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, 2002

                                       OR

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

           For the transition period from ___________ to _____________

                        Commission File Number: 333-60991

                                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, 2002, 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, 2002
                        -  June 30, 2002

                        Consolidated Condensed Statements of Operations

                        -  Three months ended September 30, 2002
                        -  Three months ended September 30, 2001

                        Consolidated Condensed Statement of Changes in
                        Stockholder's Equity

                        -  Three months ended September 30, 2002

                        Consolidated Condensed Statements of Cash Flows

                        -  Three months ended September 30, 2002
                        -  Three months ended September 30, 2001

                        Notes to Consolidated Condensed Financial Statements


<PAGE>


         Item 1.  Financial Statements (unaudited) (continued)

                  AKI, Inc. and Subsidiaries

                        Consolidated Condensed Balance Sheet

                        -  September 30, 2002
                        -  June 30, 2002

                        Consolidated Condensed Statements of Operations

                        -  Three months ended September 30, 2002
                        -  Three months ended September 30, 2001

                        Consolidated Condensed Statement of Changes in
                        Stockholder's Equity

                        -  Three months ended September 30, 2002

                        Consolidated Condensed Statements of Cash Flows

                        -  Three months ended September 30, 2002
                        -  Three months ended September 30, 2001

                        Notes to Consolidated Condensed Financial Statements


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

         Item 3.  Quantitative and Qualitative Discussions About Market Risk

         Item 4.  Controls and Procedures

Part II. OTHER INFORMATION

         Item 4.  Submission of Matters to a Vote of Security Holder's

         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,
                                                                                    2002                2002
                                                                                -------------      -------------
                                                                                 (unaudited)         (unaudited)

<S>                                                                             <C>                <C>
ASSETS
Current assets
Cash and cash equivalents..................................................     $       1,543      $       1,875
Accounts receivable, net...................................................            23,561             23,796
Inventory..................................................................             9,762              8,014
Prepaid expenses...........................................................             1,210                667
Deferred income taxes......................................................               977                977
                                                                                -------------      -------------

   Total current assets....................................................            37,053             35,329

Property, plant and equipment, net.........................................            19,078             19,616
Goodwill, net..............................................................           153,277            153,277
Other intangible assets, net...............................................            12,685             13,142
Deferred charges, net......................................................             3,885              4,059
Deferred income taxes......................................................             1,032                692
Other assets...............................................................               163                164
                                                                                -------------      -------------

   Total assets............................................................     $     227,173      $     226,279
                                                                                =============      =============

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of long-term debt..........................................     $       1,562      $       1,375
Accounts payable, trade....................................................             4,595              5,826
Accrued income taxes.......................................................             2,453              2,007
Accrued compensation.......................................................             2,941              5,338
Accrued interest...........................................................             2,853              5,570
Accrued expenses...........................................................             4,318              3,642
                                                                                -------------      -------------

   Total current liabilities...............................................            18,722             23,758

Revolving credit line......................................................             6,675              2,750
Term loan..................................................................             7,688              8,125
Senior notes...............................................................           103,510            103,510
Promissory note to affiliate...............................................               355                  -
Senior discount debentures.................................................            16,438             15,901
Other non-current liabilities..............................................             1,628              2,338
                                                                                -------------      -------------

   Total liabilities.......................................................           155,016            156,382

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........................................................            (5,696)            (7,583)
Accumulated other comprehensive loss.......................................               (73)              (446)
Carryover basis adjustment.................................................           (15,730)           (15,730)
                                                                                --------------     -------------

   Total stockholder's equity..............................................            72,157             69,897
                                                                                -------------      -------------


   Total liabilities and stockholder's equity..............................     $     227,173      $     226,279
                                                                                =============      =============

</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, 2002         September 30, 2001
                                                                    ------------------         ------------------
                                                                       (unaudited)                (unaudited)

<S>                                                                    <C>                        <C>
Net sales.................................................             $    30,400                $    27,381
Cost of goods sold........................................                  18,515                     16,714
                                                                       -----------                -----------

       Gross profit.......................................                  11,885                     10,667

Selling, general and administrative expenses..............                   4,664                      4,195
Amortization of goodwill..................................                       -                      1,201
Amortization of other intangibles.........................                     286                        245
                                                                       -----------                -----------

       Income from operations.............................                   6,935                      5,026

Other expenses:
   Interest expense.......................................                   3,738                      3,871
   Management fees and other, net.........................                      63                         63
                                                                       -----------                -----------

       Income before income taxes.........................                   3,134                      1,092

Income tax expense........................................                   1,247                        946
                                                                       -----------                -----------

       Net income ........................................             $     1,887                $       146
                                                                       ===========                ===========

</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, 2002 (unaudited)......    1,000    $    -     $   93,656   $   (7,583)    $    (446)    $   (15,730)   $  69,897

Net income (unaudited)...................                                          1,887                                      1,887

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

Comprehensive income (unaudited).........                                                                                     2,260
                                             -----    ------     ----------   ----------     ---------     -----------    ---------

Balances, September 30, 2002 (unaudited).    1,000    $    -     $   93,656   $   (5,696)    $     (73)    $   (15,730)   $  72,157
                                             =====    ======     ==========   ==========     =========     ===========    =========


</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, 2002    September 30, 2001
                                                                             ------------------    ------------------
                                                                                 (unaudited)           (unaudited)

