FORM 10-Q

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

                  For the quarterly period ended March 31, 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 April 30, 2002,  1,000 shares of common stock of AKI Holding  Corp.,  $.01
par value,  were outstanding and 1,000 shares of common stock of AKI, Inc., $.01
par value, were outstanding.

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


<PAGE>


                       AKI HOLDING CORP. AND SUBSIDIARIES

                               INDEX TO FORM 10-Q


Part I.  FINANCIAL INFORMATION

         Item 1.  Financial Statements (unaudited)

                  AKI Holding Corp. and Subsidiaries

                      Consolidated Condensed Balance Sheet

                      -   March 31, 2002
                      -   June 30, 2001

                      Consolidated Condensed Statements of Operations

                      -   Three months ended March 31, 2002
                      -   Three months ended March 31, 2001
                      -   Nine months ended March 31, 2002
                      -   Nine months ended March 31, 2001

                      Consolidated Condensed Statement of Changes in
                      Stockholder's Equity

                      -   Nine months ended March 31, 2002

                      Consolidated Condensed Statements of Cash Flows

                      -   Nine months ended March 31, 2002
                      -   Nine months ended March 31, 2001

                      Notes to Consolidated Condensed Financial Statements


<PAGE>


         Item 1.  Financial Statements (unaudited) (continued)

                  AKI, Inc. and Subsidiaries

                      Consolidated Condensed Balance Sheet

                      -   March 31, 2002
                      -   June 30, 2001

                      Consolidated Condensed Statements of Operations

                      -   Three months ended March 31, 2002
                      -   Three months ended March 31, 2001
                      -   Nine months ended March 31, 2002
                      -   Nine months ended March 31, 2001

                      Consolidated Condensed Statement of Changes in
                      Stockholder's Equity

                      -   Nine months ended March 31, 2002

                      Consolidated Condensed Statements of Cash Flows

                      -   Nine months ended March 31, 2002
                      -   Nine months ended March 31, 2001

                      Notes to Consolidated Condensed Financial Statements


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

Part II. OTHER INFORMATION

         Item 6.  Exhibits and Reports on Form 8-K


<PAGE>


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


<TABLE>
<CAPTION>

                                                                                  March 31,           June 30,
                                                                                    2002                2001
                                                                                -------------      -------------
                                                                                 (unaudited)         (unaudited)

<S>                                                                             <C>                <C>
ASSETS
Current assets
Cash and cash equivalents..................................................     $       1,344      $       4,654
Accounts receivable, net...................................................            29,594             18,020
Inventory..................................................................             9,219              6,330
Prepaid expenses...........................................................               688                492
Deferred income taxes......................................................               770                770
                                                                                -------------      -------------

   Total current assets....................................................            41,615             30,266

Property, plant and equipment, net.........................................            20,840             15,778
Goodwill, net..............................................................           159,979            157,334
Other intangible assets, net...............................................             8,669              6,337
Deferred charges, net......................................................             4,553              4,381
Deferred income taxes......................................................             1,134                  -
Other assets...............................................................               177                 88
                                                                                -------------      -------------

   Total assets............................................................     $     236,967      $     214,184
                                                                                =============      =============

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of capital lease obligations...............................     $           -      $         503
Current portion of long-term debt..........................................             1,188                  -
Accounts payable, trade....................................................             6,350              3,886
Accrued income taxes.......................................................               636              1,642
Accrued compensation.......................................................             4,809              4,715
Accrued interest...........................................................             2,842              5,443
Accrued expenses...........................................................             4,524              3,908
                                                                                -------------      -------------

   Total current liabilities...............................................            20,349             20,097

Revolving loan.............................................................            11,450                  -
Term loan..................................................................             8,562                  -
Senior notes...............................................................           103,510            103,510
Promissory note to affiliate...............................................               350                  -
Senior discount debentures.................................................            26,394             23,926
Deferred income taxes......................................................                 -                 19
Other non-current liabilities..............................................             2,020              1,863
                                                                                -------------      -------------

