    (5,493)   $    72,871

     Dividend to AHC I Acquisition
       Corp. (unaudited)...........................          -            -              -          (1,863)        (1,863)

     Net loss (unaudited)..........................          -            -              -          (2,267)        (2,267)
                                                     ---------    ---------     ----------     -----------    -----------

     Balance, March 31, 1999 (unaudited)...........      1,000    $       -     $   78,364     $    (9,623)   $    68,741
                                                     =========    =========     ==========     ===========    ===========


</TABLE>

                                              STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>


                                                                                                    Nine Months
                                                                                                       Ended
                                                                                                  March 31, 1999
                                                                                                  --------------
                                                                                                    (unaudited)
     <S>                                                                                           <C>    
     
     Cash flows from operating activities
       Net loss........................................................                            $    (2,267)
         Adjustments to reconcile net loss to net cash.................
           provided by operating activities............................
           Net change in investment in subsidiaries....................                                    416
           Amortization of debt discount...............................                                  2,693
           Amortization of debt issuance costs.........................                                     67
           Deferred income taxes.......................................                                   (900)
           Increase in debt issuance costs.............................                                   (347)
                                                                                                   -----------

       Net cash used by operating activities...........................                                   (338)
                                                                                                   -----------

     Cash flows from financing activities
       Dividend to AHC I Acquisition Corp..............................                                 (1,863)
                                                                                                   -----------

     Net decrease in cash and cash equivalents.........................                                 (2,201)
     Cash and cash equivalents, beginning of period....................                                  2,201
                                                                                                   -----------

     Cash and cash equivalents, end of period..........................                            $         -
                                                                                                   ===========


</TABLE>


<PAGE>

<TABLE>
<CAPTION>


                                            AKI,  INC.,  AND   SUBSIDIARIES   (a
                                 wholly-owned subsidiary of AKI Holding Corp.)
                                       CONSOLIDATED CONDENSED BALANCE SHEET
                                 (dollars in thousands, except share information)

                                                                                  March 31,           June 30,
                                                                                    1999                1998    
                                                                                -------------      -------------
                                                                                                     (unaudited)
<S>                                                                             <C>                <C>    

ASSETS
Current assets
Cash and cash equivalents..................................................     $       1,413      $       1,641
Accounts receivable, net...................................................            22,329             13,577
Inventory..................................................................             5,975              2,078
Income tax refund receivable...............................................                 -              5,155
Prepaid expenses...........................................................                71                378
Deferred income taxes......................................................               827                827
                                                                                -------------      -------------

   Total current assets....................................................            30,615             23,656

Property, plant and equipment..............................................            18,821             18,936
Goodwill, net..............................................................           148,953            151,842
Intangible assets..........................................................             6,742               7,289
Debt issuance costs........................................................             5,500               5,272
Deferred income taxes......................................................             1,571               3,869
Other assets...............................................................                47                 200
                                                                                -------------      --------------

   Total assets............................................................     $     212,249      $      211,064
                                                                                =============      ==============

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of capital lease obligations...............................     $         672      $          609
Current portion of other notes payable.....................................                 -               1,330
Accounts payable, trade....................................................             5,330               4,140
Accrued income taxes.......................................................               532                 100
Accrued interest...........................................................             3,041                 168
Accrued expenses...........................................................             3,598               4,464
                                                                                -------------      --------------

   Total current liabilities...............................................            13,173              10,811

Long-term portion of capital lease obligations.............................             1,527               1,489
Revolving credit line......................................................               800                   -
Senior notes...............................................................           115,000             115,000
Deferred income taxes......................................................             2,792               4,143
                                                                                -------------      --------------

   Total liabilities.......................................................           133,292             131,443

Stockholder's equity
Preferred  stock,  $0.01  par,  8,700  shares  authorized;  No shares  issued or
   outstanding at June 30, 1998 and
   March 31, 1999 (unaudited)..............................................                 -                   -
Common stock, $0.01 par 100,000 shares authorized;
   1,000 shares issued and outstanding at June 30, 1998 and
   March 31, 1999 (unaudited)..............................................                 -                   -
Addition paid-in capital...................................................           100,862             100,862
Accumulated deficit........................................................            (5,870)             (5,454)
Accumulated other comprehensive loss.......................................              (305)                (57)
Carryover basis adjustment.................................................           (15,730)            (15,730)
                                                                                -------------      --------------

   Total stockholder's equity..............................................            78,957              79,621
                                                                                -------------      --------------


   Total liabilities and stockholder's equity..............................     $     212,249      $      211,064
                                                                                =============      ==============







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

</TABLE>


<PAGE>

<TABLE>
<CAPTION>

                                            AKI,  INC.,  AND   SUBSIDIARIES   (a
                                 wholly-owned subsidiary of AKI Holding Corp.)
                                  CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                                              (dollars in thousands)


                                         AKI                                   AKI                      Predecessor 
                             -----------------------------      ------------------------------       -----------------
                              Three months   Three Months         Nine Months   December 16, 1997      July 1, 1997
                                  Ended          Ended               Ended           Through              Through
                             March 31, 1999 March 31, 1998      March 31, 1999   March 31, 1998      December 15, 1997
                             -------------- --------------      --------------   --------------      -----------------
                               (unaudited)    (unaudited)         (unaudited)                           (unaudited)

<S>                            <C>             <C>                <C>               <C>                   <C>    

Net sales..................    $  24,518       $ 19,191           $  68,979         $  21,982             $  35,186
Cost of goods sold.........       14,827         11,935              43,908            13,913                22,809
                               ---------       --------           ---------         ---------             ---------

   Gross profit............        9,691          7,256              25,071             8,069                12,377

Selling, general and.......
   administrative expenses.        3,924          2,699              10,333             3,182                 5,703
Amortization of goodwill and
   other intangibles.......        1,151            954               3,454             1,131                   568
                               ---------       --------           ---------         ---------             ---------

   Income from operations..        4,616          3,603              11,284             3,756                 6,106

