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 December 31, 2002

                                       OR

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

           For the transition period from ___________ to _____________

                        Commission File Number: 333-60991

                                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 January 31, 2003, 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

                       -  December 31, 2002
                       -  June 30, 2002

                       Consolidated Condensed Statements of Operations

                       -  Three months ended December 31, 2002
                       -  Three months ended December 31, 2001
                       -  Six months ended December 31, 2002
                       -  Six months ended December 31, 2001

                       Consolidated Condensed Statement of Changes in
                       Stockholder's Equity

                       -  Six months ended December 31, 2002

                       Consolidated Condensed Statements of Cash Flows

                       -  Six months ended December 31, 2002
                       -  Six months ended December 31, 2001

                       Notes to Consolidated Condensed Financial Statements


<PAGE>


         Item 1.  Financial Statements (unaudited) (continued)

                  AKI, Inc. and Subsidiaries

                       Consolidated Condensed Balance Sheet

                       -  December 31, 2002
                       -  June 30, 2002

                       Consolidated Condensed Statements of Operations

                       -  Three months ended December 31, 2002
                       -  Three months ended December 31, 2001
                       -  Six months ended December 31, 2002
                       -  Six months ended December 31, 2001

                       Consolidated Condensed Statement of Changes in
                       Stockholder's Equity

                       -  Six months ended December 31, 2002

                       Consolidated Condensed Statements of Cash Flows

                       -  Six months ended December 31, 2002
                       -  Six months ended December 31, 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>

                                                                                December 31,          June 30,
                                                                                    2002                2002
                                                                                -------------      -------------
                                                                                 (unaudited)        (unaudited)

<S>                                                                             <C>                <C>
ASSETS
Current assets
Cash and cash equivalents..................................................     $       1,771      $       1,875
Accounts receivable, net...................................................            19,336             23,796
Inventory..................................................................             7,479              8,014
Prepaid expenses...........................................................             1,204                667
Income tax receivable......................................................             1,720                  -
Deferred income taxes......................................................               977                977
                                                                                -------------      -------------

   Total current assets....................................................            32,487             35,329

Property, plant and equipment, net.........................................            18,165             19,616
Goodwill, net..............................................................           153,277            153,277
Other intangible assets, net...............................................            12,237             13,142
Deferred charges, net......................................................             3,668              4,059
Deferred income taxes......................................................               882                692
Other assets...............................................................               174                164
                                                                                -------------      -------------

   Total assets............................................................     $     220,890      $     226,279
                                                                                =============      =============

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of long-term debt..........................................     $       1,750      $       1,375
Accounts payable, trade....................................................             3,976              5,826
Accrued income taxes.......................................................                 -              2,007
Accrued compensation.......................................................             3,394              5,338
Accrued interest...........................................................             5,573              5,570
Accrued expenses...........................................................             3,824              3,642
                                                                                -------------      -------------

   Total current liabilities...............................................            18,517             23,758

Revolving credit line......................................................             2,500              2,750
Term loan..................................................................             7,250              8,125
Senior notes...............................................................           103,510            103,510
Promissory note to affiliate...............................................               355                  -
Senior discount debentures.................................................            13,461             15,901
Other non-current liabilities..............................................             1,656              2,338
                                                                                -------------      -------------

   Total liabilities.......................................................           147,249            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........................................................            (4,205)            (7,583)
Accumulated other comprehensive loss.......................................               (80)              (446)
Carryover basis adjustment.................................................           (15,730)           (15,730)
                                                                                -------------      -------------

   Total stockholder's equity..............................................            73,641             69,897
                                                                                -------------      -------------


   Total liabilities and stockholder's equity..............................     $     220,890      $     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                          Six months ended
                                                  --------------------------------------     --------------------------------------
                                                  December 31, 2002    December 31, 2001     December 31, 2002    December 31, 2001
                                                  -----------------    -----------------     -----------------    -----------------
                                                     (unaudited)          (unaudited)           (unaudited)          (unaudited)

<S>                                                   <C>                  <C>                    <C>                <C>
Net sales......................................       $  31,644            $  22,329             $  62,044            $  49,710
Cost of goods sold.............................          20,704               15,929                39,219               32,643
                                                      ---------            ---------             ---------            ---------

   Gross profit................................          10,940                6,400                22,825               17,067

Selling, general and administrative expenses...           4,740                4,569                 9,404                8,764
Amortization of goodwill.......................               -                1,202                     -                2,403
Amortization of other intangibles..............             286                  268                   572                  513
                                                      ---------            ---------             ---------            ---------

   Income from operations......................           5,914                  361                12,849                5,387

Other (income) expenses:
   Interest expense............................           3,675                3,865                 7,413                7,736
   Management fees and other, net..............              62                   62                   125                  125
   Gain from early retirement of debt..........            (144)                   -                  (144)                   -
                                                      ---------            ---------             ---------            ---------

   Income (loss) before income taxes...........           2,321               (3,566)                5,455               (2,474)

Income tax expense (benefit)...................             830                 (869)                2,077                   77
                                                      ---------            ---------             ---------            ---------

   Net income (loss)...........................       $   1,491            $  (2,697)            $   3,378            $  (2,551)
                                                      =========            =========             =========            =========


</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)....................                                          3,378                                     3,378

Other comprehensive income, net of tax:
   Foreign currency translation
     adjustment (unaudited)...............                                                          366                         366
                                                                                                                          ---------

Comprehensive income (unaudited)..........                                                                                    3,744
                                             -----    -------      ---------    ---------      --------      ---------    ---------

Balances, December 31, 2002 (unaudited)...   1,000    $     -      $  93,656    $  (4,205)     $    (80)     $ (15,730)   $  73,641
                                             =====    =======      =========    =========      ========      =========    =========


</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>
                                                                                            Six months ended
                                                                                 ---------------------------------------
                                                                                 December 31, 2002     December 31, 2001
                                                                                 -----------------     -----------------
                                                                                    (unaudited)           (unaudited)

