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 September 30, 2001

                                       OR

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

           For the transition period from ___________ to _____________

                        Commission File Number: 333-60991

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

             Delaware                                  74-2883163
  (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                                  13-3785856
  (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 October 31, 2001, 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 (unaudited)

                  AKI Holding Corp. and Subsidiaries

                           Consolidated Condensed Balance Sheet

                           -  September 30, 2001
                           -  June 30, 2001

                           Consolidated Condensed Statements of Operations

                           -  Three months ended September 30, 2001
                           -  Three months ended September 30, 2000

                           Consolidated Condensed Statement of Changes in
                           Stockholder's Equity

                           -  Three months ended September 30, 2001

                           Consolidated Condensed Statements of Cash Flows

                           -  Three months ended September 30, 2001
                           -  Three months ended September 30, 2000

                           Notes to Consolidated Condensed Financial Statements


<PAGE>


         Item 1.  Financial Statements (unaudited) (continued)

                  AKI, Inc. and Subsidiaries

                           Consolidated Condensed Balance Sheet

                           -  September 30, 2001
                           -  June 30, 2001

                           Consolidated Condensed Statements of Operations

                           -  Three months ended September 30, 2001
                           -  Three months ended September 30, 2000

                           Consolidated Condensed Statement of Changes in
                           Stockholder's Equity

                           -  Three months ended September 30, 2001

                           Consolidated Condensed Statements of Cash Flows

                           -  Three months ended September 30, 2001
                           -  Three months ended September 30, 2000

                           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>


                       AKI HOLDING CORP. AND SUBSIDIARIES
                      CONSOLIDATED CONDENSED BALANCE SHEETS
         (dollars in thousands, except share and per share information)

<TABLE>
<CAPTION>

                                                                                September 30,         June 30,
                                                                                    2001                2001
                                                                                -------------      -------------
                                                                                 (unaudited)         (unaudited)

<S>                                                                             <C>                <C>
ASSETS
Current assets
Cash and cash equivalents..................................................     $         449      $       4,654
Accounts receivable, net...................................................            28,307             18,020
Inventory..................................................................             7,090              6,330
Prepaid expenses...........................................................               624                492
Deferred income taxes......................................................               770                770
                                                                                -------------      -------------

   Total current assets....................................................            37,240             30,266

Property, plant and equipment, net.........................................            15,021             15,778
Goodwill, net..............................................................           156,133            157,334
Other intangible assets, net...............................................             6,117              6,337
Deferred charges, net......................................................             4,214              4,381
Deferred income taxes......................................................               663                  -
Other assets...............................................................                88                 88
                                                                                -------------      -------------

   Total assets............................................................     $     219,476      $     214,184
                                                                                =============      =============

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of capital lease obligations...............................     $         496      $         503
Accounts payable, trade....................................................             4,985              3,886
Accrued income taxes.......................................................             2,564              1,642
Accrued compensation.......................................................             2,092              4,715
Accrued interest...........................................................             2,762              5,443
Accrued expenses...........................................................             4,281              3,908
                                                                                -------------      -------------

   Total current liabilities...............................................            17,180             20,097

Revolving credit line......................................................             6,500                  -
Senior notes...............................................................           103,510            103,510
Senior discount debentures.................................................            24,733             23,926
Promissory note to stockholder.............................................               350                  -
Deferred income taxes......................................................                 -                 19
Other non-current liabilities..............................................             1,915              1,863
                                                                                -------------      -------------

   Total liabilities.......................................................           154,188            149,415

Stockholder's equity
Common stock, $0.01 par 1,000 shares authorized;
    1,000 shares issued and outstanding....................................                 -                  -
Additional paid-in capital.................................................            93,656             93,656
Accumulated deficit........................................................           (12,174)           (12,320)
Accumulated other comprehensive loss.......................................              (464)              (837)
Carryover basis adjustment.................................................           (15,730)           (15,730)
                                                                                --------------     -------------

   Total stockholder's equity..............................................            65,288             64,769
                                                                                -------------      -------------


   Total liabilities and stockholder's equity..............................     $     219,476      $     214,184
                                                                                =============      =============

</TABLE>


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


<PAGE>


                       AKI HOLDING CORP. AND SUBSIDIARIES
                 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                             (dollars in thousands)


<TABLE>
<CAPTION>

                                                                                 Three months ended
                                                                    ---------------------------------------------
                                                                    September 30, 2001         September 30, 2000
                                                                    ------------------         ------------------
                                                                       (unaudited)                 (unaudited)

<S>                                                                    <C>                        <C>
Net sales.................................................             $    27,381                $    32,353
Cost of goods sold........................................                  16,714                     19,548
                                                                       -----------                -----------

   Gross profit...........................................                  10,667                     12,805

Selling, general and administrative expenses..............                   4,195                      4,518
Amortization of goodwill and other intangibles............                   1,446                      1,419
                                                                       -----------                -----------

   Income from operations.................................                   5,026                      6,868

Other expenses:
   Interest expense to stockholder .......................                       4                        113
   Interest expense, other................................                   3,867                      4,291
   Management fees and other, net.........................                      63                         62
                                                                       -----------                -----------

Income before income taxes................................                   1,092                      2,402

Income tax expense........................................                     946                      1,465
                                                                       -----------                -----------