   Total liabilities.......................................................           172,635            149,415

Stockholder's equity
Common stock, $0.01 par 1,000 shares authorized;
    1,000 shares issued and outstanding....................................                 -                  -
Additional paid-in capital.................................................            93,656             93,656
Accumulated deficit........................................................           (12,842)           (12,320)
Accumulated other comprehensive loss.......................................              (752)              (837)
Carryover basis adjustment.................................................           (15,730)           (15,730)
                                                                                --------------     -------------

   Total stockholder's equity..............................................            64,332             64,769
                                                                                -------------      -------------


   Total liabilities and stockholder's equity..............................     $     236,967      $     214,184
                                                                                =============      =============


</TABLE>


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


<PAGE>


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


<TABLE>
<CAPTION>


                                                           Three months ended                    Nine months ended
                                                   ---------------------------------    ---------------------------------
                                                   March 31, 2002     March 31, 2001    March 31, 2002     March 31, 2001
                                                   --------------     --------------    --------------     --------------
                                                     (unaudited)       (unaudited)        (unaudited)        (unaudited)

<S>                                                   <C>                <C>               <C>                <C>
Net sales........................................     $  35,472          $  33,093         $  85,182          $  91,626
Cost of goods sold...............................        20,357             19,328            53,000             56,569
                                                      ---------          ---------         ---------          ---------

   Gross profit..................................        15,115             13,765            32,182             35,057

Selling, general and administrative expenses.....         5,018              5,021            13,782             13,954
Amortization of goodwill and other intangibles...         1,679              1,446             4,595              4,311
                                                      ---------          ---------         ---------          ---------

   Income from operations........................         8,418              7,298            13,805             16,792

Other expenses:
   Interest expense to stockholder...............             1                 91                 9                272
   Interest expense other, net...................         4,181              4,178            11,909             12,645
   Management fees and other, net................            57                 63               182                188
                                                      ---------          ---------         ---------          ---------

   Income before income taxes and
     extraordinary gain..........................         4,179              2,966             1,705              3,687

Income tax expense...............................         2,150              1,665             2,227              3,020
                                                      ---------          ---------         ---------          ---------

   Income (loss) before extraordinary gain.......         2,029              1,301              (522)               667

Extraordinary gain from early retirement of
debt, net of tax.................................             -                411                 -              1,361
                                                      ---------          ---------         ---------          ---------

   Net income (loss).............................     $   2,029          $   1,712         $    (522)         $   2,028
                                                      =========          =========         ==========         =========


</TABLE>


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


<PAGE>


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


<TABLE>
<CAPTION>

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


<S>                                          <C>      <C>        <C>          <C>             <C>           <C>           <C>
Balances, June 30, 2001 (unaudited)......    1,000    $     -    $   93,656   $  (12,320)     $   (837)     $  (15,730)    $ 64,769

Net loss (unaudited).....................                                           (522)                                      (522)

Other comprehensive income, net of tax:
   Foreign currency translation
     adjustment (unaudited)..............                                                           85                           85
                                                                                                                           --------

Comprehensive loss (unaudited)...........                                                                                      (437)
                                             -----    -------    ----------   ----------      --------      ----------     --------

Balances, March 31, 2002 (unaudited).....    1,000    $     -    $   93,656   $  (12,842)     $   (752)     $  (15,730)    $ 64,332
                                             =====    =======    ==========   ==========      ========      ==========     ========


</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>

                                                                                        Nine months ended
                                                                               ------------------------------------
                                                                               March 31, 2002        March 31, 2001
                                                                               --------------        --------------
                                                                                 (unaudited)           (unaudited)