<S>                                                                                 <C>                   <C>
Cash flows from operating activities
   Net income (loss)....................................................            $    3,378            $   (2,551)
   Adjustments to reconcile net income (loss) to net cash provided by
   operating activities:
     Depreciation and amortization of goodwill and other intangibles....                 3,724                 5,258
     Amortization of debt discount......................................                   981                 1,614
     Amortization of debt issuance costs................................                   306                   335
     Deferred income taxes..............................................                  (190)                 (756)
     Gain from early retirement of debt.................................                  (144)                    -
     Other..............................................................                  (326)                  403
     Changes in operating assets and liabilities:
       Accounts receivable..............................................                 4,460                 1,325
       Inventory........................................................                   535                   320
       Prepaid expenses, deferred charges and other assets..............                  (537)                   43
       Accounts payable and accrued expenses............................                (3,609)               (2,885)
       Income taxes.....................................................                (3,727)               (2,889)
                                                                                    ----------            ----------

         Net cash provided by operating activities......................                 4,851                   217
                                                                                    ----------            ----------

Cash flows from  investing activities
   Purchases of equipment...............................................                (1,297)                 (470)
   Patents..............................................................                   (71)                  (46)
   Payments for acquisition, net of cash acquired.......................                     -               (19,053)
                                                                                    ----------            ----------

         Net cash used in investing activities..........................                (1,368)              (19,569)
                                                                                    ----------            ----------

Cash flows from financing activities
   Payments under capital leases .......................................                     -                  (503)
   Repayment of long-term debt..........................................                (3,192)                    -
   Net proceeds (repayments) on revolving loan..........................                  (250)                7,700
   Net proceeds (repayments) on term loan...............................                  (500)               10,000
   Payments of loan closing costs.......................................                     -                  (605)
   Net proceeds from promissory note to stockholder.....................                   355                     -
                                                                                    ----------            ----------

         Net cash provided by (used in) financing activities............                (3,587)               16,592
                                                                                    ----------            ----------

Net decrease in cash and cash equivalents...............................                  (104)               (2,760)
Cash and cash equivalents, beginning of period..........................                 1,875                 4,654
                                                                                    ----------            ----------

Cash and cash equivalents, end of period................................            $    1,771            $    1,894
                                                                                    ==========            ==========

Supplemental information
  Cash paid during the period for:
     Interest...........................................................            $    5,980            $    5,617
     Income taxes.......................................................                 6,092                 3,763


</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 an initial test and subsequent  annual tests for impairment
     of goodwill.  The Company  completed its initial test of the carrying value
     of goodwill which resulted in no 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 gains
     or losses resulting from future early retirements of debt to be included in
     other income and  expenses  which could  materially  affect  income  before
     income taxes. In the period ended December 31, 2002 the Company reported an
     approximate  $144 gain from early  retirement  of debt.  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.

          FASB Statement of Financial  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 and nullifies  Emerging Issues
     Task  Force  (EITF)  Issue No.  94-3,  Liability  Recognition  for  Certain
     Employee Termination Benefits and Other Costs to Exit an Activity. SFAS 146
     requires  that a liability for a cost  associated  with an exit or disposal
     activity be recognized  and measured  initially at fair value only when the
     liability  is  incurred.  SFAS  146  is  effective  for  exit  or  disposal
     activities that are initiated after December 31, 2002. The Company does not
     anticipate  that the  provisions  of this  statement  will have a  material
     impact on the Company's reported results of operations, financial positions
     or cash flows.

          FASB  Interpretation  No. 45  "Guarantor's  Accounting  and Disclosure
     Requirements for Guarantees,  Including Indirect Guarantees of Indebtedness
     of Others" ("FIN 45") was issued in November 2002. FIN 45 elaborates on the
     disclosures  to be made by a guarantor in its interim and annual  financial
     statements  about its  obligations  under  certain  guarantees  that it has
     issued.  It also requires the  guarantor to recognize,  at the inception of
     the guarantee,  a liability for the fair value of obligation  undertaken in
     issuing the  guarantee.  The  disclosure  requirements  are  effective  for
     quarters ending after December 15, 2002 and the liability recognition is in
     effect for guarantees  initiated  after December 31, 2002. The Company does
     not anticipate that the

<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)

     provisions of this statement  will have a material  impact on the Company's
     reported results of operations, financial positions or cash flows.

          FASB  Statement  of  Financial   Standards  No.  148  "Accounting  for
     Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB
     Statement  No. 123"  ("SFAS  148") was issued in  December  2002.  FASB 148
     amends FASB  Statement  of  Financial  Standards  No. 123  "Accounting  for
     Stock-Based  Compensation"  ("FASB 123"), to provide alternative methods of
     transition  for a  voluntary  change  to the fair  value  based  method  of
     accounting for stock-based  employee  compensation.  In addition,  FASB 148
     amends  the  disclosure  requirements  of  FASB  123 to  require  prominent
     disclosures  in both  annual and  interim  financial  statements  about the
     method of accounting for stock-based  employee  compensation and the effect
     of the method used on reported  results.  The Company  does not  anticipate
     that the provisions of this  statement  will have a material  impact on the
     reported results of operations, financial positions or cash flows.

     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.


             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.

     Interim financial statements

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


<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)

     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.  The interim
     consolidated  condensed financial  statements should be read in conjunction
     with the financial statements and notes thereto for the year ended June 30,
     2002 as filed on Form 10-K.

     Reclassification

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

2.   INVENTORY

          The following table details the components of inventory:


<TABLE>
<CAPTION>

                                                         December 31, 2002       June 30, 2002
                                                         -----------------       -------------
                                                            (unaudited)            (unaudited)
              <S>                                           <C>                    <C>
              Raw materials
                  Paper..........................           $    2,044             $    2,180
                  Other raw materials............                2,873                  4,216
                                                            ----------             ----------
                      Total raw materials........                4,917                  6,396
              Work in process....................                3,205                  2,468
              Reserve for obsolescence...........                 (643)                  (850)
                                                            ----------             ----------

              Total inventory....................           $    7,479             $    8,014
                                                            ==========             ==========

</TABLE>


3.   RETIREMENT OF DEBT

          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.  In accordance with SFAS 145, the
     gain from early retirement of debt is included in other income.