   Net income ............................................             $       146                $       937
                                                                       ===========                ===========

</TABLE>


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


<PAGE>


                       AKI HOLDING CORP. AND SUBSIDIARIES
       CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
                (dollars in thousands, except share information)


<TABLE>
<CAPTION>

                                                                                              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, 2001 (unaudited).......  1,000     $     -     $  93,656     $  (12,320)    $    (837)    $  (15,730)  $  64,769

Net income (unaudited)....................                                             146                                      146

Other comprehensive income, net of tax:
   Foreign currency translation
     adjustment (unaudited)...............                                                           373                        373
                                                                                                                          ---------

Comprehensive income (unaudited)..........                                                                                      519
                                            -----     -------     ---------     ----------     ---------     ----------   ---------

Balances, September 30, 2001 (unaudited)..  1,000     $     -     $  93,656     $  (12,174)    $    (464)    $  (15,730)  $  65,288
                                            =====     =======     =========     ==========     =========     ==========   =========


</TABLE>


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


<PAGE>


                       AKI HOLDING CORP. AND SUBSIDIARIES
                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                             (dollars in thousands)


<TABLE>
<CAPTION>


                                                                                         Three months ended
                                                                             ----------------------------------------
                                                                             September 30, 2001    September 30, 2000
                                                                             ------------------    ------------------
                                                                                 (unaudited)           (unaudited)

<S>                                                                              <C>                 <C>
Cash flows from operating activities
   Net income........................................................            $       146         $       937
   Adjustments to reconcile net income to net cash used in
   operating activities:
     Depreciation and amortization of goodwill and other intangibles.                  2,600               2,506
     Amortization of debt discount...................................                    807                 939
     Amortization of debt issuance costs.............................                    167                 171
     Deferred income taxes...........................................                   (682)               (186)
     Other...........................................................                    425                (292)
     Changes in operating assets and liabilities:
       Accounts receivable...........................................                (10,287)             (7,003)
       Inventory.....................................................                   (760)             (1,798)
       Prepaid expenses, deferred charges and other assets...........                   (132)               (497)
       Accounts payable and accrued expenses.........................                 (3,832)             (1,620)
       Income taxes..................................................                    922               1,691
                                                                                 -----------         -----------

         Net cash used in operating activities.......................                (10,626)             (5,152)
                                                                                 ------------        -----------

Cash flows from  investing activities
   Purchases of equipment............................................                   (392)               (776)
   Patents...........................................................                    (30)                  -
                                                                                 ------------        -----------

         Net cash used in investing activities.......................                   (422)               (776)
                                                                                 ------------        -----------

Cash flows from financing activities
   Payments under capital leases for equipment.......................                     (7)               (123)
   Net proceeds on line of credit....................................                  6,500                 950
   Net proceeds from promissory note to stockholder..................                    350               4,745
                                                                                 -----------         -----------

         Net cash provided by financing activities...................                  6,843               5,572
                                                                                 -----------         -----------

Net decrease in cash and cash equivalents............................                 (4,205)               (356)
Cash and cash equivalents, beginning of period.......................                  4,654               1,158
                                                                                 -----------         -----------

Cash and cash equivalents, end of period.............................            $       449         $       802
                                                                                 ===========         ===========

Supplemental information
   Cash paid during the period for:
     Interest, other.................................................            $     5,507         $     5,919
     Income taxes....................................................                    848                  48

</TABLE>


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


<PAGE>


                       AKI HOLDING CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
         (dollars in thousands, except share and per share information)

1.   BASIS OF PRESENTATION

          AKI, Inc. ("AKI") is the successor to Arcade Holding  Corporation (the
     "Predecessor"),  which was acquired by AHC I Acquisition,  Corp. ("AHC") in
     December  1997.  AHC was  organized for the purpose of acquiring all of the
     equity interests of the Predecessor and subsequent to such acquisition, AHC
     contributed  $1 and all of its  ownership  interest to AKI  Holding,  Corp.
     ("Holding") for all of the outstanding equity of Holding.  Accordingly, AKI
     is a wholly owned subsidiary of Holding, which is a wholly owned subsidiary
     of AHC.

          AKI is engaged in interactive  multi-sensory  advertising for consumer
     product  companies  and  has a  specialty  in the  design,  production  and
     distribution of sampling systems from its Chattanooga, Tennessee facilities
     and  distributes  its  products in Europe  through  its French  subsidiary,
     Arcade Europe S.A.R.L.

     Interim financial statements

          The interim consolidated condensed balance sheet at September 30, 2001
     and the interim  consolidated  condensed  statements of operations  for the
     three months ended  September 30, 2001 and 2000,  the interim  consolidated
     condensed statements of cash flows for the three months ended September 30,
     2001 and 2000 and the interim  consolidated  condensed statement of changes
     in  stockholder's  equity for the three months ended September 30, 2001 are
     unaudited, and certain information and footnote disclosure related thereto,
     normally  included in  financial  statements  prepared in  accordance  with
     generally accepted accounting  principles,  have been omitted. The June 30,
     2001  consolidated  condensed  balance  sheet was derived  from the audited
     balance  sheet  for the year  then  ended.  In  management's  opinion,  the
     unaudited interim consolidated condensed financial statements were prepared
     following the same policies and procedures  used in the  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.