<S>                                                                             <C>                   <C>
Cash flows from operating activities
   Net income (loss)....................................................        $      (522)          $     2,028
   Adjustments to reconcile net income (loss) to net cash provided by
   operating activities:
     Depreciation and amortization of goodwill and other intangibles....              8,378                 7,568
     Amortization of debt discount......................................              2,468                 2,732
     Amortization of debt issuance costs................................                433                   497
     Deferred income taxes..............................................             (1,153)                 (879)
     Gain from early retirement of debt.................................                  -                (1,361)
     Other..............................................................                180                   108
     Changes in operating assets and liabilities:
       Accounts receivable..............................................             (8,339)               (8,808)
       Inventory........................................................               (465)                  446
       Prepaid expenses, deferred charges and other assets..............               (152)                 (380)
       Accounts payable and accrued expenses............................             (3,571)               (1,744)
       Income taxes.....................................................             (1,006)                1,038
                                                                                -----------           -----------

         Net cash provided by (used in) operating activities............             (3,749)                1,245
                                                                                -----------           -----------

Cash flows from investing activities
   Purchases of equipment...............................................               (888)               (2,436)
   Patents..............................................................                (62)                    -
   Payments for acquisition of business, net of cash acquired...........            (19,053)                    -
                                                                                -----------           -----------

         Net cash used in investing activities..........................            (20,003)               (2,436)
                                                                                -----------           -----------

Cash flows from financing activities
   Payments under capital leases .......................................               (503)                 (840)
   Repurchase of long-term debt.........................................                  -                (3,110)
   Net proceeds on revolving loan.......................................             11,450                 3,125
   Net proceeds on term loan............................................              9,750                     -
   Payments of loan closing costs.......................................               (605)                    -
   Net proceeds from promissory note to stockholder.....................                350                 2,904
                                                                                -----------           -----------

         Net cash provided by financing activities......................             20,442                 2,079
                                                                                -----------           -----------

Net increase (decrease) in cash and cash equivalents....................             (3,310)                  888
Cash and cash equivalents, beginning of period..........................              4,654                 1,158
                                                                                -----------           -----------

Cash and cash equivalents, end of period................................        $     1,344           $     2,046
                                                                                ===========           ===========

Supplemental information
  Cash paid during the period for:
    Interest, other.....................................................        $    11,297           $    12,125
    Interest to stockholder.............................................                  8                   230
    Income taxes........................................................              4,479                 2,836

Significant non-cash activities
  Contribution of equity and retirement of senior discount debentures...        $         -           $     2,071


</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.

     Acquisition of Color Prelude business

          On December 18, 2001, the Company,  through a newly formed subsidiary,
     IST,  Corp.,  acquired the business  including  certain  assets and assumed
     certain  liabilities  of Color Prelude,  Inc.  (such  business  referred to
     hereafter as "CP").  CP manufactures  interactive  advertising and sampling
     products  for cosmetic and consumer  products  companies.  The  acquisition
     complements the Company's product lines and the Company expects to increase
     domestic and international  product sales through broader  distribution and
     to reduce costs through certain economies of scale.

          The aggregate  purchase price of CP was $19.1 million which was funded
     through  cash and  borrowings  of  approximately  $18.0  million  under the
     restated credit  agreement.  The following  table  summarizes the estimated
     fair value of the assets  acquired and  liabilities  assumed at the date of
     acquisition.  The  Company is in the  process of  obtaining  valuations  of
     certain  assets;  thus the  allocation  of  purchase  price is  subject  to
     refinement.

                  Property and equipment..........................  $  7,871
                  Current assets..................................     5,731
                  Intangible assets...............................     8,946
                  Accounts payable and accrued expenses...........     3,494

          Goodwill  totaling  approximately  $6,250  will  not be  amortized  in
     accordance with Statement of Financial  Accounting Standards (SFAS) No. 142
     - Goodwill  and Other  Intangible  Assets.  The results of  operations  are
     included in the financial  statements  since the date of  acquisition.  Pro
     forma  results had CP been  acquired at the beginning of fiscal 2001 are as
     follows:


<TABLE>
<CAPTION>

                                                             Three months ended              Nine months ended
                                                                 March 31,                       March 31,
                                                                 ---------                       ---------
                                                            2002            2001           2002            2001
                                                            ----            ----           ----            ----

<S>                                                    <C>             <C>             <C>            <C>
    Revenue  ...................................       $   35,472      $   35,332      $   91,515     $  100,290
    Income (loss) before extraordinary items....            2,029           1,175            (563)           532
    Net income (loss)...........................            2,029           1,586            (563)         1,893


</TABLE>


     Interim financial statements

          The interim consolidated condensed balance sheet at March 31, 2002 and
     the interim  consolidated  condensed statements of operations for the three
     and nine months  ended March 31,  2002 and 2001,  the interim  consolidated
     condensed statements of cash flows for the nine months ended March 31, 2002
     and 2001 and 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)

     interim consolidated condensed statement of changes in stockholder's equity
     for the nine  months  ended  March  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, 2001 consolidated
     condensed  balance sheet was derived from the audited balance sheet for the
     year  then  ended.  In   management's   opinion,   the  unaudited   interim
     consolidated  condensed  financial  statements were prepared  following the
     same  policies  and  procedures  used  in the  preparation  of the  audited
     financial  statements  and  all  adjustments,  consisting  only  of  normal
     recurring adjustments to fairly present the financial position,  results of
     operations  and  cash  flows  with  respect  to  the  interim  consolidated
     condensed  financial  statements,   have  been  included.  The  results  of
     operations for the interim  periods are not  necessarily  indicative of the
     results for the entire year.

     Reclassification

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

2.   INVENTORY

          The following table details the components of inventory:

                                          March 31, 2002         June 30, 2001
                                          --------------         -------------
                                           (unaudited)            (unaudited)
     Raw materials
       Paper..........................     $     1,875            $    1,796
       Other raw materials............           3,956                 2,697
                                           -----------            ----------
         Total raw materials..........           5,831                 4,493
     Work in process..................           3,388                 1,837
                                           -----------            ----------

     Total inventory..................     $     9,219            $    6,330
                                           ===========            ==========

3.   RETIREMENT OF DEBT

          On April  17,  2002,  Holding  purchased  $11,054  of  Holding  Senior
     Discount  Debentures  for $6,804.  The purchase  price was funded through a
     distribution received from AKI.

4.   AMENDED AND RESTATED CREDIT AGREEMENT

          On December  18, 2001,  AKI amended and restated its 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  are
     limited to a borrowing base  consisting of accounts  receivable,  inventory
     and  property,  plant  and  equipment  which  serve as  collateral  for the
     borrowings.  Interest on amounts borrowed under the term loan and revolving
     loan accrue at a floating  rate based upon either prime or LIBOR as elected
     by the  Company.  The  Company is required  to pay  commitment  fees on the
     unused portion of the revolving loan commitment.

5.   CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS

          The following  condensed balance sheets at March 31, 2002 and June 30,
     2001 and  condensed  statements  of  operations,  changes in  stockholder's
     equity and cash flows for the nine months ended March 31, 2002 and 2001 for
     Holding have been prepared on the equity basis of accounting  and should be
     read in conjunction with the consolidated statements and notes thereto.


<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)


                                  BALANCE SHEET


<TABLE>
<CAPTION>

                                                                      March 31, 2002         June 30, 2001
                                                                      --------------         -------------
                                                                        (unaudited)           (unaudited)

<S>                                                                    <C>                   <C>
     Assets
     Investment in subsidiaries...............................         $   103,415           $   102,237
     Deferred charges.........................................                 744                   806
     Deferred income taxes....................................               3,168                 2,338
                                                                       -----------           -----------

         Total assets.........................................         $   107,327           $   105,381
                                                                       ===========           ===========

     Liabilities
     Accrued income taxes.....................................         $       119           $       119
     Senior discount debentures...............................              26,394                23,926
                                                                       -----------           -----------