4.   AMORTIZATION OF GOODWILL

          In accordance with SFAS 142 goodwill is no longer being amortized. The
     following pro forma amounts reflect  goodwill  amortization  and net income
     had SFAS 142 been implemented at the beginning of fiscal 2002:

<TABLE>
<CAPTION>


                                                           Three months ended            Six months ended
                                                              December 31,                 December 31,
                                                           2002          2001           2002          2001
                                                           ----          ----           ----          ----

       <S>                                               <C>           <C>            <C>           <C>
       Goodwill amortization......................       $     -       $     -        $     -       $     -
       Net income (loss)..........................         1,491        (1,495)         3,378          (148)


</TABLE>


<PAGE>


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

5.   CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS

          The following  condensed  balance sheets at December 31, 2002 and June
     30, 2002 and condensed  statements of operations and cash flows for the six
     months  ended  December  31, 2002 and 2001 and the  condensed  statement of
     changes in stockholder's  equity for the six months ended December 31, 2002
     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>

                                                                     December 31, 2002       June 30, 2002
                                                                     -----------------       -------------
                                                                        (unaudited)           (unaudited)

<S>                                                                    <C>                   <C>
     Assets
     Investment in subsidiaries...............................         $   100,281           $    99,583
     Income tax receivable....................................                 526                    46
     Deferred charges.........................................                 313                   422
     Deferred income taxes....................................               1,792                 1,923
                                                                       -----------           -----------

         Total assets.........................................         $   102,912           $   101,974
                                                                       ===========           ===========

     Liabilities
     Senior discount debentures...............................         $    13,461           $    15,901
                                                                        ----------           -----------

         Total liabilities....................................              13,461                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......................................              (4,205)               (7,583)
                                                                       -----------           -----------

         Total stockholder's equity...........................              89,451                86,073
                                                                       -----------           -----------

         Total liabilities and stockholder's equity...........         $   102,912           $   101,974
                                                                       ===========           ===========


</TABLE>


                             STATEMENT OF OPERATIONS


<TABLE>
<CAPTION>

                                                                                Six months ended
                                                                     ---------------------------------------
                                                                     December 31, 2002     December 31, 2001
                                                                     -----------------     -----------------
                                                                        (unaudited)           (unaudited)

<S>                                                                     <C>                   <C>
     Equity in net income (loss) of subsidiaries..............          $     3,890           $    (1,438)
     Interest expense.........................................                1,005                 1,654
     Gain from early retirement of debt.......................                  144                     -
                                                                        -----------           -----------

         Income (loss) before income taxes....................                3,029                (3,092)

     Income tax benefit.......................................                 (349)                 (541)
                                                                        -----------           -----------

         Net income (loss)....................................          $     3,378           $    (2,551)
                                                                        ===========           ===========


</TABLE>


<PAGE>


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

5. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS (Continued)


                  STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY

<TABLE>
<CAPTION>

                                                                                Additional
                                                          Common Stock            Paid-in      Accumulated
                                                       Shares       Amount        Capital        Deficit          Total
                                                       ------       ------        -------        -------          -----

<S>                                                      <C>      <C>           <C>            <C>            <C>
     Balances, June 30, 2002 (unaudited)...........      1,000    $       -     $   93,656     $    (7,583)   $    86,073

     Net income (unaudited)........................                                                  3,378          3,378
                                                       -------    ---------     ----------     -----------    -----------

     Balances, December 31, 2002 (unaudited).......      1,000    $       -     $   93,656     $    (4,205)   $    89,451
                                                       =======    =========     ==========     ===========    ===========


</TABLE>


                             STATEMENT OF CASH FLOWS


<TABLE>
<CAPTION>

                                                                                     Six months ended
                                                                           ---------------------------------------
                                                                           December 31, 2002     December 31, 2001
                                                                           -----------------     -----------------
                                                                              (unaudited)           (unaudited)

<S>                                                                           <C>                   <C>
     Cash flows from operating activities
       Net income (loss).............................................         $     3,378           $    (2,551)
         Adjustments to reconcile net income (loss) to net cash
           provided by (used in) operating activities:
              Net change in investment in subsidiaries...............              (3,890)                1,438
              Amortization of debt discount..........................                 981                 1,614
              Amortization of debt issuance costs....................                  24                    40
              Income tax receivable..................................                (480)                    -
              Deferred income taxes..................................                 131                  (541)
              Gain from early retirement of debt.....................                (144)                    -
                                                                              -----------           -----------

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

     Cash flows from financing activities
       Repayment of long-term debt...................................              (3,192)                    -
       Distribution from subsidiary..................................               3,192                     -
                                                                              -----------           -----------
           Net cash provided by (used in) financing 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>

                                                                                December 31,          June 30,
                                                                                    2002                2002
                                                                                -------------      -------------
                                                                                 (unaudited)         (unaudited)

<S>                                                                             <C>                <C>
ASSETS
Current assets
Cash and cash equivalents..................................................     $       1,771      $       1,875
Accounts receivable, net...................................................            19,336             23,796
Inventory..................................................................             7,479              8,014
Prepaid expenses...........................................................             1,204                667
Income tax receivable......................................................             1,194                  -
Deferred income taxes......................................................               977                977
                                                                                -------------      -------------

   Total current assets....................................................            31,961             35,329

Property, plant and equipment, net.........................................            18,165             19,616
Goodwill, net..............................................................           153,277            153,277
Other intangible assets, net...............................................            12,237             13,142
Deferred charges, net......................................................             3,355              3,637
Other assets...............................................................               174                164
                                                                                -------------      -------------

   Total assets............................................................     $     219,169      $     225,165
                                                                                =============      =============