<S>                                                                              <C>                   <C>
Cash flows from operating activities
   Net income........................................................            $     1,887           $       146
   Adjustments to reconcile net income to net cash used in
   operating activities:
     Depreciation and amortization of goodwill and other intangibles.                  1,855                 2,600
     Amortization of debt discount...................................                    537                   807
     Amortization of debt issuance costs.............................                    174                   167
     Deferred income taxes...........................................                   (340)                 (682)
     Other...........................................................                   (336)                  425
     Changes in operating assets and liabilities:
       Accounts receivable...........................................                    235               (10,287)
       Inventory.....................................................                 (1,748)                 (760)
       Prepaid expenses, deferred charges and other assets...........                   (543)                 (132)
       Accounts payable and accrued expenses.........................                 (5,669)               (3,832)
       Income taxes..................................................                    446                   922
                                                                                 -----------           -----------

         Net cash used in operating activities.......................                 (3,502)              (10,626)
                                                                                 -----------           -----------

Cash flows from investing activities
   Purchases of equipment............................................                   (828)                 (392)
   Patents...........................................................                    (32)                  (30)
                                                                                 -----------           -----------

         Net cash used in investing activities.......................                   (860)                 (422)
                                                                                 -----------           -----------

Cash flows from financing activities
   Payments under capital leases ....................................                      -                    (7)
   Net proceeds on revolving loan....................................                  3,925                 6,500
   Payment on term loan..............................................                   (250)                    -
   Net proceeds from promissory note to stockholder..................                    355                   350
                                                                                 -----------           -----------

         Net cash provided by financing activities...................                  4,030                 6,843
                                                                                 -----------           -----------

Net decrease in cash and cash equivalents............................                   (332)               (4,205)
Cash and cash equivalents, beginning of period.......................                  1,875                 4,654
                                                                                 -----------           -----------

Cash and cash equivalents, end of period.............................            $     1,543           $       449
                                                                                 ===========           ===========

Supplemental information
  Cash paid during the period for:
     Interest, other.................................................            $     5,706           $     5,507
     Income taxes....................................................                  1,179                   848


</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  and
     Baltimore,  Maryland  facilities  and  distributes  its  products in Europe
     through its French subsidiary, Arcade Europe S.A.R.L.

     Recently Issued Accounting Standards

          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  adoption of SFAS 142  eliminates  the  amortization  of
     goodwill,  approximately  $4,800 in the fiscal  year  ended June 30,  2002,
     while  requiring  annual tests for  impairment of goodwill.  The Company is
     currently  in the process of analyzing  the carrying  value of goodwill and
     does not expect to identify a material impairment.

          FASB Statement of Financial  Accounting  Standards No. 145 "Rescission
     of FASB  Statements No. 4, 44, and 64,  Amendment of FASB Statement No. 13,
     and Technical  Corrections" ("SFAS 145") was issued in April 2002. The most
     significant aspects of this pronouncement,  with respect to the Company, is
     the  elimination  of  SFAS  No.  4,   "Reporting   Gains  and  Losses  from
     Extinguishment  of  Debt".  As a result of the  elimination  of SFAS No. 4,
     gains and  losses  from  extinguishment  of debt  should be  classified  as
     extraordinary  items  only  if  they  meet  the  criteria  in APB  No.  30,
     "Reporting   the  Results  of   Operations   -   Discontinued   Events  and
     Extraordinary  Items".  The  implementation  of SFAS No.  145 will  require
     future early  retirements of debt to be included in income from  operations
     which could materially  affect income from  operations.  In the fiscal year
     ended  June  30,  2002  the  Company   reported   an   approximate   $2,700
     extraordinary gain from early retirement of debt, net of tax.

     Acquisition of Color Prelude business

          On December 18,  2001,  the Company  acquired  the business  including
     certain  assets and assumed  certain  liabilities  of Color  Prelude,  Inc.
     ("CP")  for  $19,423  including  direct  acquisition  costs  of  $540.  The
     acquisition  was accounted  for using the purchase  method of accounting in
     accordance with Statement of Financial Accounting Standards (SFAS) No. 141,
     "Business  Combinations".  The  purchase  price has been  allocated  to the
     assets and liabilities  acquired using estimated fair values at the date of
     acquisition and resulted in assigning value to goodwill totaling $407 which
     will not be amortized in accordance with Statement of Financial  Accounting
     Standards  (SFAS) No. 142,  "Goodwill  and Other  Intangible  Assets".  The
     following shows the allocation of the purchase price.


<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 (continued)

          Cash.............................................    $       1
          Other current assets.............................        5,680
          Property, plant and equipment....................        7,695
          Patents..........................................        7,750
          Other intangible assets..........................        1,069
          Goodwill.........................................          407
                                                               ---------

          Total allocation to assets.......................    $  22,602
                                                               =========

          Current liabilities..............................    $   3,179
                                                               =========

          Patents  are  being  amortized  over  a  ten  year  period  and  other
     intangible assets are being amortized over periods ranging from one to four
     years.