     Reclassification

          Certain prior period  amounts have been  reclassified  to conform with
     the current period presentation.

2.   INVENTORY

         The following table details the components of inventory:

                                            September 30, 2001    June 30, 2001
                                            ------------------    -------------
                                                (unaudited)         (unaudited)
              Raw materials
                  Paper....................     $     2,122         $    1,796
                  Other raw materials......           2,804              2,697
                                                -----------         ----------
                      Total raw materials..           4,926              4,493
              Work in process..............           2,164              1,837
                                                -----------         ----------

              Total inventory..............     $     7,090         $    6,330
                                                ===========         ==========


<PAGE>


                       AKI HOLDING CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
         (dollars in thousands, except share and per share information)

3.   PROMISSORY NOTE TO STOCKHOLDER

          In May 2000, AKI signed a promissory note payable to AHC, which allows
     AKI to borrow up to $10  million at such  interest  rates and due as agreed
     upon by AKI and AHC. At September 30, 2001, $350 was outstanding under this
     promissory note bearing interest at prime and is due December 31, 2002.

4.   DERIVATIVE INSTRUMENTS

          Effective July 1, 2000, AKI adopted Financial  Accounting Standard No.
     133 "Accounting for Derivative  Instruments and Hedging  Activities"  ("FAS
     133"),  as amended,  which  requires  that all  derivative  instruments  be
     reported on the balance  sheet at fair value and  establishes  criteria for
     designation  and  effectiveness  of hedging  relationships.  The cumulative
     effect of  adopting  FAS 133 as of July 1, 2000 was not  material  to AKI's
     financial statements.

          AKI  purchases  and  sells  its  products  in a  number  of  countries
     throughout  the world and, as a result,  is exposed to movements in certain
     foreign  currency  exchange  rates.  The primary  purpose of AKI's  foreign
     currency  hedging  activities  is  to  manage  the  short-term   volatility
     associated with foreign  currency  purchases and sales in the normal course
     of business.  AKI primarily  utilizes  foreign  currency  forward  exchange
     contracts with maturities of less than six months,  which do not meet hedge
     accounting  criteria.  At September 30, 2001 there were no forward exchange
     contracts outstanding.

5.   CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS

          The following  condensed balance sheets at September 30, 2001 and June
     30, 2001 and condensed  statements of operations,  changes in stockholder's
     equity and cash flows for the three  months  ended  September  30, 2001 and
     2000 for Holding have been prepared on the equity basis of  accounting  and
     should be read in conjunction  with the  consolidated  statements and notes
     thereto.


<PAGE>


                       AKI HOLDING CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
         (dollars in thousands, except share and per share information)

6.   CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS (Continued)


                                  BALANCE SHEET

<TABLE>
<CAPTION>

                                                                    September 30, 2001       June 30, 2001
                                                                    ------------------       -------------
                                                                        (unaudited)           (unaudited)

<S>                                                                    <C>                   <C>
     Assets
     Investment in subsidiaries...............................         $   102,939           $   102,237
     Deferred charges.........................................                 786                   806
     Deferred income taxes....................................               2,609                 2,338
                                                                       -----------           -----------

         Total assets.........................................         $   106,334           $   105,381
                                                                       ===========           ===========

     Liabilities
     Accrued income taxes.....................................         $       119           $       119
     Senior discount debentures...............................              24,733                23,926
                                                                       -----------           -----------

         Total liabilities....................................              24,852                24,045
                                                                       -----------           -----------

     Stockholder's equity
     Common Stock, $0.01 par value, 1,000 shares authorized
       1,000 shares issued and outstanding....................                   -                     -
     Additional paid-in capital...............................              93,656                93,656
     Accumulated deficit......................................             (12,174)              (12,320)
                                                                       ------------          -----------

         Total stockholder's equity...........................              81,482                81,336
                                                                       -----------           -----------

         Total liabilities and stockholder's equity...........         $   106,334           $   105,381
                                                                       ===========           ===========

</TABLE>



                             STATEMENT OF OPERATIONS


<TABLE>
<CAPTION>

                                                                               Three months ended
                                                                    ----------------------------------------
                                                                    September 30, 2001    September 30, 2000
                                                                    ------------------    ------------------
                                                                        (unaudited)           (unaudited)

<S>                                                                    <C>                   <C>
     Equity in net income of subsidiaries.....................         $       702           $     1,584
     Interest expense.........................................                 827                   962
                                                                       -----------           -----------

         Income (loss) before income taxes....................                (125)                  622

     Income tax benefit.......................................                (271)                 (315)
                                                                       ------------          -----------

         Net income ..........................................         $       146           $       937
                                                                       ===========           ===========


</TABLE>


<PAGE>


                       AKI HOLDING CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
         (dollars in thousands, except share and per share information)

6.   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, 2001 (unaudited)...........      1,000    $       -     $   93,656     $   (12,320)   $    81,336

     Net income (unaudited)........................                                                    146            146
                                                     ---------    ---------     ----------     -----------    -----------

     Balances, September 30, 2001 (unaudited)......      1,000    $       -     $   93,656     $   (12,174)   $    81,482
                                                     =========    =========     ==========     ============   ===========