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of long-term debt..........................................     $       1,750      $       1,375
Accounts payable, trade....................................................             3,976              5,826
Accrued income taxes.......................................................                 -              2,053
Accrued compensation.......................................................             3,394              5,338
Accrued interest...........................................................             5,573              5,570
Accrued expenses...........................................................             3,824              3,642
                                                                                -------------      -------------

   Total current liabilities...............................................            18,517             23,804

Revolving credit line......................................................             2,500              2,750
Term loan..................................................................             7,250              8,125
Senior notes...............................................................           103,510            103,510
Promissory note to affiliate...............................................               355                  -
Deferred income taxes......................................................               910              1,231
Other non-current liabilities..............................................             1,656              2,338
                                                                                -------------      -------------

   Total liabilities.......................................................           134,698            141,758

Stockholder's equity
Common stock, $0.01 par 100,000 shares authorized;
   1,000 shares issued and outstanding.....................................                 -                  -
Additional paid-in capital.................................................            97,351            100,543
Accumulated deficit........................................................             2,930               (960)
Accumulated other comprehensive loss.......................................               (80)              (446)
Carryover basis adjustment.................................................           (15,730)           (15,730)
                                                                                --------------     -------------

   Total stockholder's equity..............................................            84,471             83,407
                                                                                -------------      -------------

   Total liabilities and stockholder's equity..............................     $     219,169      $     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                          Six months ended
                                                  --------------------------------------     --------------------------------------
                                                  December 31, 2002    December 31, 2001     December 31, 2002    December 31, 2001
                                                  -----------------    -----------------     -----------------    -----------------
                                                     (unaudited)          (unaudited)           (unaudited)          (unaudited)

<S>                                                   <C>                  <C>                   <C>                  <C>
Net sales......................................       $  31,644            $  22,329             $  62,044            $  49,710
Cost of goods sold.............................          20,704               15,929                39,219               32,643
                                                      ---------            ---------             ---------            ---------

   Gross profit................................          10,940                6,400                22,825               17,067

Selling, general and administrative expenses...           4,740                4,569                 9,404                8,764
Amortization of goodwill.......................               -                1,202                     -                2,403
Amortization of other intangibles..............             286                  268                   572                  513
                                                      ---------            ---------             ---------            ---------

   Income from operations......................           5,914                  361                12,849                5,387

Other expenses:
   Interest expense............................           3,220                3,038                 6,408                6,082
   Management fees and other, net..............              62                   62                   125                  125
                                                      ---------            ---------             ---------            ---------

   Income (loss) before income taxes...........           2,632               (2,739)                6,316                 (820)

Income tax expense (benefit)...................             999                 (599)                2,426                  618
                                                      ---------            ---------             ---------            ---------

   Net income (loss)...........................       $   1,633            $  (2,140)            $   3,890            $  (1,438)
                                                      =========            =========             =========            =========


</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

Distribution to AKI Holding Corp..........                            (3,192)                                                (3,192)

Net income (unaudited)....................                                          3,890                                     3,890

Other comprehensive income, net of tax:
   Foreign currency translation
     adjustment (unaudited)...............                                                          366                         366
                                                                                                                          ---------

Comprehensive income (unaudited)..........                                                                                    4,256
                                             -----    -------      ---------    ---------      --------      ---------    ---------

Balances, December 31, 2002 (unaudited)...   1,000    $     -      $  97,351    $   2,930      $    (80)     $ (15,730)   $  84,471
                                             =====    =======      =========    =========      ========      =========    =========


</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>

                                                                                            Six months ended
                                                                                 ---------------------------------------
                                                                                 December 31, 2002     December 31, 2001
                                                                                 -----------------     -----------------
                                                                                    (unaudited)           (unaudited)

<S>                                                                                 <C>                   <C>
Cash flows from operating activities
   Net income (loss)....................................................            $    3,890            $   (1,438)
   Adjustments to reconcile net income (loss) to net cash provided by
   operating activities:
     Depreciation and amortization of goodwill and other intangibles....                 3,724                 5,258
     Amortization of debt issuance cost.................................                   282                   295
     Deferred income taxes..............................................                  (321)                 (215)
     Other..............................................................                  (326)                  403
     Changes in operating assets and liabilities:
       Accounts receivable..............................................                 4,460                 1,325
       Inventory........................................................                   535                   320
       Prepaid expenses, deferred charges and other assets..............                  (537)                   43
       Accounts payable and accrued expenses............................                (3,609)               (2,885)
       Income taxes.....................................................                (3,247)               (2,889)
                                                                                    ----------            ----------

         Net cash provided by operating activities......................                 4,851                   217
                                                                                    ----------            ----------

Cash flows from  investing activities
   Purchases of equipment...............................................                (1,297)                 (470)
   Patents..............................................................                   (71)                  (46)
   Payments for acquisition, net of cash acquired.......................                     -               (19,053)
                                                                                    ----------            ----------

         Net cash used in investing activities..........................                (1,368)              (19,569)
                                                                                    ----------            ----------

Cash flows from  financing activities
   Payments under capital leases........................................                     -                  (503)
   Net proceeds on revolving loan.......................................                  (250)                7,700
   Net proceeds (repayments) on term loan...............................                  (500)               10,000
   Payments of loan closing costs.......................................                     -                  (605)
   Net proceeds from promissory note to affiliate.......................                   355                     -
   Distribution to parent...............................................                (3,192)                    -
                                                                                    ----------            ----------

         Net cash provided by (used in) financing activities............                (3,587)               16,592
                                                                                    ----------            ----------

Net decrease in cash and cash equivalents...............................                  (104)               (2,760)
Cash and cash equivalents, beginning of period..........................                 1,875                 4,654
                                                                                    ----------            ----------

Cash and cash equivalents, end of period................................            $    1,771            $    1,894
                                                                                    ==========            ==========


Supplemental information
  Cash paid during the period for:
     Interest..........................................................             $    5,980            $    5,617
     Income taxes......................................................                  6,092                 3,763


</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 an initial test and subsequent  annual tests for impairment
     of goodwill.  The Company  completed its initial test of the carrying value
     of goodwill which resulted in no 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 gains
     or losses resulting from future early retirements of debt to be included in
     other income and  expenses  which could  materially  affect  income  before
     income taxes.  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.