          The results of the acquired  operations  are included in the financial
     statements  since the date of acquisition.  The following pro forma results
     include cost savings and other effects of the planned  integration  and are
     not necessarily  indicative of the results which would have occurred if the
     business  combination had been in effect on the dates indicated.  Pro forma
     results  had CP been  acquired  at the  beginning  of  fiscal  2001  are as
     follows:

                                                          Three months ended
                                                             September 30,
                                                             -------------
                                                           2002         2001
                                                           ----         ----

          Revenue  ..................................  $  30,400    $  29,828
          Income (loss) before extraordinary items...      1,887         (146)
          Net income (loss)..........................      1,887         (146)


     Interim financial statements

          The interim consolidated condensed balance sheet at September 30, 2002
     and the interim  consolidated  condensed  statements of operations  for the
     three months ended  September 30, 2002 and 2001,  the interim  consolidated
     condensed statements of cash flows for the three months ended September 30,
     2002 and 2001 and the interim  consolidated  condensed statement of changes
     in  stockholder's  equity for the three months ended September 30, 2002 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,
     2002  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.


<PAGE>


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

2.   INVENTORY

          The following table details the components of inventory:

                                          September 30, 2002     June 30, 2002
                                          ------------------     -------------
                                              (unaudited)          (unaudited)
         Raw materials
             Paper......................      $     1,982          $    2,180
             Other raw materials........            4,928               4,216
                                              -----------          ----------
                 Total raw materials....            6,910               6,396
         Work in process................            3,702               2,468
         Reserve for obsolescence.......             (850)               (850)
                                              -----------          ----------

         Total inventory................      $     9,762          $    8,014
                                              ===========          ==========


3.   SUBSEQUENT EVENT

          On  October  15,  2002,  Holding  purchased,   with  proceeds  from  a
     distribution  from AKI,  it's Senior  Discount  Debentures  with a carrying
     value of $3,420 for $3,192.  The  distribution  from AKI was funded through
     borrowings under AKI's credit agreement.

4.   CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS

          The following  condensed balance sheets at September 30, 2002 and June
     30, 2002 and condensed  statements of operations,  changes in stockholder's
     equity and cash flows for the three  months  ended  September  30, 2002 and
     2001 for Holding have been prepared on the equity basis of  accounting  and
     should be read in conjunction  with the  consolidated  statements and notes
     thereto.

                                  BALANCE SHEET
<TABLE>
<CAPTION>

                                                               September 30, 2002       June 30, 2002
                                                               ------------------       -------------
                                                                   (unaudited)           (unaudited)

<S>                                                               <C>                   <C>
     Assets
     Investment in subsidiaries..............................     $   101,840           $    99,583
     Income tax receivable...................................              46                    46
     Deferred charges........................................             409                   422
     Deferred income taxes...................................           2,103                 1,923
                                                                  -----------           -----------

         Total assets........................................     $   104,398           $   101,974
                                                                  ===========           ===========

     Liabilities
     Senior discount debentures..............................     $    16,438           $    15,901
                                                                   ----------            ----------

         Total liabilities...................................          16,438                15,901
                                                                  -----------            ----------

     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.....................................          (5,696)               (7,583)
                                                                  -----------           -----------

         Total stockholder's equity..........................          87,960                86,073
                                                                  -----------           -----------

         Total liabilities and stockholder's equity..........     $   104,398           $   101,974
                                                                  ===========           ===========


</TABLE>


<PAGE>


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

4. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS (Continued)

                             STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                     Three months ended
                                                                          ----------------------------------------
                                                                          September 30, 2002    September 30, 2001
                                                                          ------------------    ------------------
                                                                             (unaudited)           (unaudited)

<S>                                                                          <C>                   <C>
     Equity in net income of subsidiaries...........................         $     2,257           $       702
     Interest expense...............................................                (550)                 (827)
                                                                             -----------           -----------

         Income (loss) before income taxes..........................               1,707                  (125)

     Income tax benefit.............................................                (180)                 (271)
                                                                             -----------           -----------

         Net income.................................................         $     1,887           $       146
                                                                             ===========           ===========


</TABLE>

                  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, 2002 (unaudited)...........      1,000    $      -     $   93,656     $    (7,583)   $    86,073

     Net income (unaudited)........................                                                 1,887          1,887
                                                      --------    --------     ----------     -----------    -----------

     Balances, September 30, 2002 (unaudited)......      1,000    $      -     $   93,656     $    (5,696)   $    87,960
                                                      ========    ========     ==========     ===========    ===========


</TABLE>

                             STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                   Three months ended
                                                                        ----------------------------------------
                                                                        September 30, 2002    September 30, 2001
                                                                        ------------------    ------------------
                                                                           (unaudited)           (unaudited)

<S>                                                                        <C>                   <C>
     Cash flows from operating activities
       Net income...................................................       $     1,887           $       146
         Adjustments to reconcile net income to net cash provided
           by (used in) operating activities:
              Net change in investment in subsidiaries..............            (2,257)                 (702)
              Amortization of debt discount.........................               537                   807
              Amortization of debt issuance costs...................                13                    20
              Deferred income taxes.................................              (180)                 (271)
                                                                           -----------           -----------

               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,
                                                                                    2002                2002
                                                                                -------------      -------------
                                                                                 (unaudited)         (unaudited)

<S>                                                                             <C>                <C>
ASSETS
Current assets
Cash and cash equivalents..................................................     $       1,543      $       1,875
Accounts receivable, net...................................................            23,561             23,796
Inventory..................................................................             9,762              8,014
Prepaid expenses...........................................................             1,210                667
Deferred income taxes......................................................               977                977
                                                                                -------------      -------------