Other expenses (income):...
   Interest expense to.....
      stockholder(s) and affiliate     -          4,293                   -             5,032                 2,143
   Interest expense to others,net  3,298            111               9,752               131                   503
   Management fees and.....
      other, net...........          242             48                 367                48                   226
                               ---------       --------           ---------         ---------             ---------

Income (loss) before.......
   income taxes............        1,076           (849)              1,165            (1,455)                3,234

Income tax expense (benefit)         795             38               1,581              (125)                1,441
                               ----------     -------------       --------------    ---------              --------


   Net income (loss).......    $     281       $   (887)          $    (416)        $  (1,330)            $   1,793
                               =========       ========           =========         ==========            =========
































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

</TABLE>


<PAGE>

<TABLE>
<CAPTION>


                                                   AKI, INC., AND SUBSIDIARIES (a
                                            wholly-owned subsidiary of AKI Holding Corp.)
                                           CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN
                                             STOCKHOLDER'S EQUITY (dollars in thousands,
                                                      except share information)


                                                                                          Accumulated
                                                                  Additional                  Other     Carryover
                                                Common Stock       Paid-in   Accumulated Comprehensive   Basis
                                              Shares    Dollars    Capital    Deficit        Loss      Adjustment         Total   
                                              ------    -------    -------    -------     -----------  ----------         ----- 

<S>     <C>    <C>    <C>    <C>    <C>    <C>

Balances, June 30, 1998.........               1,000  $       -   $ 100,862   $(5,454)    $     (57)   $(15,730)        $ 79,621

Net loss (unaudited)............                                                 (416)                                      (416)

Other comprehensive loss, net of tax:
     Foreign currency translation
       adjusted (unaudited).....                                                               (248)                        (248)
                                                                                                                       ---------

Comprehensive loss (unaudited)..                                                                                            (664)
                                             -------  ---------   ---------   --------     --------    --------        ---------
Balances, March 31, 1999 (unaudited)           1,000  $       -   $ 100,862   $(5,870)     $   (305)   $(15,730)       $  78,957
                                             =======  =========   =========   ========     ========    ========        =========











































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


</TABLE>

<PAGE>

<TABLE>
<CAPTION>


                                                   AKI, INC., AND SUBSIDIARIES (a
                                            wholly-owned subsidiary of AKI Holding Corp.)
                                           CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                                       (dollars in thousands)

                                                         AKI                     AKI              Predecessor  
                                                   --------------          --------------      -----------------
                                                     Nine Months          December 16, 1997      July 1, 1997
                                                        Ended                  Through              Through
                                                   March 31, 1999          March 31, 1998      December 15, 1997
                                                   --------------          --------------      -----------------
                                                     (unaudited)             (unaudited)
<S>                                                  <C>                     <C>                  <C>    

Cash flows from operating activities
   Net income (loss).............................    $    (416)              $  (1,330)           $   1,793
   Adjustments to reconcile net income (loss) to
     net cash provided by operating activities:
     Depreciation and amortization of goodwill...
       and other intangibles.....................        6,561                   2,007                2,456
     Amortization of debt discount...............            -                      44                  233
     Amortization of debt issuance costs.........          461                   1,119                  101
     Deferred income taxes.......................          947                    (141)                (460)
     Other.......................................         (248)                    (76)                 (18)
     Changes in operating assets and liabilities:
       Accounts receivable.......................       (8,752)                 (6,329)               1,153
       Inventory.................................       (3,897)                    350                   69
       Prepaid expenses, deferred charges
         and other assets........................         (248)                   (429)                 (62)
       Income taxes..............................        5,587                       -                  699
       Accounts payable and accrued expenses.....        3,197                  (4,809)              (1,036)
                                                     ---------               ---------            ---------

       Net cash provided by (used in)
           operating activities..................        3,192                  (9,594)               4,928
                                                     ---------               ---------            ---------

   Cash flows from investing activities
     Purchases of equipment......................       (2,430)                   (255)                (807)
     Payments for acquisitions, net of cash
       acquired..................................            -                (134,153)                   -
                                                     ---------               ---------            ---------

         Net cash used in investing activities...       (2,430)               (134,408)                (807)
                                                     ---------               ---------            ---------

   Cash flows from financing activities
       Payments under capital leases for equipment        (460)                   (165)                (249)
     Net proceeds (repayments) on line of credit.          800                  (5,100)               2,362
     Proceeds from issuance of senior increasing
       rate notes, net of offering costs.........            -                 119,735                    -
     Proceeds from issuance  of common stock.....            -                  76,000                    -
     Redemption of preferred stock...............            -                  (8,678)                   -
     Repayment of loans payable to stockholder...            -                 (36,649)              (1,851)
     Repayment of other notes payable............       (1,330)                    (25)                 (50)
     Dividends paid on preferred stock...........            -                    (128)                (155)
                                                     ---------               ---------            ---------

       Net cash provided by (used in) financing
         activities..............................         (990)                144,990                   57
                                                     ---------               ---------            ---------

   Net increases (decrease) in cash and cash equivalents  (228)                    988                4,178
   Cash and cash equivalents, beginning of period        1,641                       -                  303
                                                     ---------               ---------            ---------

   Cash and cash equivalents, end of period......    $   1,413               $     988            $   4,481
                                                     =========               =========            =========


   Supplemental information
     Cash paid (received) during the period for:
       Interest to stockholder(s)................    $       -               $   3,296            $   1,146
       Interest, other...........................        6,498                      68                  459
       Income taxes..............................       (4,953)                     15                1,222

   Significant non-cash activities
     Assets acquired under capital lease.........    $     561               $       -            $       -


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

</TABLE>

<PAGE>



1.   BASIS OF PRESENTATION

         On November 4, 1993, Arcade Holding Corporation (the "Predecessor") was
     organized  for the  purpose of  acquiring  all the  issued and  outstanding
     capital stock of Arcade,  Inc. Arcade,  Inc.  manufacturers and distributes
     cosmetics sampling products from its Chattanooga, Tennessee facilities, and
     distributes products in Europe through its French subsidiary, Arcade Europe
     S.A.R.L.  This  acquisition  was  accounted  for as a purchase  transaction
     whereby the purchase cost was allocated to the fair value of the net assets
     acquired.