          FASB Statement of Financial  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 and nullifies  Emerging Issues
     Task  Force  (EITF)  Issue No.  94-3,  Liability  Recognition  for  Certain
     Employee Termination Benefits and Other Costs to Exit an Activity. SFAS 146
     requires  that a liability for a cost  associated  with an exit or disposal
     activity be recognized  and measured  initially at fair value only when the
     liability  is  incurred.  SFAS  146  is  effective  for  exit  or  disposal
     activities that are initiated after December 31, 2002. The Company does not
     anticipate  that the  provisions  of this  statement  will have a  material
     impact on the Company's reported results of operations, financial positions
     or cash flows.

          FASB  Interpretation  No. 45  "Guarantor's  Accounting  and Disclosure
     Requirements for Guarantees,  Including Indirect Guarantees of Indebtedness
     of Others" ("FIN 45") was issued in November 2002. FIN 45 elaborates on the
     disclosures  to be made by a guarantor in its interim and annual  financial
     statements  about its  obligations  under  certain  guarantees  that it has
     issued.  It also requires the  guarantor to recognize,  at the inception of
     the guarantee,  a liability for the fair value of obligation  undertaken in
     issuing the  guarantee.  The  disclosure  requirements  are  effective  for
     quarters ending after December 15, 2002 and the liability recognition is in
     effect for guarantees  initiated  after December 31, 2002. The Company does
     not  anticipate  that the provisions of this statement will have a material
     impact on the Company's reported results of operations, financial positions
     or cash flows.


<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)

          FASB  Statement  of  Financial   Standards  No.  148  "Accounting  for
     Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB
     Statement  No. 123"  ("SFAS  148") was issued in  December  2002.  FASB 148
     amends FASB  Statement  of  Financial  Standards  No. 123  "Accounting  for
     Stock-Based  Compensation"  ("FASB 123"), to provide alternative methods of
     transition  for a  voluntary  change  to the fair  value  based  method  of
     accounting for stock-based  employee  compensation.  In addition,  FASB 148
     amends  the  disclosure  requirements  of  FASB  123 to  require  prominent
     disclosures  in both  annual and  interim  financial  statements  about the
     method of accounting for stock-based  employee  compensation and the effect
     of the method used on reported  results.  The Company  does not  anticipate
     that the provisions of this  statement  will have a material  impact on the
     reported results of operations, financial positions or cash flows.

     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.



             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.

     Interim financial statements

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


<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)

     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. The interim  consolidated  condensed financial
     statements should be read in conjunction with the financial  statements and
     notes thereto for the year ended June 30, 2002 as filed on Form 10-K.

     Reclassification

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

2.   INVENTORY

          The following table details the components of inventory:


<TABLE>
<CAPTION>
                                                         December 31, 2002       June 30, 2002
                                                         -----------------       -------------
                                                            (unaudited)            (unaudited)
              <S>                                           <C>                    <C>
              Raw materials
                  Paper..........................           $    2,044             $    2,180
                  Other raw materials............                2,873                  4,216
                                                            ----------             ----------
                      Total raw materials........                4,917                  6,396
              Work in process....................                3,205                  2,468
              Reserve for obsolescence...........                 (643)                  (850)
                                                            ----------             ----------

              Total inventory....................           $    7,479             $    8,014
                                                            ==========             ==========


</TABLE>


3.   DISTRIBUTION

          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.

4.   AMORTIZATION OF GOODWILL

          In accordance with SFAS 142 goodwill is no longer being amortized. The
     following pro forma amounts reflect  goodwill  amortization  and net income
     had SFAS 142 been implemented at the beginning of fiscal 2002:


<TABLE>
<CAPTION>

                                                           Three months ended            Six months ended
                                                              December 31,                 December 31,
                                                           2002          2001           2002          2001
                                                           ----          ----           ----          ----

       <S>                                               <C>           <C>            <C>           <C>
       Goodwill amortization......................       $     -       $     -        $     -       $     -
       Net income (loss)..........................         1,633          (938)         3,890           965


</TABLE>


<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 December 31, 2002 Compared to Three Months
                            Ended December 31, 2001

     Net Sales. Net sales for the three months ended December 31, 2002 increased
$9.3 million,  or 41.7%, to $31.6 million,  as compared to $22.3 million for the
three months ended  December 31, 2001.  The increase in net sales was  primarily
attributable to sales of sampling  technologies for advertising and marketing of
cosmetics by CP and an increase in the sales of our core  sampling  technologies
for advertising and marketing of domestic and  international  cosmetic  products
and domestic  consumer  products  partially offset by a decrease in the sales of
our core sampling  technologies  for advertising and marketing of  international
fragrance products.

     Gross  Profit.  Gross profit for the three  months ended  December 31, 2002
increased $4.5 million,  or 70.3%, to $10.9 million, as compared to $6.4 million
for three months ended  December 31, 2001.  Gross profit as a percentage  of net
sales increased to 34.5% in the three months ended December 31, 2002, from 28.7%
in the three  months ended  December 31, 2001.  The increase in gross profit and
gross  profit as a percentage  of net sales is primarily  due to the increase in
sales volume and changes in product mix.

     Selling,  General  and  Administrative   Expenses.   Selling,  general  and
administrative  expenses for the three months ended  December 31, 2002 increased
$0.1  million,  or 2.2%,  to $4.7  million,  as compared to $4.6 million for the
three  months  ended  December 31,  2001.  Selling,  general and  administrative
expenses as a percent of net sales  decreased to 14.9% in the three months ended
December 31, 2002,  from 20.6% in the three months ended  December 31, 2001. The
increase in selling, general and administrative expenses is primarily related to
the CP operations  and an increase in sales  commissions  partially  offset by a
decrease in legal fees and prior year non-recurring CP acquisition bonus.