   Total current assets....................................................            37,053             35,329

Property, plant and equipment, net.........................................            19,078             19,616
Goodwill, net..............................................................           153,277            153,277
Other intangible assets, net...............................................            12,685             13,142
Deferred charges, net......................................................             3,476              3,637
Other assets...............................................................               163                164
                                                                                -------------      -------------

   Total assets............................................................     $     225,732      $     225,165
                                                                                =============      =============

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of long-term debt..........................................     $       1,562      $       1,375
Accounts payable, trade....................................................             4,595              5,826
Accrued income taxes.......................................................             2,499              2,053
Accrued compensation.......................................................             2,941              5,338
Accrued interest...........................................................             2,853              5,570
Accrued expenses...........................................................             4,318              3,642
                                                                                -------------      -------------

   Total current liabilities...............................................            18,768             23,804

Revolving credit line......................................................             6,675              2,750
Term loan..................................................................             7,688              8,125
Senior notes...............................................................           103,510            103,510
Promissory note to affiliate...............................................               355                  -
Deferred income taxes......................................................             1,071              1,231
Other non-current liabilities..............................................             1,628              2,338
                                                                                -------------      -------------

   Total liabilities.......................................................           139,695            141,758

Stockholder's equity
Common stock, $0.01 par 100,000 shares authorized;
   1,000 shares issued and outstanding.....................................                 -                  -
Additional paid-in capital.................................................           100,543            100,543
Accumulated deficit........................................................             1,297               (960)
Accumulated other comprehensive loss.......................................               (73)              (446)
Carryover basis adjustment.................................................           (15,730)           (15,730)
                                                                                --------------     -------------

   Total stockholder's equity..............................................            86,037             83,407
                                                                                -------------      -------------

   Total liabilities and stockholder's equity..............................     $     225,732      $     225,165
                                                                                =============      =============


</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, 2002         September 30, 2001
                                                                    ------------------         ------------------
                                                                       (unaudited)                (unaudited)

<S>                                                                    <C>                        <C>
Net sales.................................................             $    30,400                $    27,381
Cost of goods sold........................................                  18,515                     16,714
                                                                       -----------                -----------

       Gross profit.......................................                  11,885                     10,667

Selling, general and administrative expenses..............                   4,664                      4,195
Amortization of goodwill..................................                       -                      1,201
Amortization of other intangibles.........................                     286                        245
                                                                       -----------                -----------

       Income from operations.............................                   6,935                      5,026

Other expenses:
   Interest expense.......................................                   3,188                      3,044
   Management fees and other, net.........................                      63                         63
                                                                       -----------                -----------

       Income before income taxes.........................                   3,684                      1,919

Income tax expense........................................                   1,427                      1,217
                                                                       -----------                -----------

       Net income ........................................             $     2,257                $       702
                                                                       ===========                ===========


</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, 2002 (unaudited)......    1,000    $    -     $  100,543   $     (960)    $    (446)    $   (15,730)   $  83,407

Net income (unaudited)...................                                          2,257                                      2,257
Other comprehensive income, net of tax:
   Foreign currency translation
     adjustment (unaudited)..............                                                          373                          373
                                                                                                                          ---------

Comprehensive income (unaudited).........                                                                                     2,630
                                             -----    ------     ----------   ----------     ---------     -----------    ---------

Balances, September 30, 2002 (unaudited).    1,000    $    -     $  100,543   $    1,297     $     (73)    $   (15,730)   $  86,037
                                             ======   ======     ==========   ==========     =========     ===========    =========


</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, 2002    September 30, 2001
                                                                             ------------------    ------------------
                                                                                 (unaudited)           (unaudited)

<S>                                                                              <C>                   <C>
Cash flows from operating activities
   Net income........................................................            $     2,257           $       702
   Adjustments to reconcile net income to net cash used in
    operating activities:
     Depreciation and amortization of goodwill and other intangibles.                  1,855                 2,600
     Amortization of debt issuance cost..............................                    161                   147
     Deferred income taxes...........................................                   (160)                 (411)
     Other...........................................................                   (336)                  425
     Changes in operating assets and liabilities:
       Accounts receivable...........................................                    235               (10,287)
       Inventory.....................................................                 (1,748)                 (760)
       Prepaid expenses, deferred charges and other assets...........                   (543)                 (132)
       Accounts payable and accrued expenses.........................                 (5,669)               (3,832)
       Income taxes..................................................                    446                   922
                                                                                 -----------           -----------

         Net cash used in operating activities.......................                 (3,502)              (10,626)
                                                                                 -----------           -----------

Cash flows from  investing activities
   Purchases of equipment............................................                   (828)                 (392)
   Patents...........................................................                    (32)                  (30)
                                                                                 -----------           -----------

         Net cash used in investing activities.......................                   (860)                 (422)
                                                                                 -----------           -----------

Cash flows from  financing activities
   Payments under capital leases.....................................                      -                    (7)
   Net proceeds on revolving loan....................................                  3,925                 6,500
   Payment on term loan..............................................                   (250)                    -
   Net proceeds from promissory note to affiliate....................                    355                   350
                                                                                 -----------           -----------

         Net cash provided by financing activities...................                  4,030                 6,843
                                                                                 -----------           -----------

Net decrease in cash and cash equivalents............................                   (332)               (4,205)
Cash and cash equivalents, beginning of period.......................                  1,875                 4,654
                                                                                 -----------           -----------

Cash and cash equivalents, end of period.............................            $     1,543           $       449
                                                                                 ===========           ===========


Supplemental information
  Cash paid during the period for:
     Interest, other.................................................            $     5,706           $     5,507
     Income taxes....................................................                  1,179                   848


</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  and
     Baltimore,  Maryland  facilities  and  distributes  its  products in Europe
     through its French subsidiary, Arcade Europe S.A.R.L.