</TABLE>


                             STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                                       Three months ended
                                                                            ----------------------------------------
                                                                            September 30, 2001    September 30, 2000
                                                                            ------------------    ------------------
                                                                                (unaudited)           (unaudited)

<S>                                                                            <C>                   <C>
     Cash flows from operating activities
       Net income.....................................................         $       146           $       937
         Adjustments to reconcile net income to net cash
         provided by (used in) operating activities:
              Net change in investment in subsidiaries................                (702)               (1,584)
              Amortization of debt discount...........................                 807                   939
              Amortization of debt issuance costs.....................                  20                    23
              Deferred income taxes...................................                (271)                 (315)
                                                                               -----------          ------------

               Net cash provided by (used in) operating activities....                   -                     -
                                                                               -----------          ------------

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

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

</TABLE>


<PAGE>


                           AKI, INC., AND SUBSIDIARIES
                      CONSOLIDATED CONDENSED BALANCE SHEETS
         (dollars in thousands, except share and per share information)


<TABLE>
<CAPTION>
                                                                                September 30,         June 30,
                                                                                    2001                2001
                                                                                -------------      -------------
                                                                                 (unaudited)         (unaudited)

<S>                                                                             <C>                <C>
ASSETS
Current assets
Cash and cash equivalents..................................................     $         449      $       4,654
Accounts receivable, net...................................................            28,307             18,020
Inventory..................................................................             7,090              6,330
Prepaid expenses...........................................................               624                492
Deferred income taxes......................................................               770                770
                                                                                -------------      -------------

   Total current assets....................................................            37,240             30,266

Property, plant and equipment, net.........................................            15,021             15,778
Goodwill, net..............................................................           156,133            157,334
Other intangible assets, net...............................................             6,117              6,337
Deferred charges, net  ....................................................             3,428              3,575
Other assets...............................................................                88                 88
                                                                                -------------      -------------

   Total assets............................................................     $     218,027      $     213,378
                                                                                =============      ==============

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of capital lease obligations...............................     $         496      $         503
Accounts payable, trade....................................................             4,985              3,886
Accrued income taxes.......................................................             2,445              1,523
Accrued compensation.......................................................             2,092              4,715
Accrued interest...........................................................             2,762              5,443
Accrued expenses...........................................................             4,281              3,908
                                                                                -------------      -------------

   Total current liabilities...............................................            17,061             19,978

Revolving credit line......................................................             6,500                  -
Senior notes...............................................................           103,510            103,510
Promissory note to affiliate...............................................               350                  -
Deferred income taxes......................................................             1,946              2,357
Other non-current liabilities..............................................             1,915              1,863
                                                                                -------------      -------------

   Total liabilities.......................................................           131,282            127,708

Stockholder's equity
Common stock, $0.01 par 100,000 shares authorized;
   1,000 shares issued and outstanding.....................................                 -                  -
Additional paid-in capital.................................................           107,348            107,348
Accumulated deficit........................................................            (4,409)            (5,111)
Accumulated other comprehensive loss.......................................              (464)              (837)
Carryover basis adjustment.................................................           (15,730)           (15,730)
                                                                                --------------     -------------

   Total stockholder's equity..............................................            86,745             85,670
                                                                                -------------      -------------

   Total liabilities and stockholder's equity..............................     $     218,027      $     213,378
                                                                                =============      =============

</TABLE>


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


<PAGE>


                           AKI, INC., AND SUBSIDIARIES
                 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                             (dollars in thousands)



<TABLE>
<CAPTION>

                                                                                 Three months ended
                                                                    ---------------------------------------------
                                                                    September 30, 2001         September 30, 2000
                                                                    ------------------         ------------------
                                                                       (unaudited)                 (unaudited)

<S>                                                                    <C>                        <C>
Net sales.................................................             $    27,381                $    32,353
Cost of goods sold........................................                  16,714                     19,548
                                                                       -----------                -----------

   Gross profit...........................................                  10,667                     12,805

Selling, general and administrative expenses..............                   4,195                      4,518
Amortization of goodwill and other intangibles............                   1,446                      1,419
                                                                       -----------                -----------

   Income from operations.................................                   5,026                      6,868

Other expenses:
   Interest expense to stockholder .......................                       4                        113
   Interest expense, other................................                   3,040                      3,329
   Management fees and other, net.........................                      63                         62
                                                                       -----------                -----------

Income before income taxes................................                   1,919                      3,364

Income tax expense........................................                   1,217                      1,780
                                                                       -----------                -----------

   Net income ............................................             $       702                $     1,584
                                                                       ===========                ===========

</TABLE>


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


<PAGE>


                           AKI, INC., AND SUBSIDIARIES
      CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
                (dollars in thousands, except share information)


<TABLE>
<CAPTION>

                                                                                              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, 2001 (unaudited).......  1,000     $     -     $ 107,348     $  (5,111)     $    (837)    $  (15,730)  $  85,670

Net income (unaudited)....................                                            702                                       702

Other comprehensive income, net of tax:
   Foreign currency translation
     adjustment (unaudited)...............                                                           373                        373
                                                                                                                          ---------

Comprehensive income (unaudited)..........                                                                                    1,075
                                            -----     -------     ---------     ---------      ---------     ----------   ---------