     Amortization  of  Goodwill.  Amortization  of goodwill for the three months
ended December 31, 2002  decreased $1.2 million,  or 100%, to $0, as compared to
$1.2  million for the three months  ended  December  31,  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 completed our initial test of the carrying  value of goodwill  which resulted
in no impairment.

     Income from  Operations.  Income from operations for the three months ended
December 31, 2002  increased  $5.5  million,  or 1375.0%,  to $5.9  million,  as
compared to $0.4 million for the three months  ended  December 31, 2001.  Income
from  operations  as a percentage  of net sales  increased to 18.7% in the three
months ended December 31, 2002, from 1.8% in the three months ended December 31,
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.


<PAGE>


     Interest Expense.  Interest expense for the three months ended December 31,
2002  decreased  $0.2 million,  or 5.1%,  to $3.7  million,  as compared to $3.9
million for the three months ended  December 31, 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  partially  offset by interest  payable on the term loan  incurred in
connection with the CP acquisition and use of the revolving  credit line to fund
the purchase of Senior Discount Debentures.  Interest expense as a percentage of
net sales  decreased to 11.7% in the three months ended December 31, 2002,  from
17.5%.

     Interest  expense  for AKI for the three  months  ended  December  31, 2002
increased  $0.2 million,  or 6.7%, to $3.2 million,  as compared to $3.0 million
for the three months ended December 31, 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
and use of the revolving  credit line to pay a  distribution  to Holding to fund
the  purchase  of Holding  Senior  Discount  Debentures.  Interest  expense as a
percentage  of net sales  decreased to 10.1% in the three months ended  December
31, 2002, from 13.5%.

     Income Tax Expense.  Income tax expense for the three months ended December
31, 2002  increased  $1.7 million to $0.8 million.  The Company's  effective tax
rate, after consideration of non-deductible  goodwill  amortization in 2001, was
34.9% in the three months ended December 31, 2002, and 38.5% in the three months
ended December 31, 2001.

     Income tax expense for AKI for the three  months  ended  December  31, 2002
increased  $1.6  million  to $1.0  million.  AKI's  effective  tax  rate,  after
consideration  of  non-deductible  goodwill  amortization,  was 39% in the three
months ended December 31, 2002 and 2001.

     EBITDA.  EBITDA for the three months ended December 31, 2002 increased $4.8
million,  or 160.0%, to $7.8 million,  as compared to $3.0 million for the three
months ended December 31, 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 24.7%  and  13.5% in the three  months  ended  December  31,  2002 and 2001,
respectively.   EBITDA  is  income  from   operations  plus   depreciation   and
amortization of goodwill and other intangibles.

            Six Months Ended December 31, 2002 Compared to Six Months
                             Ended December 31, 2001

     Net Sales.  Net sales for the six months ended  December 31, 2002 increased
$12.3 million,  or 24.8%,  to $62.0 million as compared to $49.7 million for the
six months  ended  December 31,  2001.  The increase in net sales was  primarily
attributable to sales of sampling  technologies for advertising and marketing of
cosmetics by CP and an increase in the sales of our core  sampling  technologies
for advertising and marketing of domestic and  international  cosmetic  products
and domestic  consumer  products  partially offset by a decrease in the sales of
our core sampling  technologies  for advertising and marketing of  international
fragrance products.

     Gross  Profit.  Gross  profit for the six months  ended  December  31, 2002
increased $5.7 million,  or 33.3%, to $22.8 million as compared to $17.1 million
for six months  ended  December 31,  2001.  Gross profit as a percentage  of net
sales  increased to 36.8% in the six months ended December 31, 2002,  from 34.4%
in the six months  ended  December  31,  2001.  The increase in gross profit and
gross  profit as a percentage  of net sales is primarily  due to the increase in
sales volume and changes in product mix.

     Selling,  General  and  Administrative   Expenses.   Selling,  general  and
administrative  expenses  for the six months ended  December 31, 2002  increased
$0.6  million,  or 6.8%, to $9.4 million as compared to $8.8 million for the six
months ended December 31, 2001. Selling,  general and administrative expenses as
a percent of net sales  decreased to 15.2% in the six months ended  December 31,
2002 from 17.7% in the six months  ended  December  31,  2001.  The  increase in
selling,  general and  administrative  expenses is  primarily  related to the CP
operations  and the impact of the weakened US dollar on the  translation  of our
European  subsidiary's  financial  statements  partially offset by a decrease in
legal fees and prior year non-recurring CP acquisition bonus.


<PAGE>


     Amortization of Goodwill. Amortization of goodwill for the six months ended
December 31, 2002  decreased  $2.4 million,  or 100%, to $0, as compared to $2.4
million for the six months ended December 31, 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 completed our
initial test of the carrying value of goodwill which resulted in no impairment.

     Income from  Operations.  Income from  operations  for the six months ended
December 31, 2002  increased  $7.4  million,  or 137.0%,  to $12.8  million,  as
compared to $5.4 million for the six months ended December 31, 2001. Income from
operations  as a  percentage  of net sales  increased to 20.7% in the six months
ended  December 31, 2002,  from 10.9% in six months ended December 31, 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.

     Interest  Expense.  Interest  expense for the six months ended December 31,
2002  decreased  $0.3 million,  or 3.9%,  to $7.4  million,  as compared to $7.7
million for the six months ended  December  31,  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  partially  offset by interest  payable on the term loan  incurred in
connection with the CP acquisition and use of the revolving  credit line to fund
the purchase of Senior Discount Debentures.  Interest expense as a percentage of
net sales  decreased  to 11.9% in the six months  ended  December  31, 2002 from
15.5% in the six months ended December 31, 2001.

     Interest  expense  for AKI  for the six  months  ended  December  31,  2002
increased  $0.3 million,  or 4.9%, to $6.4 million,  as compared to $6.1 million
for the six months ended  December 31, 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
and use of the revolving  credit line to pay a  distribution  to Holding to fund
the  purchase  of Holding  Senior  Discount  Debentures.  Interest  expense as a
percentage of net sales  decreased to 10.3% in the six months ended December 31,
2002, from 12.3% in the six months ended December 31, 2001.