     Recently Issued Accounting Standards

          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  adoption of SFAS 142  eliminates  the  amortization  of
     goodwill,  approximately  $4,800 in the fiscal  year  ended June 30,  2002,
     while  requiring  annual tests for  impairment of goodwill.  The Company is
     currently  in the process of analyzing  the carrying  value of goodwill and
     does not expect to identify a material impairment.

          FASB Statement of Financial  Accounting  Standards No. 145 "Rescission
     of FASB  Statements No. 4, 44, and 64,  Amendment of FASB Statement No. 13,
     and Technical  Corrections" ("SFAS 145") was issued in April 2002. The most
     significant aspects of this pronouncement,  with respect to the Company, is
     the  elimination  of  SFAS  No.  4,   "Reporting   Gains  and  Losses  from
     Extinguishment  of  Debt".  As a result of the  elimination  of SFAS No. 4,
     gains and  losses  from  extinguishment  of debt  should be  classified  as
     extraordinary  items  only  if  they  meet  the  criteria  in APB  No.  30,
     "Reporting   the  Results  of   Operations   -   Discontinued   Events  and
     Extraordinary  Items".  The  implementation  of SFAS No.  145 will  require
     future early  retirements of debt to be included in income from  operations
     which could materially  affect income from  operations.  In the fiscal year
     ended  June  30,  2002  the  Company   reported   an   approximate   $2,700
     extraordinary gain from early retirement of debt, net of tax.


     Acquisition of Color Prelude business

          On December 18,  2001,  the Company  acquired  the business  including
     certain  assets and assumed  certain  liabilities  of Color  Prelude,  Inc.
     ("CP")  for  $19,423  including  direct  acquisition  costs  of  $540.  The
     acquisition  was accounted  for using the purchase  method of accounting in
     accordance with Statement of Financial Accounting Standards (SFAS) No. 141,
     "Business  Combinations".  The  purchase  price has been  allocated  to the
     assets and liabilities  acquired using estimated fair values at the date of
     acquisition and resulted in assigning value to goodwill totaling $407 which
     will not be amortized in accordance with Statement of Financial  Accounting
     Standards  (SFAS) No. 142,  "Goodwill  and Other  Intangible  Assets".  The
     following shows the allocation of the purchase price.


<PAGE>


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

1.   BASIS OF PRESENTATION (continued)


          Cash.............................................    $       1
          Other current assets.............................        5,680
          Property, plant and equipment....................        7,695
          Patents..........................................        7,750
          Other intangible assets..........................        1,069
          Goodwill.........................................          407
                                                               ---------

          Total allocation to assets.......................    $  22,602
                                                               =========

          Current liabilities..............................    $   3,179
                                                               =========

          Patents  are  being  amortized  over  a  ten  year  period  and  other
     intangible assets are being amortized over periods ranging from one to four
     years.

          The results of the acquired  operations  are included in the financial
     statements  since the date of acquisition.  The following pro forma results
     include cost savings and other effects of the planned  integration  and are
     not necessarily  indicative of the results which would have occurred if the
     business  combination had been in effect on the dates indicated.  Pro forma
     results  had CP been  acquired  at the  beginning  of  fiscal  2001  are as
     follows:

                                                          Three months ended
                                                             September 30,
                                                             -------------
                                                           2002         2001
                                                           ----         ----

          Revenue  ..................................  $  30,400    $  29,828
          Income (loss) before extraordinary items...      2,257          410
          Net income (loss)..........................      2,257          410


     Interim financial statements

          The interim consolidated condensed balance sheet at September 30, 2002
     and the interim  consolidated  condensed  statements of operations  for the
     three months ended  September 30, 2002 and 2001,  the interim  consolidated
     condensed statements of cash flows for the three months ended September 31,
     2002 and 2001 and the interim  consolidated  condensed statement of changes
     in  stockholder's  equity for the three months ended September 30, 2002 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,
     2002  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.


<PAGE>


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

2.   INVENTORY

          The following table details the components of inventory:

                                          September 30, 2002     June 30, 2002
                                          ------------------     -------------
                                              (unaudited)          (unaudited)
         Raw materials
             Paper......................      $     1,982          $     2,180
             Other raw materials........            4,928                4,216
                                              -----------          -----------
                 Total raw materials....            6,910                6,396
         Work in process................            3,702                2,468
         Reserve for obsolescence.......             (850)                (850)
                                              -----------          -----------

         Total inventory................      $     9,762          $     8,014
                                              ===========          ===========


3.   SUBSEQUENT EVENT

          On October 15, 2002, AKI paid a  distribution  of $3,192 to Holding to
     fund the purchase of Holding Senior Discount  Debentures.  The distribution
     was  funded  through  borrowings  under the  amended  and  restated  credit
     agreement.