Balances, September 30, 2001 (unaudited)    1,000     $     -     $ 107,348     $  (4,409)     $    (464)    $  (15,730)  $  86,745
                                            =====     =======     =========     =========      =========     ==========   =========

</TABLE>


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


<PAGE>


                           AKI, INC., AND SUBSIDIARIES
                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                             (dollars in thousands)


<TABLE>
<CAPTION>


                                                                                          Three months ended
                                                                             ------------------------------------------
                                                                             September 30, 2001      September 30, 2000
                                                                             ------------------      ------------------
                                                                                 (unaudited)             (unaudited)

<S>                                                                             <C>                    <C>
Cash flows from operating activities
   Net income .........................................................         $       702            $     1,584
   Adjustments to reconcile net income to net cash used in
   operating activities:
     Depreciation and amortization of goodwill and other intangibles...               2,600                  2,506
     Amortization of debt issuance cost................................                 147                    148
     Deferred income taxes.............................................                (411)                   129
     Other.............................................................                 425                   (292)
     Changes in operating assets and liabilities:
       Accounts receivable.............................................             (10,287)                (7,003)
       Inventory.......................................................                (760)                (1,798)
       Prepaid expenses, deferred charges and other assets.............                (132)                  (497)
       Accounts payable and accrued expenses...........................              (3,832)                (1,620)
       Income taxes....................................................                 922                  1,691
                                                                                -----------            -----------

         Net cash used in operating activities.........................             (10,626)                (5,152)
                                                                                -----------            -----------

Cash flows from investing activities
   Purchases of equipment..............................................                (392)                  (776)
   Patents.............................................................                 (30)                     -
                                                                                ------------           -----------

         Net cash used in investing activities.........................                (422)                  (776)
                                                                                ------------           -----------

Cash flows from financing activities
   Payments under capital leases for equipment.........................                  (7)                  (123)
   Net proceeds on line of credit......................................               6,500                    950
   Net proceeds from promissory note to affiliate......................                 350                  4,745
                                                                                -----------            -----------

         Net cash provided by financing activities.....................               6,843                  5,572
                                                                                -----------            -----------

Net decrease in cash and cash equivalents..............................              (4,205)                  (356)
Cash and cash equivalents, beginning of period.........................               4,654                  1,158
                                                                                -----------            -----------

Cash and cash equivalents, end of period...............................         $       449            $       802
                                                                                ===========            ===========


Supplemental information
   Cash paid during the period for:
     Interest, other...................................................         $     5,507            $     5,919
     Income taxes......................................................                 848                     48


</TABLE>


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


<PAGE>


                           AKI, INC., AND SUBSIDIARIES
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
         (dollars in thousands, except share and per share information)

1.   BASIS OF PRESENTATION

          AKI, Inc. ("AKI") is the successor to Arcade Holding  Corporation (the
     "Predecessor"),  which was acquired by AHC I Acquisition,  Corp. ("AHC") in
     December  1997.  AHC was  organized for the purpose of acquiring all of the
     equity interests of the Predecessor and subsequent to such acquisition, AHC
     contributed  $1 and all of its  ownership  interest to AKI  Holding,  Corp.
     ("Holding") for all of the outstanding equity of Holding.  Accordingly, AKI
     is a wholly owned subsidiary of Holding, which is a wholly owned subsidiary
     of AHC.

          AKI is engaged in interactive  multi-sensory  advertising for consumer
     product  companies  and  has a  specialty  in the  design,  production  and
     distribution of sampling systems from its Chattanooga, Tennessee facilities
     and  distributes  its  products in Europe  through  its French  subsidiary,
     Arcade Europe S.A.R.L.

     Interim financial statements

          The interim consolidated condensed balance sheet at September 30, 2001
     and the interim  consolidated  condensed  statements of operations  for the
     three months ended  September 30, 2001 and 2000,  the interim  consolidated
     condensed statements of cash flows for the three months ended September 30,
     2001 and 2000 and the interim  consolidated  condensed statement of changes
     in  stockholder's  equity for the three months ended September 30, 2001 are
     unaudited, and certain information and footnote disclosure related thereto,
     normally  included in  financial  statements  prepared in  accordance  with
     generally accepted accounting  principles,  have been omitted. The June 30,
     2001  consolidated  condensed  balance  sheet was derived  from the audited
     balance  sheet  for the year  then  ended.  In  management's  opinion,  the
     unaudited interim consolidated condensed financial statements were prepared
     following the same policies and procedures  used in the  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.

     Reclassification

          Certain prior period  amounts have been  reclassified  to conform with
     the current period presentation.


2.   INVENTORY

         The following table details the components of inventory:

                                            September 30, 2001    June 30, 2001
                                            ------------------    -------------
                                                (unaudited)         (unaudited)
              Raw materials
                  Paper....................     $     2,122         $    1,796
                  Other raw materials......           2,804              2,697
                                                -----------         ----------
                      Total raw materials..           4,926              4,493
              Work in process..............           2,164              1,837
                                                -----------         ----------

              Total inventory..............     $     7,090         $    6,330
                                                ===========         ==========


<PAGE>


                           AKI, INC., AND SUBSIDIARIES
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
         (dollars in thousands, except share and per share information)


3.   PROMISSORY NOTE TO AFFILIATE

          In May 2000, AKI signed a promissory note payable to AHC, which allows
     AKI to borrow up to $10  million at such  interest  rates and due as agreed
     upon by AKI and AHC. At September 30, 2001, $350 was outstanding under this
     promissory note bearing interest at prime and is due December 31, 2002.