         Total liabilities....................................              26,513                24,045
                                                                       -----------           -----------

     Stockholder's equity
     Common Stock, $0.01 par value, 1,000 shares authorized
       1,000 shares issued and outstanding....................                   -                     -
     Additional paid-in capital...............................              93,656                93,656
     Accumulated deficit......................................             (12,842)              (12,320)
                                                                       ------------          -----------

         Total stockholder's equity...........................              80,814                81,336
                                                                       -----------           -----------

         Total liabilities and stockholder's equity...........         $   107,327           $   105,381
                                                                       ===========           ===========


</TABLE>


                             STATEMENT OF OPERATIONS


<TABLE>
<CAPTION>

                                                                                       Nine months ended
                                                                             ------------------------------------
                                                                             March 31, 2002        March 31, 2001
                                                                             --------------        --------------
                                                                              (unaudited)           (unaudited)

<S>                                                                           <C>                   <C>
     Equity in net income of subsidiaries............................         $     1,178           $     3,007
     Interest expense................................................               2,530                 2,800
                                                                              -----------           -----------

         Income (loss) before income taxes and extraordinary gain....              (1,352)                  207

     Income tax benefit..............................................                (830)                 (916)
                                                                              -----------           -----------

         Income (loss) before extraordinary gain.....................                (522)                1,123

     Extraordinary gain from early retirement of debt................                   -                   905
                                                                              -----------           -----------

         Net income (loss) ..........................................         $      (522)          $     2,028
                                                                              ===========           ===========


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

     Net loss (unaudited)..........................                                                   (522)          (522)
                                                       -------    ---------     ----------     -----------    -----------

     Balances, March 31, 2002 (unaudited)..........      1,000    $       -     $   93,656     $   (12,842)   $    80,814
                                                       =======    =========     ==========     ===========    ===========


</TABLE>


                             STATEMENT OF CASH FLOWS


<TABLE>
<CAPTION>

                                                                                        Nine months ended
                                                                                ------------------------------------
                                                                                March 31, 2002        March 31, 2001
                                                                                --------------        --------------
                                                                                  (unaudited)           (unaudited)

<S>                                                                               <C>                   <C>
     Cash flows from operating activities
       Net income (loss).................................................         $      (522)          $     2,028
         Adjustments to reconcile net income to net cash provided by
           (used in) operating activities:
              Net change in investment in subsidiaries...................              (1,178)               (3,007)
              Amortization of debt discount..............................               2,468                 2,732
              Amortization of debt issuance costs........................                  62                    68
              Deferred income taxes......................................                (830)                 (916)
              Gain from early retirement of debt.........................                   -                  (905)
                                                                                  -----------           -----------

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

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

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


     Significant non-cash activities
       Contribution of equity and retirement of senior discount
         debentures.....................................................          $         -           $     2,071


</TABLE>


<PAGE>



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


<TABLE>
<CAPTION>

                                                                                  March 31,           June 30,
                                                                                    2002                2001
                                                                                -------------      -------------
                                                                                 (unaudited)         (unaudited)

<S>                                                                             <C>                <C>
ASSETS
Current assets
Cash and cash equivalents..................................................     $       1,344      $       4,654
Accounts receivable, net...................................................            29,594             18,020
Inventory..................................................................             9,219              6,330
Prepaid expenses...........................................................               688                492
Deferred income taxes......................................................               770                770
                                                                                -------------      -------------

   Total current assets....................................................            41,615             30,266

Property, plant and equipment, net.........................................            20,840             15,778
Goodwill, net..............................................................           159,979            157,334
Other intangible assets, net...............................................             8,669              6,337
Deferred charges, net......................................................             3,809              3,575
Other assets...............................................................               177                 88
                                                                                -------------      -------------

   Total assets............................................................     $     235,089      $     213,378
                                                                                =============      =============