<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.  and the term "CP"  refers to the  business  acquired  from Color
Prelude, Inc.

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
long-standing relationships with the majority of our customer base.

Results of Operations

         Three Months Ended September 30, 2002 Compared to Three Months
                            Ended September 30, 2001

     Net  Sales.  Net  sales for the  three  months  ended  September  30,  2002
increased $3.0 million, or 11.0%, to $30.4 million, as compared to $27.4 million
for the three months  ended  September  30, 2001.  The increase in net sales was
primarily  attributable  to sales of sampling  technologies  for advertising and
marketing of cosmetics by CP.

     Gross  Profit.  Gross profit for the three months ended  September 30, 2002
increased $1.2 million, or 11.2%, to $11.9 million, as compared to $10.7 million
for three months ended  September 30, 2001.  Gross profit as a percentage of net
sales was 39.1% in the three  months  ended  September  30,  2002 and 2001.  The
increase in gross profit is primarily due to the increase in sales volume.

     Selling,  General  and  Administrative   Expenses.   Selling,  general  and
administrative  expenses for the three months ended September 30, 2002 increased
$0.5 million,  or 11.9%,  to $4.7  million,  as compared to $4.2 million for the
three  months ended  September  30, 2001.  Selling,  general and  administrative
expenses as a percent of net sales  increased to 15.5% in the three months ended
September 30, 2002, from 15.3% in the three months ended September 30, 2001. The
increase in selling, general and administrative expenses is primarily related to
the CP operations.

     Amortization  of  Goodwill.  Amortization  of goodwill for the three months
ended September 30, 2002 decreased $1.2 million,  or 100%, to $0, as compared to
$1.2  million for the three  months ended  September  30, 2001.  The decrease in
amortization  of  goodwill  resulted  from the  adoption  of FASB  Statement  of
Financial  Accounting Standards No. 142, "Goodwill and Other Intangible Assets".
We are currently in the process of analyzing the carrying  value of goodwill and
do not expect to identify a material impairment.

     Income from  Operations.  Income from operations for the three months ended
September  30, 2002  increased  $1.9  million,  or 38.0%,  to $6.9  million,  as
compared to $5.0 million for the three months ended  September 30, 2001.  Income
from  operations  as a percentage  of net sales  increased to 22.7% in the three
months ended  September 30, 2002, from 18.3% in the three months ended September
30, 2001. The increase in income from operations and income from operations as a
percentage of net sales is principally the result of the factors described above
and the $1.2 million decrease in amortization of goodwill in connection with the
adoption of FASB Statement of Financial  Accounting Standards No. 142, "Goodwill
and Other Intangible Assets".

     Interest Expense. Interest expense for the three months ended September 30,
2002  decreased  $0.2 million,  or 5.4%,  to $3.7  million,  as compared to $3.9
million for the three months ended  September 30, 2001. The decrease in interest
expense,  including the  amortization of deferred  financing costs, is primarily
due to a  decrease  in  interest  expense  related to  retired  Senior  Discount
Debentures repurchased in April 2002 partially offset by interest payable


<PAGE>


on the term  loan  incurred  in  connection  with the CP  acquisition.  Interest
expense as a  percentage  of net sales  decreased  to 12.2% in the three  months
ended September 30, 2002, from 14.2%.

     Interest  expense for AKI for the three  months  ended  September  30, 2002
increased  $0.2 million,  or 6.7%, to $3.2 million,  as compared to $3.0 million
for the three months ended September 30, 2001. The increase in interest expense,
including the  amortization  of deferred  financing  costs,  is primarily due to
interest   payable  on  the  term  loan  incurred  in  connection  with  the  CP
acquisition. Interest expense as a percentage of net sales decreased to 10.5% in
the three months ended September 30, 2002, from 11.0%.

     Income Tax Expense. Income tax expense for the three months ended September
30, 2002  increased  $0.3 million to $1.2 million.  The Company's  effective tax
rate, after consideration of non-deductible  goodwill  amortization,  was 39% in
the three months  ended  September  30, 2002,  and 41% in the three months ended
September 30, 2001.

     Income tax expense for AKI for the three  months ended  September  30, 2002
increased  $0.2  million  to $1.4  million.  AKI's  effective  tax  rate,  after
consideration  of  non-deductible  goodwill  amortization,  was 39% in the three
months ended September 30, 2002 and 2001.

     EBITDA. EBITDA for the three months ended September 30, 2002 increased $1.2
million,  or 15.8%,  to $8.8 million,  as compared to $7.6 million for the three
months ended September 30, 2001. The increase in EBITDA principally reflects the
increase in gross profit  partially  offset by the increase in selling,  general
and administrative expenses discussed above. EBITDA as a percentage of net sales
was 28.9%  and 27.7% in the three  months  ended  September  30,  2002 and 2001,
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, 2002,  we had  consolidated  indebtedness  in an aggregate
amount  of  $136.2  million  (excluding  trade  payables,  accrued  liabilities,
deferred taxes and other non-current liabilities),  of which approximately $16.4
million  was a direct  obligation  of Holding  relating  to its  debentures  and
approximately  $119.8  million was a direct  obligation  of AKI  relating to its
notes, term loan, revolving loan and promissory note to affiliate. Borrowings at
September  30, 2002  included  $6.7 million  under the  revolving  loan and $9.3
million under the term loan which was incurred to acquire CP and $0.4 million on
the  promissory  note to  affiliate.  At September 30, 2002 we had $13.0 million
available  under the revolving  loan. At September 30, 2002,  AKI also had $19.9
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, term loan and revolving
loan.  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  the  revolving  loan and  promissory  note to
affiliate.  During the three months ended September 30, 2002, cash totaling $3.5
million  was used by  operating  activities  primarily  due to the  increase  in
inventory and a decrease in accrued interest,  accrued compensation and accounts
payable,  offset partially by an increase in accrued expenses.  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.