     Acquisition of Arcade Holding Corporation

         DLJ Merchant  Banking  Partners II, L.P. and certain related  investors
     (collectively,  "DLJMBII") and certain members of the Predecessor organized
     AHC I  Acquisition  Corp.  ("Acquisition  Corp.")  and AHC I  Merger  Corp.
     ("Merger  Corp.") for purposes of acquiring the  Predecessor.  Merger Corp.
     was organized as a  wholly-owned  subsidiary of  Acquisition  Corp. and was
     initially  capitalized by Acquisition Corp. with an equity  contribution of
     $78,363,  comprised of $76,000 of cash and $2,363 of non-cash consideration
     in the form of an option to purchase Senior  Preferred Stock of Acquisition
     Corp.  Immediately following this equity contribution,  Merger Corp. issued
     $123,500 of Senior Increasing Rate Notes ("Bridge Notes") to an entity that
     has an  ownership  interest in  Acquisition  Corp.  The Bridge  Notes had a
     stated  maturity of December 15, 1998 and had an interest rate equal to the
     greater of (i) 10% per annum and (ii) a daily  floating  rate of prime plus
     2.25%  plus an  additional  percentage  amount  equal to (a) 1.0%  from and
     including  the interest  payment date on June 15, 1998 or (b) 1.5% from and
     including  the interest  payment date on September  15, 1998.  Merger Corp.
     received  cash  proceeds from the issuance of the Bridge Notes of $119,735,
     net of $3,765 of associated  debt issuance costs paid to an entity that has
     an ownership interest in Acquisition Corp.

         On December 15, 1997, Merger Corp. acquired all of the equity interests
     of the Predecessor (the  "Acquisition")  for a total cost of $197,730 which
     consisted of $138,634 cash paid for equity interests and direct acquisition
     costs,  $2,363  in  non-cash  consideration  in the  form of an  option  to
     purchase Senior  Preferred Stock of Acquisition  Corp. used to retire 1,370
     options of the Predecessor and the assumption of $56,733 in debt, preferred
     stock and related accrued interest and dividends, including a capital lease
     obligation.  Included in the cost of the acquisition was $19,342 related to
     the purchase and retirement of 11,201 options of the Predecessor and $2,022
     paid for acquisition  expenses to an entity that has an ownership  interest
     in Acquisition Corp. Merger Corp. then merged with and into the Predecessor
     and the combined entity assumed the name AKI, Inc.  ("AKI").  Subsequent to
     the Acquisition,  Acquisition  Corp.  contributed $1 of cash and all of its
     ownership interest in AKI to AKI Holding Corp. ("Holding").

         The  Acquisition  was  accounted  for  using  the  purchase  method  of
     accounting. In accordance with the consensus reached by the Emerging Issues
     Task Force of the  Financial  Accounting  Standards  Board in Issue  88-16,
     "Basis of Leveraged  Buyout  Transactions,"  the purchase price  allocation
     required  an  adjustment  for  the  continuing  interest   attributable  to
     management's   ownership  interest  in  the  Predecessor  carried  over  in
     connection with the Acquisition.  As a result, a reduction in stockholder's
     equity of $15,730 was recorded which represents the difference  between the
     fair value of Predecessor's  assets and the related book value attributable
     to  the  interest  of  the  continuing   shareholders'  investment  in  the
     Predecessor.  The remaining purchase price has been allocated to assets and
     liabilities  based  upon  estimates  of  their  respective  fair  value  as
     determined  by  management  and  third-party  appraisals  and  goodwill  of
     approximately $153,929.Goodwill is being amortized on a straight-line basis
     over 40 years.

         In connection with the Acquisition,  AKI repaid the outstanding balance
     and related interest of the Predecessor's loans payable to a shareholder of
     $37,374,  the outstanding balance and related interest of the Predecessor's
     line of credit of $6,278 and the outstanding  balance and related dividends
     on the Predecessor's preferred stock of $8,806.


<PAGE>
                           AKI, INC. AND SUBSIDIARIES
                (a wholly owned subsidiary of AKI Holding Corp.)
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                (dollars in thousands, except share information)

1.   BASIS OF PRESENTATION (Continued)

     Acquisition  of  fragrance   sampling  business  of  Minnesota  Mining  and
     Manufacturing Company

         On June 22,  1998,  AKI  acquired the  fragrance  sampling  business of
     Minnesota Mining and Manufacturing  Company ("3M") for approximately $7,250
     in  cash  and  the  assumption  of  liabilities   totaling  $182  (the  "3M
     Acquisition"). The only tangible assets acquired were approximately $143 of
     equipment.  The  acquisition was accounted for using the purchase method of
     accounting and result in the recognition of intangible assets,  primarily a
     non-compete  agreement,  totaling  $7,289  which are being  amortized  on a
     straight-line basis over a period of 10 years.

     Refinancing of Bridge Notes

         On June 25,  1998,  AKI  completed a private  placement  of $115,000 of
     Senior Notes (the "Notes"). The Notes are general, unsecured obligations of
     AKI and bear interest at 10.5% per annum, payable  semi-annually on January
     1 and July 1. The Notes mature on July 1, 2008.  The placement of the Notes
     yielded AKI net proceeds of $109,502 after deducting  offering  expenses of
     $5,498,  including certain costs that were incurred  subsequent to June 30,
     1998. These offering expenses also include $3,450 of underwriting fees paid
     to an affiliate of the stockholder.  The Notes contain customary  covenants
     including  restrictions  on the  declaration  and payment of dividends  and
     limitations on the incurrence of additional indebtedness.