4.   DERIVATIVE INSTRUMENTS

          Effective July 1, 2000, AKI adopted Financial  Accounting Standard No.
     133 "Accounting for Derivative  Instruments and Hedging  Activities"  ("FAS
     133"),  as amended,  which  requires  that all  derivative  instruments  be
     reported on the balance  sheet at fair value and  establishes  criteria for
     designation  and  effectiveness  of hedging  relationships.  The cumulative
     effect of  adopting  FAS 133 as of July 1, 2000 was not  material  to AKI's
     financial statements.

          AKI  purchases  and  sells  its  products  in a  number  of  countries
     throughout  the world and, as a result,  is exposed to movements in certain
     foreign  currency  exchange  rates.  The primary  purpose of AKI's  foreign
     currency  hedging  activities  is  to  manage  the  short-term   volatility
     associated with foreign  currency  purchases and sales in the normal course
     of business.  AKI primarily  utilizes  foreign  currency  forward  exchange
     contracts with maturities of less than six months,  which do not meet hedge
     accounting  criteria.  At September 30, 2001 there were no forward exchange
     contracts outstanding.


<PAGE>


                     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"),  the term  "Holding"  refers to AKI
Holding Corp.

General

     Our sales are  derived  primarily  through our  multi-sensory,  interactive
marketing  activities  primarily from the sale of printed advertising  materials
with sampling systems and products to fragrance, cosmetics and consumer products
companies,  and also from creative services.  Substantially all of our sales are
made  directly  to  our  customers  while  a  small  portion  are  made  through
advertising  agencies.  Each of our customer's  marketing programs is unique and
pricing is negotiated based on estimated costs plus a margin.  While our company
and its customers generally do not enter into long-term  contracts,  we have had
long-standing relationships with the majority of our customer base.

Results of Operations

      Three Months Ended September 30, 2001 Compared to Three Months Ended
                               September 30, 2000

     Net  Sales.  Net  sales for the  three  months  ended  September  30,  2001
decreased $5.0 million, or 15.4%, to $27.4 million, as compared to $32.4 million
for the three months  ended  September  30, 2000.  The decrease in net sales was
primarily  attributable  to  decreases  in volume of domestic  sales of sampling
technologies  for advertising  and marketing of consumer  products and cosmetics
products and  international  sales of sampling  technologies for advertising and
marketing of  fragrance  products.  We believe the decline of domestic  sales is
partially  attributable  to the weak economic  conditions in the United  States,
particularly in the advertising  industry.  We expect the significant decline in
sales  experienced  in our first fiscal quarter to continue in our second fiscal
quarter.  We cannot  predict if this trend will worsen or  continue  through the
remainder of our fiscal year.

     Gross  Profit.  Gross profit for the three months ended  September 30, 2001
decreased $2.1 million, or 16.4%, to $10.7 million, as compared to $12.8 million
for three months ended  September 30, 2000.  Gross profit as a percentage of net
sales  decreased  to 39.1% in the three months ended  September  30, 2001,  from
39.5% in the three months ended September 30, 2000. The decrease in gross profit
as a  percentage  of net sales is  substantially  due to the  decrease  in sales
volume and  changes in product mix  partially  offset by reduced  premium  labor
costs.

     Selling,  General  and  Administrative   Expenses.   Selling,  general  and
administrative  expenses for the three months ended September 30, 2001 decreased
$0.3  million,  or 6.7%,  to $4.2  million,  as compared to $4.5 million for the
three  months ended  September  30, 2000.  Selling,  general and  administrative
expenses as a percent of net sales  increased to 15.3% in the three months ended
September 30, 2001, from 13.9% in the three months ended September 30, 2000. The
decrease in selling,  general and administrative  expenses is primarily due to a
one-time  severance  charge in 2000 and a decrease  in  personnel  in 2001.  The
increase in selling,  general  and  administrative  expenses as a percent of net
sales was primarily due to the decrease in net sales described above.

     Income from  Operations.  Income from operations for the three months ended
September  30, 2001  decreased  $1.9  million,  or 27.5%,  to $5.0  million,  as
compared to $6.9 million for the three months ended  September 30, 2000.  Income
from  operations  as a percentage  of net sales  decreased to 18.3% in the three
months ended  September 30, 2001, from 21.3% in the three months ended September
30, 2000, principally as a result of the factors described above.

     Interest Expense. Interest expense for the three months ended September 30,
2001  decreased  $0.5 million,  or 11.4%,  to $3.9 million,  as compared to $4.4
million for the three months ended  September  30, 2000.  Interest  expense as a
percentage of net sales  increased to 14.2% in the three months ended  September
30, 2001,  from 13.6% in the three months ended September 30, 2000. The decrease
in interest expense, including the amortization of


<PAGE>


deferred  financing  costs,  is primarily due to repurchased  and retired Senior
Discount  Debentures and Senior Notes,  reduced  borrowings  under the revolving
credit line and promissory note to stockholder.