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of capital lease obligations...............................     $           -      $         503
Current portion of long-term debt..........................................             1,188                  -
Accounts payable, trade....................................................             6,350              3,886
Accrued income taxes.......................................................               517              1,523
Accrued compensation.......................................................             4,809              4,715
Accrued interest...........................................................             2,842              5,443
Accrued expenses...........................................................             4,524              3,908
                                                                                -------------      -------------

   Total current liabilities...............................................            20,230             19,978

Revolving loan.............................................................            11,450                  -
Term loan..................................................................             8,562                  -
Senior notes...............................................................           103,510            103,510
Promissory note to affiliate...............................................               350                  -
Deferred income taxes......................................................             2,034              2,357
Other non-current liabilities..............................................             2,020              1,863
                                                                                -------------      -------------

   Total liabilities.......................................................           148,156            127,708

Stockholder's equity
Common stock, $0.01 par 100,000 shares authorized;
   1,000 shares issued and outstanding.....................................                 -                  -
Additional paid-in capital.................................................           107,348            107,348
Accumulated deficit........................................................            (3,933)            (5,111)
Accumulated other comprehensive loss.......................................              (752)              (837)
Carryover basis adjustment.................................................           (15,730)           (15,730)
                                                                                --------------     -------------

   Total stockholder's equity..............................................            86,933             85,670
                                                                                -------------      -------------

   Total liabilities and stockholder's equity..............................     $     235,089      $     213,378
                                                                                =============      =============


</TABLE>


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


<PAGE>


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


<TABLE>
<CAPTION>

                                                           Three months ended                    Nine months ended
                                                   ---------------------------------    ---------------------------------
                                                   March 31, 2002     March 31, 2001    March 31, 2002     March 31, 2001
                                                   --------------     --------------    --------------     --------------
                                                     (unaudited)       (unaudited)        (unaudited)        (unaudited)

<S>                                                   <C>                <C>               <C>                <C>
Net sales........................................     $  35,472          $  33,093         $  85,182          $  91,626
Cost of goods sold...............................        20,357             19,328            53,000             56,569
                                                      ---------          ---------         ---------          ---------

   Gross profit..................................        15,115             13,765            32,182             35,057

Selling, general and administrative expenses.....         5,018              5,021            13,782             13,954
Amortization of goodwill and other intangibles...         1,679              1,446             4,595              4,311
                                                      ---------          ---------         ---------          ---------

   Income from operations........................         8,418              7,298            13,805             16,792

Other expenses:
   Interest expense to affiliate.................             1                 91                 9                272
   Interest expense other, net...................         3,305              3,240             9,379              9,845
   Management fees and other, net................            57                 63               182                188
                                                      ---------          ---------         ---------          ---------

   Income before income taxes and
     extraordinary gain..........................         5,055              3,904             4,235              6,487

Income tax expense...............................         2,439              1,972             3,057              3,936
                                                      ---------          ---------         ---------          ---------

   Income before extraordinary gain..............         2,616              1,932             1,178              2,551

Extraordinary gain from early retirement of
debt, net of tax.................................             -                  -                 -                456
                                                      ---------          ---------         ---------          ---------

   Net income....................................     $   2,616          $   1,932         $   1,178          $   3,007
                                                      =========          =========         =========          =========


</TABLE>


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


<PAGE>


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


<TABLE>
<CAPTION>

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

<S>                                          <C>      <C>        <C>          <C>             <C>           <C>            <C>
Balances, June 30, 2001 (unaudited)......    1,000    $     -    $  107,348   $   (5,111)     $   (837)     $  (15,730)    $ 85,670

Net income (unaudited)...................                                          1,178                                      1,178

Other comprehensive income, net of tax:
   Foreign currency translation
     adjustment (unaudited)..............                                                           85                           85
                                                                                                                           --------

Comprehensive income (unaudited).........                                                                                     1,263
                                             -----    -------    ----------   ----------      --------      ----------     --------