         Contemporaneous  with the Notes offering,  Holding  completed a private
     offering of $50,000 of Senior Discount Debentures (the  "Debentures").  The
     Debentures do not accrue or pay interest until July 1, 2003 and were issued
     with an  original  issuance  discount  of $24,038.  The  original  issuance
     discount  is  being  accreted  from  issuance  through  July 1,  2003 at an
     effective rate of 13.5% per annum.  After July 1, 2003, the Debentures will
     accrue  interest  at a rate of  13.5%  per  annum,  payable  semi-annually,
     commencing   January  1,  2004.  The  Debentures  are  general,   unsecured
     obligations of Holding and mature on July 1, 2009.

         With the  proceeds  of the  Debentures  offering,  Holding  contributed
     $22,499 of cash to AKI.  No  additional  shares were issued to Holding as a
     result of this  contribution.  On June 25, 1998, AKI used the proceeds from
     the  contribution  from  Holding,  together  with the proceeds of the Notes
     offering,  to repay the Bridge Notes,  without penalty  (collectively,  the
     "Refinancing").  In  conjunction  with  the  Refinancing,  AKI  recorded  a
     non-cash interest charge of $1,795 for the unamortized  portion of the debt
     issuance costs associated with the Bridge Notes.

      Interim financial statements

         The interim consolidated condensed balance sheet at March 31, 1999, the
     interim consolidated  condensed statement of operations for the period from
     December  16,  1997  through  March  31,  1998,  the  interim  consolidated
     condensed  statement  of  operations  for the period  from  January 1, 1998
     through March 31, 1998, the interim  consolidated  condensed  statements of
     operations  for the three and nine months ended March 31, 1999, the interim
     consolidated condensed statement of cash flows for the period from December
     16,  1997  through  March 31,  1998,  the  interim  consolidated  condensed
     statement  of cash flows for the nine  months  ended March 31, 1999 and the
     interim consolidated condensed statement of changes in stockholder's equity
     for the nine  months  ended  March  31,  1999 are  unaudited,  and  certain
     information and footnote  disclosure related thereto,  normally included in
     the financial  statements  prepared in accordance  with generally  accepted
     accounting principles, have been omitted. In the opinion of management, the
     unaudited interim consolidated condensed financial statements were prepared
     following  the same  policies and  procedures  used in  preparation  of the
     audited financial statements and all adjustments, consisting only of normal
     recurring adjustments to fairly present the financial position,  results of
     operations  and  cash  flows  with  respect  to  the  interim  consolidated
     condensed  financial  statements,   have  been  included.  The  results  of
     operations for the interim  periods are not  necessarily  indicative of the
     results for the entire year.


<PAGE>

                           AKI, INC. AND SUBSIDIARIES
                (a wholly owned subsidiary of AKI Holding Corp.)
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                (dollars in thousands, except share information)


1.   BASIS OF PRESENTATION (Continued)

         The accompanying  unaudited interim  consolidated  condensed  financial
     statements  as of March 31,  1999 and for the three  and nine  months  then
     ended and for the period  from  January  1, 1998  through  March 31,  1998,
     present the  financial  position  and results of  operations  of AKI on the
     basis of accounting  described above and,  accordingly,  are not comparable
     with the  audited  financial  statements  for the period  from July 1, 1997
     through December 15, 1997.

         Unaudited  pro forma results for AKI assuming the  Acquisition,  the 3M
     Acquisition  and the  Refinancing  had  occurred  as of July  1,  1997  are
     presented below:

<TABLE>
<CAPTION>


                                                           Unaudited Pro Forma Results for the
                                                           -----------------------------------
                                                           Three Months           Nine Months
                                                               Ended                 Ended
                                                          March 31, 1998        March 31, 1998
                                                          --------------        --------------
               <S>                                          <C>                   <C>    

               Net sales.........................           $    22,374           $    65,473

               Income from operations............                 3,010                 6,568

               Interest expense..................                 3,300                 9,816

               Net loss..........................                   570                 3,228

</TABLE>

2.       INVENTORY

         The following table details the components of inventory:
<TABLE>
<CAPTION>

                                                           March 31,1999         June 30, 1998
                                                           -------------         -------------
                                                            (unaudited)
              <S>                                           <C>                   <C>    

              Raw materials
                  Paper..........................           $       580           $       556
                  Other raw materials............                 3,437                   786
                                                            -----------           -----------

              Net raw materials..................                 4,017                 1,342
              Work in process....................                 1,958                   736
                                                            -----------           -----------

              Net inventory......................           $     5,975           $     2,078
                                                            ===========           ===========



</TABLE>




<PAGE>

ITEM 2.


                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS


         Item 2 is  presented  with respect to both AKI Holding  Corp.  and AKI,
Inc. As used within Item 2 the term  "Company"  refers to AKI Holding Corp.  and
its  subsidiaries  including AKI, Inc.  ("AKI") and the term "Holding" refers to
AKI Holding Corp.

General

         The sales of the Company are derived from the sale of sampling products
to cosmetics and consumer products companies. Substantially all of the Company's
sales are made directly to its customers  while a small portion are made through
advertising agencies.  Each customer's sampling program is unique and pricing is
negotiated  based on  estimated  costs plus a margin.  While the Company and its
customers generally do not enter into long-term  contracts,  the Company has had
long-standing  relationships  with  the  majority  of  its  customer  base.  The
introduction of the Company's new products,  such as BeautiSeal,  PowdaTouch and
LiquaTouch,  has affected the Company's results of operations for certain of the
periods discussed below.