     Interest  expense for AKI for the three  months  ended  September  30, 2001
decreased $0.4 million,  or 11.8%, to $3.0 million,  as compared to $3.4 million
for the three months ended September 30, 2000.  Interest expense as a percentage
of net sales  increased to 11.0% in the three months ended  September  30, 2001,
from 10.5% in the three  months  ended  September  30,  2000.  The  decrease  in
interest  expense,  including the  amortization of deferred  financing costs, is
primarily due to repurchased  and retired Senior Notes,  and reduced  borrowings
under the revolving credit line and promissory note to affiliate.

     Income Tax Expense. Income tax expense for the three months ended September
30, 2001  decreased  $0.6 million to $0.9 million.  The Company's  effective tax
rate, after consideration of non-deductible goodwill amortization,  was 41.2% in
the three months ended  September 30, 2001,  and 40.6% in the three months ended
September 30, 2000.

     Income tax expense for AKI for the three  months ended  September  30, 2001
decreased  $0.6  million  to $1.2  million.  AKI's  effective  tax  rate,  after
consideration  of  non-deductible  goodwill  amortization,  was 39% in the three
months ended September 30, 2001 and 2000.

     EBITDA. EBITDA for the three months ended September 30, 2001 decreased $1.8
million,  or 19.2%,  to $7.6 million,  as compared to $9.4 million for the three
months ended September 30, 2000. The decrease in EBITDA principally reflects the
decrease in gross profit  partially  offset by the decrease in selling,  general
and administrative expenses discussed above. EBITDA as a percentage of net sales
was 27.7%  and 29.0% in the three  months  ended  September  30,  2001 and 2000,
respectively.   EBITDA  is  income  from   operations  plus   depreciation   and
amortization of goodwill and other intangibles.

Liquidity and Capital Resources

     We have substantial  indebtedness and significant debt service obligations.
As of  September  30, 2001,  we had  consolidated  indebtedness  in an aggregate
amount  of  $135.6  million  (excluding  trade  payables,  accrued  liabilities,
deferred taxes and other non-current liabilities),  of which approximately $24.7
million  was a direct  obligation  of Holding  relating  to its  debentures  and
approximately  $110.9  million was a direct  obligation  of AKI  relating to its
notes,  revolving credit line,  promissory note to affiliate and capital leases.
Borrowings  at September  30, 2001  included  $6.5 million  under the  revolving
credit  line and $0.4  million  on the  promissory  note to  affiliate  that was
incurred to provide working capital.  At September 30, 2001 we had $13.5 million
available  under the revolving  credit line. At September 30, 2001, AKI also had
$20.4 million in additional  outstanding  liabilities (including trade payables,
accrued liabilities, deferred taxes and other non-current liabilities).

     Holding's   principal   liquidity   requirements   are  for  debt   service
requirements under the debentures.  AKI's principal  liquidity  requirements are
for debt  service  requirements  and fees under the notes and the  credit  line.
Historically,   we  have  funded  our  capital,   debt  service  and   operating
requirements  with a combination  of net cash provided by operating  activities,
together with borrowings  under revolving  credit  facilities.  During the three
months  ended  September  30,  2001,  cash  totaling  $10.6  million was used by
operating  activities primarily due to the increase in accounts receivable and a
decrease in accrued  compensation and accrued  interest,  offset partially by an
increase in accounts  payable and accrued income taxes.  During the three months
ended  September  30,  2000,  cash  totaling  $5.2 million was used by operating
activities  primarily due to the increase in accounts  receivable  and inventory
and a decrease in accrued interest and accrued compensation, offset partially by
an increase in accounts payable and accrued expenses.

     In the three  months  ended  September  30,  2001 and 2000,  we had capital
expenditures of approximately $0.4 million and $0.8 million, respectively. These
capital  expenditures  consisted  primarily  of the  purchase  of  manufacturing
equipment and upgrading our computer systems.

     We may from time to time evaluate additional potential acquisitions.  There
can be no assurance that  additional  capital sources will be available to us to
fund additional acquisitions on terms that we find acceptable, or


<PAGE>


at all.  Additional capital resources,  if available,  may be on terms generally
less  favorable  and/or more  restricted  than the terms of our  current  credit
facilities.

     As of September 30, 2001, AKI had purchased and retired $4.0 million of AKI
Senior Notes originally issued in 1998.

     Capital  expenditures  for the  twelve  months  ending  June  30,  2002 are
currently  estimated  to be  approximately  $2.5  million.  Based on  borrowings
outstanding  as of September  30, 2001,  we expect total cash  payments for debt
service for the twelve  months  ending June 30, 2002 to be  approximately  $11.8
million,  consisting  of $10.9 million in interest  payments of the notes,  $0.5
million in capital lease obligations and $0.4 million in interest and fees under
the  revolving  credit  line.  We  also  expect  to  make  royalty  payments  of
approximately $1.1 million during the twelve months ending June 30, 2002.

     At September 30, 2001,  Holding's cash and cash equivalents and net working
capital  were $0.4  million  and $20.1  million,  respectively,  representing  a
decrease  in cash and cash  equivalents  of $4.3  million and an increase in net
working capital of $9.9 million from June 30, 2001. Account receivables, net, at
September  30,  2001  increased  57.2% or $10.3  million  over the June 30, 2001
amount,  primarily due to increased  sales volume and the  seasonality  of those
sales.