     Income Tax Expense.  Income tax expense for the six months  ended  December
31, 2002  increased  $2.0 million to $2.1 million.  The Company's  effective tax
rate, after consideration of non-deductible goodwill amortization,  was 37.2% in
the six  months  ended  December  31,  2002 and  53.1% in the six  months  ended
December 31, 2001.

     Income tax  expense  for AKI for the six months  ended  December  31,  2002
increased  $1.8  million  to $2.4  million.  AKI's  effective  tax  rate,  after
consideration  of  non-deductible  goodwill  amortization,  was 39.0% in the six
months ended December 31, 2002 and 2001.

     EBITDA.  EBITDA for the six months ended  December 31, 2002  increased $6.0
million,  or 56.6%,  to $16.6  million as compared to $10.6  million for the six
months ended December 31, 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  26.8%  and  21.3%  in the six  months  ended  December  31,  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 December 31, 2002, we had consolidated indebtedness in an aggregate amount
of $128.8 million (excluding trade payables, accrued liabilities, deferred taxes
and other non-current  liabilities),  of which approximately $13.5 million was a
direct obligation of Holding relating to its debentures and approximately $115.3
million  was a direct  obligation  of AKI  relating  to its  notes,  term  loan,
revolving loan and promissory note to affiliate. Borrowings at December 31, 2002
included $2.5 million  under the revolving  loan and $9.0 million under the term
loan and $0.4 million on the promissory note to affiliate.  At December 31, 2002
we had $17.2 million  available  under the revolving loan. At December 31, 2002,
AKI also had $18.4  million in  additional  outstanding  liabilities  (including
trade  payables,  accrued  liabilities,  deferred  taxes and  other  non-current
liabilities).


<PAGE>


     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 six months ended  December 31, 2002,  cash  totaling $4.9
million was provided by operating  activities  resulting  from net income before
depreciation and amortization and a decrease in accounts  receivable,  partially
offset by decreases in accounts payable, accrued compensation and accrued income
taxes. During the six months ended December 31, 2001, cash totaling $0.2 million
was  provided  by  operating   activities   resulting  from  net  income  before
depreciation and amortization and a decrease in accounts  receivable,  partially
offset by decreases in accounts  payable and accrued expenses 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  plus a margin of 1.75% to 2.5% (none
outstanding  at  December  31,  2002)  or LIBOR  plus a margin  of 3.0% to 3.75%
(outstanding  borrowings  averaged  5.7% at December 31,  2002).  The Company is
required to pay  commitment  fees on the unused  portion of the  revolving  loan
commitment.  In  addition,  the Company is required to pay fees equal to 2.5% of
the average daily outstanding amount of lender guarantees.  On November 15, 2002
we amended our  restated  credit  agreement  with  Heller  Financial,  Inc.  The
amendment delayed  mandatory  prepayments of the term loan from excess cash flow
from fiscal years  commencing with the year ending June 30, 2003 to fiscal years
commencing  with the year ending June 30, 2004;  increased the aggregate cost of
permitted   restricted   junior  payments  for  the  purpose  of  purchasing  or
repurchasing our Senior Notes and Senior Discount  Debentures from $10.0 million
to $25.0 million; and increased the permitted payment of a management, advisory,
consulting  or other  similar fee to an  affiliate in the  aggregate  from $0.25
million  to $0.4  million  per year.  The  Company  had $0.3  million  of lender
guarantees outstanding at December 31, 2002.

     In the six  months  ended  December  31,  2002  and  2001,  we had  capital
expenditures of approximately $1.3 million and $0.5 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, its 13.5% Senior  Discount  Debentures due 2009 with an accreted value
of $3.4 million for $3.2 million. AKI funded the distribution through borrowings
under its credit agreement.

     Capital  expenditures for the six months ending June 30, 2003 are currently
estimated to be approximately $2.7 million.  Based on borrowings  outstanding as
of December 31, 2002, we expect total cash payments for debt service for the six
months ending June 30, 2003 to be approximately $7.1 million, consisting of $0.9
million in  principal  payments  under the term loan,  $5.4  million in interest
payments  on the notes and $0.6  million in  interest  and fees under the credit
agreement. We also expect to make royalty payments of approximately $0.3 million
during the six months ending June 30, 2003.

     At December 31, 2002,  Holding's cash and cash  equivalents and net working
capital  were $1.8  million  and $14.0  million,  respectively,  representing  a
decrease  in cash and cash  equivalents  of $0.1  million and an increase in


<PAGE>


net working  capital of $2.4 million from June 30, 2002. The increase in working
capital is  primarily  due to the  reduction  of current  liabilities  partially
offset by a decrease in accounts receivable.

Seasonality / Cyclicality

     Our  sales and  operating  results  have  historically  reflected  seasonal
variations. Such seasonal and cyclical 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  fluctuations  require  us  to
accurately  allocate our resources to manage our manufacturing  capacity,  which
often operates at full capacity during peak 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.  Sales of the CP products  subsequent to our acquisition
totaled  $22.6  million in the six months  ended June 30,  2002,  a  significant
increase  compared  to CP's  historical  levels  due to sales  related  to a new
sampling  technology and the major  introduction of new products by Mary Kay. We
do not  believe  that sales of this  magnitude  will  continue in the six months
ending June 30, 2003.

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 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  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 and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, Liability  Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity.  SFAS 146 requires  that a liability  for a
cost  associated  with an exit or disposal  activity be recognized  and measured
initially  at fair  value  only  when the  liability  is  incurred.  SFAS 146 is
effective for exit or disposal  activities that are initiated after December 31,
2002. The Company does not anticipate that the provisions of this statement will
have a  material  impact  on  the  Company's  reported  results  of  operations,
financial positions or cash flows.