The Acquisition

         DLJ Merchant  Banking  Partners II, L.P. and certain related  investors
(collectively,  "DLJMBII")  and  certain  members  of the  Company's  management
organized AHC I Acquisition Corp.  ("Acquisition  Corp.") and AHC I Merger Corp.
("Merger  Corp.") for  purposes of acquiring  Arcade  Holding  Corporation  (the
"Predecessor").  On December 15, 1997,  Merger Corp.  acquired all of the equity
interests of the Predecessor (the  "Acquisition")  for $205.7 million (including
related fees, expenses and cash for working capital). Included in the total cost
of the Acquisition were  approximately  $6.2 million in non-cash costs comprised
of (i)  the  assumption  of a  promissory  note  issued  by the  Predecessor  in
connection  with the 1995  acquisition of Scent Seal,  Inc. and certain  capital
lease obligations and (ii) the exchange of stock options to acquire common stock
in the Predecessor by the Predecessor's chief executive officer for an option to
acquire  preferred  stock in Acquisition  Corp. To provide the $199.5 million of
cash necessary to fund the Acquisition,  including the equity purchase price and
the  retirement  of all  previously  existing  preferred  stock  and debt of the
Predecessor  not assumed,  (i) the Merger Corp.  issued  $123.5  million  Senior
Increasing Rate Notes (the "Bridge Notes") to Scratch & Sniff Funding,  Inc., an
affiliate of DLJMBII and Acquisition Corp. and (ii) Acquisition  Corp.  received
$76.0 million from debt and equity (common and preferred) financings,  including
equity  investments  by  certain  stockholders  of the  Predecessor,  which  was
contributed to Merger Corp. Immediately following the Acquisition,  Merger Corp.
merged with and into the  Predecessor  and the combined  entity assumed the name
AKI,  Inc.  Acquisition  Corp.  then  contributed  its $1 of cash and all of its
ownership interest in AKI to Holding for 1,000 shares of Holding's common stock.

         The Bridge  Notes were  subsequently  repaid on June 25,  1998 from the
proceeds of AKI's  issuance of $115.0  million of Senior Notes (the "Notes") and
from a capital  contribution (the "Equity  Contribution")  from Holding. On June
25, 1998, Holding issued and sold Senior Discount  Debentures (the "Debentures")
totaling  $50.0  million in  aggregate  principal  amount at maturity  for gross
proceeds  of $26.0  million,  the  majority of which were used to fund a capital
contribution to AKI.

         The  Acquisition  was  accounted  for  using  the  purchase  method  of
accounting  and resulted in the  recognition of $153.9 million of goodwill and a
significant increase in amortization expense.

Results of Operations

         For purposes of the following discussion, the results of operations for
the nine months ended March 31, 1998 reflect the  combination  of the results of
operations of the Predecessor  for the period July 1, 1997 through  December 15,
1997, the date of the Acquisition, with the results of operations of the Company
for the period December 16, 1997 through March 31, 1998.  Because of the effects
of purchase  accounting  applied in the Acquisition and the additional  interest
expense  associated  with the debt  incurred  to finance  the  Acquisition,  the
results of operations  of the Company are not  comparable in all respects to the
results of operations of the Predecessor.



<PAGE>


Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998

         Net  Sales.  Net sales  for the  three  months  ended  March 31,  1999,
increased $5.3 million,  or 27.6%, to $24.5 million as compared to $19.2 million
for the three  months  ended  March  31,  1998.  The  increases  were  primarily
attributable to a $4.4 million  increase in domestic sales of cosmetic  sampling
products and an increase in sales of consumer product samples,  partially offset
by decreases in certain fragrance industry sampling.

         Gross  Profit.  Gross profit for the three months ended March 31, 1999,
increased  $2.4 million,  or 32.9%,  to $9.7 million as compared to $7.3 million
for three months ended March 31, 1998. Gross profit as a percentage of net sales
increased to 39.6% in the three  months ended March 31, 1999,  from 38.0% in the
three months ended March 31, 1998. The increase in gross profit and gross profit
as a percentage  of net sales is primarily  attributable  to the increase in net
sales discussed above and reductions in raw materials costs.

         Selling,  General and  Administrative  Expenses.  Selling,  general and
administrative  expenses for the three  months  ended March 31, 1999,  increased
$1.2 million, or 44.4% to $3.9 million as compared to $2.7 million for the three
months ended March 31, 1998. The increase in selling, general and administrative
expenses was primarily due to a severance charge related to the former president
and chief executive  officer,  changes in executive  compensation  following the
Acquisition  and  increased  sales  commissions  related to the  increase in net
sales.  As a result  of  these  factors,  selling,  general  and  administrative
expenses as a percent of net sales  increased to 15.9% in the three months ended
March 31, 1999 from 14.1% in the three months ended March 31, 1998.

         Income from  Operations.  Income from  operations  for the three months
ended  March 31, 1999  increased  $1.0  million,  or 27.8%,  to $4.6  million as
compared to $3.6 million for the three months ended March 31, 1998.  Income from
operations  as a  percentage  of net sales was 18.8% in the three  months  ended
March  31,  1999,  unchanged  from  the  three  months  ended  March  31,  1998,
principally as a result of the factors  described above,  offset by the increase
in amortization of other intangibles resulting from the 3M Acquisition.

         Interest Expense. Interest expense for the three months ended March 31,
1999,  decreased  $0.1  million,  or 2.3% to $4.3  million,  as compared to $4.4
million  for the three  months  ended  March 31,  1998.  Interest  expense  as a
percentage  of net sales  decreased to 17.6% in the three months ended March 31,
1999 from 22.9% in the three  months  ended  March 31,  1998.  The  decrease  in
interest expense,  including the amortization of deferred  financing costs, is a
result  of the  refinancing  in  June  1998 of the  Bridge  Notes,  incurred  in
connection with the Acquisition, with the Notes and Debentures.

         Interest  expense for AKI for the three  months  ended March 31,  1999,
decreased  $1.1 million,  or 25.0% to $3.3 million,  as compared to $4.4 million
for the three months ended March 31, 1998.  Interest  expense as a percentage of
net sales decreased to 13.5% in the three months ended March 31, 1999 from 22.9%
in the three  months ended March 31,  1998.  The  decrease in interest  expense,
including  the  amortization  of deferred  financing  costs,  is a result of the
refinancing  in June 1998 of the Bridge Notes,  incurred in connection  with the
Acquisition, with the Notes and the Equity Contribution.

         Management Fees and Other, Net.  Management fees and other, net for the
three months ended March 31, 1999,  increased $0.2 million to $0.2 million.  The
increase is primarily due to the write off of failed acquisition costs.