     On December  18, 2001 we amended and  restated  our credit  agreement  with
Heller  Financial,  Inc.  ("restated  credit  agreement").  The restated  credit
agreement  provides for: (1) a $10.0 million term loan which matures on December
31, 2006 with varying quarterly principal  installments beginning March 31, 2002
and (2) a  revolving  loan  commitment  up to a maximum of $20.0  million  which
expires  December 31, 2006.  Borrowings  under the revolving loan commitment are
limited to a borrowing  base  consisting of accounts  receivable,  inventory and
property,  plant and  equipment  which serve as collateral  for the  borrowings.
Interest on amounts  borrowed under the term loan and revolving loan accrue at a
floating  rate based upon either prime or LIBOR.  The Company is required to pay
commitment  fees on the unused  portion of the  revolving  loan  commitment.  In
addition, the


<PAGE>


Company is required to pay fees equal to 2.5% of the average  daily  outstanding
amount of lender  guarantees.  The Company had $0.3 million of lender guarantees
outstanding at September 30, 2002.

     In the three  months  ended  September  30,  2002 and 2001,  we had capital
expenditures of approximately $0.8 million and $0.4 million, respectively. These
capital  expenditures  consisted  primarily  of the  purchase  of  manufacturing
equipment and upgrading our computer systems.

     On December 18, 2001, we acquired, through a newly formed subsidiary,  IST,
Corp., CP for an aggregate  purchase price of approximately  $19.1 million.  The
purchase price was financed  primarily by borrowings  under the restated  credit
agreement.

     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 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.

     On October 15, 2002, Holding  purchased,  with proceeds from a distribution
from AKI, it's 13.5% Senior  Discount  Debentures due 2009 with a carrying value
of $3.4 million for $3.2 million. AKI funded the distribution through borrowings
under it's credit agreement. The effects of this transaction will be included in
the Company's second quarter.

     Capital  expenditures  for the  twelve  months  ending  June  30,  2003 are
currently  estimated  to be  approximately  $4.0  million.  Based on  borrowings
outstanding  as of September  30, 2002,  we expect total cash  payments for debt
service for the twelve  months  ending June 30, 2003 to be  approximately  $13.4
million,  consisting of $1.4 million in principal  payments under the term loan,
$10.9 million in interest payments on the notes and $1.1 million in interest and
fees under the credit  agreement.  We also  expect to make  royalty  payments of
approximately $1.1 million during the twelve months ending June 30, 2003.

     At September 30, 2002,  Holding's cash and cash equivalents and net working
capital  were $1.5  million  and $18.3  million,  respectively,  representing  a
decrease  in cash and cash  equivalents  of $0.4  million and an increase in net
working  capital of $6.7  million  from June 30,  2002.  The increase in working
capital is primarily  due to the  reduction of current  liabilities  principally
funded through increased draws against the revolving credit line.

Seasonality

     Our  sales and  operating  results  have  historically  reflected  seasonal
variations.  Such seasonal  variations are based on the timing of our customers'
advertising  campaigns  and  product  launches,  which have  traditionally  been
concentrated  prior to the Christmas and spring  holiday  seasons.  As a result,
generally,  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.  The
severity of our seasonal  sales  variations  has decreased  over time as we have
developed and acquired other sampling technologies for advertising and marketing
of cosmetic and consumer products.

Recently Issued Accounting Standards

     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 adoption of
SFAS 142 eliminates the amortization of goodwill,  approximately $4.8 million in
fiscal 2002 and requires annual tests for impairment of goodwill.

     FASB Statement of Financial  Accounting  Standards No. 144  "Accounting for
the  Impairment  of Disposal of  Long-Lived  Assets"  ("SFAS 144") was issued in
August 2001. SFAS 144 requires that long-lived assets that are to be disposed of
by sale be  measured at the lower of book value or fair value less cost to sell.
SFAS 144 is


<PAGE>


effective  for  financial  statements  issued for fiscal years  beginning  after
December 15, 2001. The Company does not expect a material impact in implementing
SFAS 144 on its future financial statements.

     FASB  Statement of Financial  Accounting  Standards No. 145  "Rescission of
FASB  Statements  No. 4, 44, and 64,  Amendment  of FASB  Statement  No. 13, and
Technical  Corrections"  ("SFAS  145")  was  issued  in  April  2002.  The  most
significant aspects of this  pronouncement,  with respect to the Company, is the
elimination of SFAS No. 4, "Reporting  Gains and Losses from  Extinguishment  of
Debt".  As a result of the  elimination  of SFAS No. 4,  gains and  losses  from
extinguishment of debt should be classified as extraordinary  items only if they
meet the  criteria  in APB No.  30,  "Reporting  the  Results  of  Operations  -
Discontinued Events and Extraordinary Items". The implementation of SFAS No. 145
will require early  retirements of debt to be included in income from continuing
operations which could materially affect our income from continuing  operations.
In fiscal 2002 the Company  reported an approximate  $2.7 million  extraordinary
gain from early retirement of debt, net of tax.