     FASB   Interpretation   No.  45  "Guarantor's   Accounting  and  Disclosure
Requirements for Guarantees,  Including  Indirect  Guarantees of Indebtedness of
Others"  ("FIN  45") was  issued in  November  2002.  FIN 45  elaborates  on the
disclosures  to be made by a  guarantor  in its  interim  and  annual  financial
statements about its obligations under certain guarantees that it has issued. It
also requires the guarantor to recognize,  at the inception of the guarantee,  a
liability for the fair value of obligation  undertaken in issuing the guarantee.
The disclosure


<PAGE>


requirements  are effective for quarters  ending after December 15, 2002 and the
liability  recognition is in effect for guarantees  initiated after December 31,
2002. The Company does not anticipate that the provisions of this statement will
have a  material  impact  on  the  Company's  reported  results  of  operations,
financial positions or cash flows.

     FASB Statement of Financial  Standards No. 148  "Accounting for Stock-Based
Compensation  - Transition  and  Disclosure - an Amendment of FASB Statement No.
123" ("SFAS 148") was issued in December 2002. FASB 148 amends FASB Statement of
Financial  Standards No. 123 "Accounting for  Stock-Based  Compensation"  ("FASB
123"), to provide  alternative  methods of transition for a voluntary  change to
the fair value based method of accounting for stock-based employee compensation.
In addition,  FASB 148 amends the disclosure requirements of FASB 123 to require
prominent  disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method  used on  reported  results.  The Company  does not  anticipate  that the
provisions of this statement will have a material impact on the reported results
of operations, financial positions or cash flows.

Critical Accounting Policies

     We have  chosen  accounting  policies  that we believe are  appropriate  to
accurately and fairly report our operating results and financial  position,  and
we apply those accounting policies in a consistent manner.

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles requires that we make estimates and assumptions
that affect the reported amounts of assets, liabilities,  revenues and expenses.
These  estimates  and  assumptions  are based on  historical  and other  factors
believed to be reasonable under the  circumstances.  We evaluate these estimates
and assumptions on an ongoing basis and may retain outside professional advisors
to assist in our evaluation.  We believe the following  accounting  policies are
the most  critical  because  they  involve the most  significant  judgments  and
estimates used in preparation of our consolidated financial statements:

     o    Allowance for doubtful accounts. We maintain an allowance for doubtful
          receivables for estimated  losses  resulting from the inability of our
          trade customers to make required payments. We provide an allowance for
          specific  customer  accounts  where  collection  is doubtful  and also
          provide a general  allowance  for other  accounts  based on historical
          collection and write-off experience.  Judgment is necessary and if the
          financial  condition  of our  customers  were  to  worsen,  additional
          allowances may be required.

     o    Inventories.  Our  inventories,  which  consist of raw  materials  and
          work-in-process,  are valued at the lower of cost or market value.  We
          evaluate all of our raw  material  inventory  for slow moving  product
          based on  recent  usage,  projections  of  future  demand  and  market
          conditions.  For those units in inventory that are so  identified,  we
          estimate their market value based on current  realization  trends.  If
          the  projected  net  realizable  value is less than cost, we provide a
          provision  to  reflect  the  lower  value  of  that  inventory.   This
          methodology  recognizes  projected  inventory  losses at the time such
          losses are evident.

     o    Intangible  assets.  When we acquire other  companies or businesses we
          allocate  the   purchase   price,   including   expenses  and  assumed
          liabilities,   to  the  assets  and  liabilities   acquired  including
          intangible  assets and  goodwill.  We estimate the useful lives of the
          intangible assets by factoring in the  characteristics  of the related
          products  such  as:  existing  sales  contracts,   patent  protection,
          estimated future introductions of competing products and other issues.
          The  factors  that  drive  the  estimate  of the life of the asset are
          inherently uncertain.

     o    Long-lived  assets.  We review  our  property,  intangible  assets and
          goodwill  for possible  impairment  whenever  events or  circumstances
          indicate that the carrying  amount of an asset may not be recoverable.
          Assumptions  and estimates  used in the  evaluation of impairment  may
          affect the carrying value of long-lived assets,  which could result in
          impairment  charges  in  future  periods.   Such  assumptions  include
          projections of future cash flows and, in some cases,  the current fair
          value of the asset. In addition,  our  depreciation  and  amortization
          policies reflect judgments on the estimated useful lives of assets.

     o    Revenue recognition. We recognize revenue when the risks and reward of
          ownership  are  assumed  by the  buyer.  This  generally  occurs  upon
          delivery of product to the buyer.


<PAGE>


     o    Deferred  income tax  assets.  We have  recorded  deferred  income tax
          assets related to the temporary  differences between the tax bases and
          financial reporting bases of assets and liabilities.  An adjustment to
          income  tax  expense  would  be  required  in a  future  period  if we
          determine  that the  amount of  deferred  tax  assets  to be  realized
          differs from the net recorded amount.

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  20% of our sales from  customers  outside  the
United States,  principally in Europe.  International sales are made mostly from
our foreign  subsidiary  located in France and are primarily  denominated in the
local currency.  Our foreign subsidiary also incurs the majority of its expenses
in the local currency and uses the local currency as its functional currency.

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

     We periodically  enter into forward foreign currency exchange  contracts to
hedge certain  exposures  related to selected  transactions  that are relatively
certain as to both  timing  and amount and to hedge a portion of the  production
costs expected to be denominated in foreign currencies.  The purpose of entering
into these  hedge  transactions  is to minimize  the impact of foreign  currency
fluctuations  on the results of operations  and cash flows.  Gains and losses on
the hedging  activities  are recognized  concurrently  with the gains and losses
from the underlying  transactions.  At December 31, 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


<PAGE>


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 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)  Exhibits

              Exhibit 4.1    First Amendment to Amended and Restated Credit
                             Agreement and Amended and Restated Pledge
                             Agreement dated as of November 15, 2002
                             between the Company and Heller Financial, Inc.

              Exhibit 10.1   Financial Advisory Agreement

              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:  February 12, 2003              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     February 12, 2003


/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     February 12, 2003


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


<PAGE>


                                      AKI, INC.

Date:  February 12, 2003              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     February 12, 2003


/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     February 12, 2003


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