         Income Tax Expense. Income tax expense for the three months ended March
31, 1999  increased  $0.5  million to $0.5  million.  The increase is due to the
increase in income  before  income  taxes as a result of the  factors  described
above. The Company's  effective tax rate, after  consideration of non-deductible
goodwill  amortization,  was 44.5% in the three  months ended March 31, 1999 and
38.2% in the three months ended March 31,  1998.  The increase in the  effective
tax rate is due to the portion of the interest  expense on the Debentures  which
is non-deductible for income tax purposes.

         Income tax  expense for AKI for the three  months  ended March 31, 1999
increased  $0.8 million to $0.8 million.  The increase is due to the increase in
income before  income taxes as a result of the factors  described  above.  AKI's
effective tax rate, after consideration of non-deductible goodwill amortization,
was 39.0% in the three months ended March 31, 1999 and 38.2% in the three months
ended March 31, 1998.

<PAGE>

         EBITDA.  EBITDA for the three months  ended March 31,  1999,  increased
$1.5  million,  or 28.3%,  to $6.8  million as compared to $5.3  million for the
three  months  ended  March 31,  1998,  principally  as a result of the  factors
described  above.  EBITDA  is  income  from  operations  plus  depreciation  and
amortization of goodwill and other intangibles.

Nine Months Ended March 31, 1999 Compared to Nine Months Ended March 31, 1998

         Net  Sales.  Net  sales  for the nine  months  ended  March  31,  1999,
increased $11.8 million, or 20.6%, to $69.0 million as compared to $57.2 million
for the  nine  months  ended  March  31,  1998.  The  increases  were  primarily
attributable to a $6.7 million  increase in domestic sales of cosmetic  sampling
products and the $3.8 million growth of the Company's European  revenues.  Other
increases were  attributable to increases in sales of consumer  product samples,
partially offset by decreases in certain fragrance industry sampling.

         Gross  Profit.  Gross  profit for the nine months ended March 31, 1999,
increased $4.7 million,  or 23.0%, to $25.1 million as compared to $20.4 million
for the nine months  ended March 31, 1998.  Gross profit as a percentage  of net
sales  increased to 36.4% in the nine months ended March 31, 1999, from 35.7% in
the nine months  ended March 31,  1998.  The  increase in gross profit and gross
profit as a percentage of net sales is primarily attributable to the increase in
net sales  discussed  above and  reduction  in raw  material  costs  offset by a
decrease in certain  fragrance  samples  pricing,  changes in product sales mix,
increased  costs  associated  with the  outsourcing  of European  production and
increased costs associated with the initial  production runs of certain customer
products.

         Selling,  General and  Administrative  Expenses.  Selling,  general and
administrative expenses for the nine months ended March 31, 1999, increased $1.4
million,  or 15.7% to $10.3  million as  compared  to $8.9  million for the nine
months ended March 31, 1998. The increase in selling, general and administrative
expenses was primarily due to a severance charge related to the former president
and chief executive  officer,  changes in executive  compensation  following the
Acquisition,  increased sales  commissions  related to the increase in net sales
and costs associated with the transition of the 3M Acquisition, offset partially
by reduced  advertising  expenditures,  staff reductions and realized gains from
foreign currency transactions in Europe. As a result of these factors,  selling,
general and administrative expenses as a percent of net sales decreased to 14.9%
in the nine months  ended  March 31,  1999 from 15.6% in the nine  months  ended
March 31, 1998.

         Income  from  Operations.  Income from  operations  for the nine months
ended March 31, 1999,  increased  $1.4  million,  or 14.1%,  to $11.3 million as
compared to $9.9 million for the nine months  ended March 31, 1998.  Income from
operations  as a percentage  of net sales  decreased to 16.4% in the nine months
ended  March 31,  1999,  from 17.3% in the nine  months  ended  March 31,  1998,
principally  as a result of the increase in  amortization  of goodwill and other
intangibles  resulting  from  the  Acquisition  and the 3M  Acquisition  and the
factors described above.

         Interest Expense.  Interest expense for the nine months ended March 31,
1999,  increased  $4.7  million,  or 60.3% to $12.5  million as compared to $7.8
million  for the nine  months  ended  March  31,  1998.  Interest  expense  as a
percentage  of net sales  increased  to 18.1% in the nine months ended March 31,
1999 from  13.6% in the nine  months  ended  March 31,  1998.  The  increase  in
interest  expense  is due to  the  increased  indebtedness  as a  result  of the
recapitalization  of the Company in connection with the  Acquisition,  partially
offset by the refinancing of the Bridge Notes with the Notes and Debentures.

         Interest  expense  for AKI for the nine months  ended  March 31,  1999,
increased $2.0 million, or 25.6% to $9.8 million as compared to $7.8 million for
the nine months ended March 31, 1998.  Interest  expense as a percentage  of net
sales  increased  to 14.2% in the nine months ended March 31, 1999 from 13.6% in
the nine months ended March 31, 1998. The increase in interest expense is due to
the increased indebtedness as a result of the recapitalization of the Company in
connection  with the  Acquisition,  partially  offset by the  refinancing of the
Bridge Notes with the Notes and the Equity Contribution.

         Management Fees and Other, Net.  Management fees and other, net for the
nine months ended March 31, 1999,  were $0.4 million as compared to $0.3 million
for the nine months ended March 31, 1998.  Management  fees and other,  net as a
percentage of net sales were relatively  constant in the nine months ended March
31, 1999 and 1998.

<PAGE>

         Income Tax Expense.  Income tax expense for the nine months ended March
31,  1999,  decreased  $0.6 million or 46.2% to $0.7 million as compared to $1.3
million for the nine months  ended March 31, 1998 due to the  decrease in income
before income taxes partially offset by the increase in non-deductible  goodwill
amortization.   The  Company's   effective  tax  rate,  after  consideration  of
non-deductible  goodwill amortization,  was 52.3% in the nine months ended March
31, 1999, and 38.0% in the nine months ended March 31, 1998. The increase in the
effective  tax  rate  is due to the  portion  of  the  interest  expense  on the
Debentures which is non-deductible for income tax purposes.