     FASB Statement of Financial  Accounting  Standards No. 146  "Accounting for
Costs  Associated with Exit or Disposal  Activities"  ("SFAS 146") was issued in
June 2002.  SFAS 146  addresses  financial  accounting  and  reporting for costs
associated with exit or disposal  activities.  SFAS 146 is effective for exit or
disposal  activities  that are initiated  after  December 31, 2002.  The Company
adopted SFAS 146 in fiscal 2002 and did not consider the impact to be material.

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: (1) economic conditions in general and
in our specific market areas;  (2) the significant  indebtedness of our company;
(3) changes in operating  strategy or  development  plans;  (4) the  competitive
environment  in the  sampling  industry  in general and in our  specific  market
areas;  (5) changes in prevailing  interest rates;  (6) changes in or failure to
comply with postal  regulations or other federal,  state and/or local government
regulations;  (7)  changes  in cost of goods and  services;  (8)  changes in our
capital  expenditure  plans;  (9) the  ability to attract  and retain  qualified
personnel;  (10) inflation; (11) liability and other claims asserted against us;
(12)  labor  disturbances  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 24, 2002.

     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 to 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  25% 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.


<PAGE>


     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, 2002, there were no forward
exchange contracts outstanding.

ITEM 4.  CONTROLS AND PROCEDURES

     (a) Evaluation of Disclosure  Controls and Procedures.  The Company's chief
executive  officer and chief financial  officer have evaluated the effectiveness
of the design and operation of the Company's  disclosure controls and procedures
(as defined in Exchange Act Rule  13a-14(c))  as of a date within 90 days of the
filing  date of this  quarterly  report.  Based on that  evaluation,  the  chief
executive  officer and chief financial officer have concluded that the Company's
disclosure  controls  and  procedures  are  effective  to ensure  that  material
information relating to the Company and the Company's consolidated  subsidiaries
is made known to such  officers by others  within these  entities,  particularly
during the period this quarterly  report was prepared,  in order to allow timely
decisions regarding required disclosure.

     (b)  Changes in  Internal  Controls.  There  have not been any  significant
changes  in the  Company's  internal  controls  or in other  factors  that could
significantly affect these controls subsequent to the date of their evaluation.


                            PART II OTHER INFORMATION

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

     On September 11, 2002, by unanimous  written  consent,  each of Holding and
AKI held its respective annual meeting of stockholders to vote upon the election
of directors. The stockholder in each case voted to elect Thompson Dean, William
Fox, David Wittels,  Hugh  Kirkpatrick and David Durkin to serve as directors of
each of Holding and AKI until the next annual meeting or until their  successors
are elected and duly qualified.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits

         Exhibit 99.1     Certification pursuant to 18 U.S.C. Section 1350, as
                          adopted pursuant to Section 906 of the Sarbanes-Oxley
                          Act of 2002

         Exhibit 99.2     Certification pursuant to 18 U.S.C. Section 1350, as
                          adopted pursuant to Section 906 of the Sarbanes-Oxley
                          Act of 2002

     (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 12, 2002               By:  /s/ Kenneth A. Budde
                                            -----------------------------------
                                            Kenneth A. Budde
                                            Senior Vice President &
                                              Chief Financial Officer
                                              (Principal Financial and
                                               Accounting Officer)


                                 CERTIFICATIONS

I, William J. Fox, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of AKI Holding Corp.;

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

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

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

     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during  the  period in which  this  quarterly
          report  is being  prepared;
     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this quarterly report (the "Evaluation Date"); and
     c)   presented  in  this  quarterly   report  our  conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

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

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and
     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     quarterly report whether or not there were significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls


<PAGE>


     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.


Date     November 12, 2002


/s/ William J. Fox
-----------------------
William J. Fox
Chief Executive Officer


I, Kenneth A. Budde, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of AKI Holding Corp.;

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

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

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

     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during  the  period in which  this  quarterly
          report is being prepared;
     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this quarterly report (the "Evaluation Date"); and
     c)   presented  in  this  quarterly   report  our  conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

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

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and
     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

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


Date     November 12, 2002


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


<PAGE>


                                       AKI, INC.

Date:  November 12, 2002               By:  /s/ Kenneth A. Budde
                                            -----------------------------------
                                            Kenneth A. Budde
                                            Senior Vice President &
                                              Chief Financial Officer
                                              (Principal Financial and
                                               Accounting Officer)


                                 CERTIFICATIONS

I, William J. Fox, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of AKI, Inc.;

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

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

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

     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during  the  period in which  this  quarterly
          report is being prepared;
     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this quarterly report (the "Evaluation Date"); and
     c)   presented  in  this  quarterly   report  our  conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

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

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and
     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

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


<PAGE>


Date     November 12, 2002


/s/ William J. Fox
-----------------------
William J. Fox
Chief Executive Officer


I, Kenneth A. Budde, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of AKI, Inc.;

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

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

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

     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during  the  period in which  this  quarterly
          report is being prepared;
     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this quarterly report (the "Evaluation Date"); and
     c)   presented  in  this  quarterly   report  our  conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

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

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and
     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

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


Date     November 12, 2002


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