Seasonality

     Our  sales and  operating  results  have  historically  reflected  seasonal
variations.  Such seasonal  variations are based on the timing of our customers'
advertising  campaigns,  which have traditionally been concentrated prior to the
Christmas and spring holiday  seasons.  As a result, a higher level of sales are
reflected in our first and third fiscal quarters ended September 30 and March 31
when sales from such  advertising  campaigns are principally  recognized.  These
seasonal  fluctuations require us to accurately allocate our resources to manage
our  manufacturing  capacity,  which often operates at full capacity during peak
seasonal demand periods.

Recently Issued Accounting Standards

     In September  2000,  the Emerging  Issues Task Force reached a consensus on
Issue 00-10,  "Accounting  for Shipping  and  Handling  Fees and Costs"  ("Issue
00-10").  Issue 00-10 requires that all amounts  billed to customers  related to
shipping  and  handling  should  be  classified  as  revenues.  Issue  00-10 was
effective  for the  Company no later than the fourth  quarter of the fiscal year
ending June 30, 2001, and  accordingly,  amounts billed to customers  related to
shipping  and  handling  have been  reclassified  from cost of goods sold to net
sales.

     FASB  Statement  of  Financial   Accounting  Standards  No.  141  "Business
Combinations"  ("SFAS  141")  was  issued in June  2001.  SFAS 141  changes  the
accounting  and reporting for business  combinations.  SFAS 141 is effective for
all business combinations initiated after June 30, 2001.

     FASB  Statement of Financial  Accounting  Standards  No. 142  "Goodwill and
Other Intangible  Assets" ("SFAS 142") was issued in June 2001. SFAS 142 changes
the accounting and reporting for acquired goodwill and other intangible  assets.
SFAS 142 is effective  for fiscal years  beginning  after  December 15, 2001 and
must be applied at the  beginning  of an entity's  fiscal  year.  The Company is
currently assessing the effect on its financial  statements of implementing SFAS
142.

Forward-Looking Statements

     The  information   provided  in  this  document  contains   forward-looking
statements that involve a number of risks and uncertainties. A number of factors
could  cause  actual  results,  performance  or  achievements  of our company or
industry results to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking  statements.  These
factors  include,  but are not  limited  to:  the  possible  trend of  customers
decreasing their use of our products;  economic conditions in general and in our
market areas,  specifically the advertising market; the competitive  environment
in the sampling industry in general and in our specific market areas; changes in
prevailing  interest  rates;  inflation;  changes in cost of goods and services;
changes in or failure to comply with postal regulations or other federal,  state
and/or local government regulations; liability


<PAGE>


and  other  claims  asserted  against  us;  changes  in  operating  strategy  or
development  plans; the ability to attract and retain qualified  personnel;  our
significant indebtedness; labor disturbances; changes in our capital expenditure
plans; and other factors.  We also advise you to read the section entitled "Risk
Factors"  in the  Company's  annual  report  on Form 10K  filed  with the SEC on
September 18, 2001.

     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 such word,  or other
variations  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.  We disclaim any  obligations  to
update any such factors or to publicly  announce the results of any revisions to
any of the  forward-looking  statements  contained  in this  document to reflect
future events or developments.





ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We  generate  approximately  21% of our sales from  customers  outside  the
United States,  principally in Europe.  International sales are made mostly from
our foreign  subsidiary  located in France and are primarily  denominated in the
local currency.  Our foreign subsidiary also incurs the majority of its expenses
in the local currency and uses the local currency as its functional currency.

     Our major principal cash balances are held in U.S.  dollars.  Cash balances
in foreign  currencies are held to minimum balances for working capital purposes
and therefore have a minimum risk to currency fluctuations.

     We periodically  enter into forward foreign currency exchange  contracts to
hedge certain  exposures  related to selected  transactions  that are relatively
certain as to both  timing  and amount and to hedge a portion of the  production
costs expected to be denominated in foreign currencies.  The purpose of entering
into these  hedge  transactions  is to minimize  the impact of foreign  currency
fluctuations  on the results of operations  and cash flows.  Gains and losses on
the hedging  activities  are recognized  concurrently  with the gains and losses
from the underlying  transactions.  At September 30, 2001, there were no forward
exchange contracts outstanding.






                            PART II OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)  Exhibits

              10.17    Salary Continuation Agreement dated October 1, 2001,
                       between AKI and Alan Bruce Prashker


         (b)  Reports on Form 8-K

              None


<PAGE>


                                   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.

Date:  November 9, 2001                     By:  /s/ Kenneth A. Budde
                                                 -------------------------------
                                                 Kenneth A. Budde
                                                 Senior Vice President &
                                                   Chief Financial Officer
                                                   (Principal Financial and
                                                   Accounting Officer)


                                            AKI, INC.

Date:  November 9, 2001                     By:  /s/ Kenneth A. Budde
                                                 -------------------------------
                                                 Kenneth A. Budde
                                                 Senior Vice President &
                                                   Chief Financial Officer
                                                   (Principal Financial and
                                                   Accounting Officer)


<PAGE>


                                  EXHIBIT INDEX




Exhibit                             Description
-------                             -----------

 10.17        Salary Continuation Agreement dated as of October 1, 2001 between
              AKI and Alan Bruce Prashker