         Income tax expense for AKI for the nine  months  ended March 31,  1999,
increased  $0.3 million or 23.1% to $1.6 million as compared to $1.3 million for
the nine  months  ended March 31,  1998 due to the  increase  in taxable  income
resulting from the increase in  non-deductible  goodwill,  partially offset by a
decrease  in income  before  taxes.  The  Company's  effective  tax rate,  after
consideration of  non-deductible  goodwill  amortization,  was 39.0% in the nine
months ended March 31, 1999, and 38.0% in the nine months ended March 31, 1998.

         EBITDA. EBITDA for the nine months ended March 31, 1999, increased $3.5
million,  or 24.5%,  to $17.8  million as compared to $14.3 million for the nine
months ended March 31, 1998,  principally  as a result of the factors  described
above.  EBITDA is income form operations plus  depreciation  and amortization of
goodwill and other intangibles.

Liquidity and Capital Resources

         At March 31, 1999,  the  Company's  cash and cash  equivalents  and net
working capital were $1.4 million and $17.4 million, respectively,  representing
a decrease in cash and cash  equivalents  of $2.4 million and an increase in net
working capital of $2.4 million from June 30, 1998. Account receivables, net, at
March 31, 1999  increased  64.5% or $8.8  million over the June 30, 1998 amount,
primarily due to increased sales and an increase in days sales outstanding.

         As of March  31,  1999,  the  Company  had  consolidated  indebtedness,
including accrued interest, in an aggregate amount of $149.8 million, consisting
primarily  of AKI's  $115.0  million  principal  amount  of  Notes  due 2008 and
Holding's  $28.7 million of  Debentures,  net of unamortized  original  issuance
discount,  due 2009 and AKI had  consolidated  indebtedness,  including  accrued
interest,  in an aggregate  amount of $121.0  million.  At March 31,  1999,  the
Company's  revolving  credit  facility  (the  "Credit  Agreement")  provided for
additional  borrowings of  approximately  $18.6 million,  subject to a borrowing
base calculation and the achievement of certain  financial ratios and compliance
with certain conditions.

         Capital  expenditures  for the twelve  months ending March 31, 2000 are
expected to be approximately $3.0 million. Based on borrowings outstanding as of
March 31, 1999, the Company expects total cash payments for debt service for the
twelve  months  ending  March  31,  2000  to  be  approximately  $13.1  million,
consisting of $12.1 million in interest  payments on the Notes,  $0.9 million in
capital lease payments, and $0.1 million in fees under the Credit Agreement. The
Company  also  expects to make royalty  payments of  approximately  $1.0 million
during the twelve  months ending March 31, 2000.  The Company  believes that its
liquidity,  capital  resources and cash flows from existing  operations  will be
sufficient to fund budgeted capital  expenditures,  working capital requirements
and interest payments on its  indebtedness,  including the Notes, for the twelve
months ending March 31, 2000.

         The Company may from time to time evaluate potential acquisitions.  The
Company expects that funding for future  acquisitions may come from a variety of
sources,  depending  on the size and nature of any such  acquisition.  Potential
sources of capital include cash generated from operations,  borrowings under the
Credit Agreement, additional equity investments or other external debt or equity
financing,  subject to  compliance  with the terms of the Notes and  Debentures.
There can be no assurance that such additional capital sources will be available
to the Company on terms that the Company finds acceptable, or at all.




<PAGE>


3M Acquisition

         On June 22, 1998, the Company acquired the fragrance  sampling business
of the  Industrial  and  Consumer  Products  division  of  Minnesota  Mining and
Manufacturing  Company  ("3M")  for $7.25  million in cash and  assumption  of a
liability  of  $182,000  to one of  the  customers  of  the  business  (the  "3M
Acquisition").  3M's fragrance  sampling  business was predominantly a sales and
distribution  business as it  outsourced  the  manufacturing  of the products it
sold.  The company did not assume such  outsourcing  arrangements  and relocated
such  operations to its existing  facilities in  Chattanooga to utilize the then
excess manufacturing  capacity at such facilities.  Except for several sales and
technical employees, the Company did not extend employment to any employees from
3M.

Cost Reduction Program

         The Company has implemented a comprehensive  program designed to reduce
annual operating costs. The  comprehensive  cost reduction program was developed
by the Company in connection  with an evaluation of its operations  conducted by
manufacturing  consultants with significant  experience in the printing industry
and is  designed  to improve  the  Company's  operating  efficiency  through (i)
reduced  materials  cost  derived  from  scrap/waste  reduction  and  from  more
effective  purchasing  (savings of approximately  $1.2 million  annually),  (ii)
streamlined  manufacturing  processes that reduce the amount of time required to
prepare for  successive  production  runs  utilizing the same equipment and that
reduce the amount of time equipment is under utilized by improved  scheduling of
production  runs (savings of  approximately  $2.2 million  annually),  and (iii)
rationalized staffing in the product support area (savings of approximately $0.6
million  annually).  Management  expects  the  benefit  of  the  materials  cost
reductions and  rationalized  staffing which were implemented in July 1998 to be
realized in Fiscal 1999,  while  manufacturing  process  improvements  are being
reviewed to  determine  which  improvements  are best suited to be  implemented.
Realization from such  implemented  improvements is expected to be in the fiscal
year ended June 30, 2000.  Approximately  ninety percent and seventy-five of the
estimated annual savings for reduced materials costs (partially as the result of
reduced  paper  pricing) and reduced  staffing  levels,  respectfully  have been
realized as of March 31,  1999.  The amount of  operational  savings  ultimately
realized may also be affected by changes in product mix that may take place.

Seasonality

         The  Company's  sales are seasonal due to the timing of its  customers'
major advertising campaigns, which have traditionally been concentrated prior to
the Christmas and spring holiday seasons. Sales are recognized when products are
shipped.  As a result,  a higher level of sales are  reflected in the  Company's
first two fiscal  quarters  ended  December 31 when sales from such  advertising
campaigns are principally  recognized  while the Company's fourth fiscal quarter
ended June 30  typically  reflects  the lowest  sales level of the fiscal  year.
Sales seasonality may be affected from time to time as the Company's new product
technologies are introduced and gain acceptance by its customers.

Recently Issued Accounting Standards

         In June  1998,  the  FASB  issued  Statement  of  Financial  Accounting
Standards No. 133 ("SFAS No. 133"),  "Accounting for Derivative  Instruments and
Hedging Activities" which is effective for fiscal years beginning after June 15,
1999. SFAS No. 133 established accounting and reporting standards for derivative
instruments,   including  certain  derivative   instruments  embedded  in  other
contracts and for hedging  activities.  The Company has only utilized derivative
financial  instruments  to hedge  the  Company's  exposure  to  certain  foreign
currencies.  Such hedging activity has historically been minor and, as a result,
adoption of this  Statement  is not  expected  to have a material  impact on the
Company's financial  condition or results of operations.  The Company will adopt
the provisions of this Statement on July 1, 1999.

Year 2000 Issues

         The Company is currently working to resolve the potential impact of the
Year  2000  on  its  information  technology  systems  and  its  non-information
technology  systems so they will  properly  recognize  and utilize  dates beyond
December 31, 1999.


<PAGE>

         The Company has in place a Year 2000 program which is being executed by
an internal project team. The objective of the Year 2000 program is to determine
and assess the risks of the Year 2000 issue and to plan and institute mitigating
actions to  minimize  those  risks to  acceptable  levels.  To date,  all of the
Company's  systems  have been  assessed  for Year 2000  compliance.  The Company
relies on five computerized  systems all of which required  remediation,  two of
which are  maintained  internally  and the others are  maintained by third party
vendors.  The Company believes that all of these systems are currently Year 2000
compliant. Upon review of the Company's  non-information  technology systems the
Company believes that none of its manufacturing  equipment is date sensitive. Of
the remaining non-information  technology systems, the Company believes all such
systems are Year 2000  compliant.  If,  however,  all necessary  actions are not
taken on a timely  basis to ensure  Year 2000  compliance,  the Year 2000  issue
could have a material adverse effect on the Company.

         To date,  the  Company  has  spent  $76,000  on Year  2000  compliance.
Although  the  Company  expects  the  above  referenced   expenditures  will  be
sufficient to ensure the Company is Year 2000 compliant, the Company anticipates
budgeting an additional $49,000 for any unforeseen problems arising with respect
to Year 2000 compliance between July 1, 1999 and the Year 2000. All expenditures
with respect to Year 2000 compliance will be funded from working capital.

         The Company is communicating with its significant customers and vendors
to understand  their Year 2000 issues and how they might  prepare  themselves to
manage  those  issues as they relate to the  Company.  To date,  no  significant
customers or vendors have  informed the Company that a material  Year 2000 issue
exists which will have a material effect on the Company.

         The Company has not  formulated a  contingency  plan in the event it or
its significant customers or vendors are not Year 2000 compliant.

Management Change

         On  February  1, 1999,  Roger  Barnett  terminated  his  employment  as
president and chief executive  officer and the Company engaged William J. Fox as
president and chief executive officer.

Forward-Looking Statements

         The information  provided herein  contains  forward-looking  statements
that  involve a number of risks and  uncertainties.  A number of  factors  could
cause  actual  results,  performance,  achievements  of the  Company or industry
results to be materially  difference  from any future  results,  performance  or
achievements  expressed  or implied by such  forward-looking  statements.  These
factors  include,  but are not limited to: the  competitive  environment  in the
sampling industry in general and in the Company's specific market areas; changes
in prevailing interest rates; inflation;  changes in cost of goods and services;
economic  conditions  in general and in the  Company's  specific  market  areas;
changes in or failure to comply with postal regulations or other federal,  state
and/or local government regulations; liability and other claims asserted against
the Company;  changes in operating strategy or development plans; the ability of
the Company to effectively  implement its cost reduction program; the ability to
attract and retain  qualified  personnel;  the  significant  indebtedness of the
Company; labor disturbances; changes in the Company's capital expenditure plans;
and other factors. In addition, such forward-looking  statements are necessarily
dependent  upon  assumptions,  estimates  and  dates  that may be  incorrect  or
imprecise and involve known and unknown risk,  uncertainties  and other factors.
Accordingly, any forward-looking statements included herein do not purport to be
predictions  of  future  events  or  circumstances  and  may  not  be  realized.
Forward-looking  statements can be identified by, among other things, the use of
forward-looking  terminology  such as "believes,"  "expects,"  "may,"  "should,"
"seeks," "pro forma,"  "anticipates,"  "intends" or the negative of any thereof,
or other  variations  thereon or comparable  terminology,  or by  discussions of
strategy or  intentions.  Given these  uncertainties,  readers are cautioned not
place undue reliance on such forward-looking  statements.  The Company disclaims
any  obligations to update any such factors or to publicly  announce the results
of any revisions to any of the  forward-looking  statements  contained herein to
reflect future events or developments.


<PAGE>




ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits

          27.1     Financial Data Schedule
          27.2     Financial Data Schedule
          27.3     Financial Data Schedule
          27.4     Financial Data Schedule

(b)      Reports on Form 8-K

         On February 11, 1999, AKI Holding Corp. filed a Form 8-K, reporting the
         appointment of William J. Fox as Chief Executive Officer.


                                   SIGNATURES

   Pursuant to the  requirements  of the  Securities  Exchange Act of 1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                                     AKI HOLDING CORP.

                                     By:      /s/ Kenneth A. Budde    
                                              ----------------------------------
                                              Kenneth A. Budde
                                              Chief Financial Officer

                                     AKI, INC.

                                     By:      /s/ Kenneth A. Budde  
                                              ----------------------------------
                                              Kenneth A. Budde
                                              Chief Financial Officer