Balances, March 31, 2002 (unaudited).....    1,000    $     -    $  107,348   $   (3,933)     $   (752)     $  (15,730)    $ 86,933
                                             =====    =======    ==========   ==========      ========      ==========     ========


</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>

                                                                                        Nine months ended
                                                                               ------------------------------------
                                                                               March 31, 2002        March 31, 2001
                                                                               --------------        --------------
                                                                                 (unaudited)           (unaudited)

<S>                                                                             <C>                   <C>
Cash flows from operating activities
   Net income...........................................................        $     1,178           $     3,007
   Adjustments to reconcile net income to net cash provided by
   operating activities:
     Depreciation and amortization of goodwill and other intangibles....              8,378                 7,568
     Amortization of debt issuance cost.................................                371                   429
     Deferred income taxes..............................................               (323)                   37
     Gain from early retirement of debt.................................                  -                  (456)
     Other..............................................................                180                   108
     Changes in operating assets and liabilities:
       Accounts receivable..............................................             (8,339)               (8,808)
       Inventory........................................................               (465)                  446
       Prepaid expenses, deferred charges and other assets..............               (152)                 (380)
       Accounts payable and accrued expenses............................             (3,571)               (1,744)
       Income taxes.....................................................             (1,006)                1,038
                                                                                -----------           -----------

         Net cash provided by (used in) operating activities............             (3,749)                1,245
                                                                                -----------           -----------

Cash flows from investing activities
   Purchases of equipment...............................................               (888)               (2,436)
   Patents..............................................................                (62)                    -
   Payments for acquisition of business, net of cash acquired...........            (19,053)                    -
                                                                                -----------           -----------

         Net cash used in investing activities..........................            (20,003)               (2,436)
                                                                                -----------           -----------

Cash flows from financing activities
   Payments under capital leases........................................               (503)                 (840)
   Repurchase of long-term debt.........................................                  -                (3,110)
   Net proceeds on revolving loan.......................................             11,450                 3,125
   Net proceeds on term loan............................................              9,750                     -
   Payments of loan closing costs.......................................               (605)                    -
   Net proceeds from promissory note to affiliate.......................                350                 2,904
                                                                                -----------            ----------

         Net cash provided by financing activities......................             20,442                 2,079
                                                                                -----------            ----------

Net increase (decrease) in cash and cash equivalents....................             (3,310)                  888
Cash and cash equivalents, beginning of period..........................              4,654                 1,158
                                                                                -----------            ----------

Cash and cash equivalents, end of period................................         $    1,344            $    2,046
                                                                                ===========            ==========


Supplemental information
  Cash paid during the period for:
    Interest, other.....................................................         $   11,297            $   12,125
    Interest to affiliate...............................................                  8                   230
    Income taxes........................................................              4,479                 2,836


</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.

     Acquisition of Color Prelude business

          On December 18, 2001, the Company,  through a newly formed subsidiary,
     IST,  Corp.,  acquired the business  including  certain  assets and assumed
     certain  liabilities  of Color Prelude,  Inc.  (such  business  referred to
     hereafter as "CP").  CP manufactures  interactive  advertising and sampling
     products  for cosmetic and consumer  products  companies.  The  acquisition
     complements the Company's product lines and the Company expects to increase
     domestic and international  product sales through broader  distribution and
     to reduce costs through certain economies of scale.

          The aggregate  purchase price of CP was $19.1 million which was funded
     through  cash and  borrowings  of  approximately  $18.0  million  under the
     restated credit  agreement.  The following  table  summarizes the estimated
     fair value of the assets  acquired and  liabilities  assumed at the date of
     acquisition.  The  Company is in the  process of  obtaining  valuations  of
     certain  assets;  thus the  allocation  of  purchase  price is  subject  to
     refinement.

                  Property and equipment..........................  $  7,871
                  Current assets..................................     5,731
                  Intangible assets...............................     8,946
                  Accounts payable and accrued expenses...........     3,494

          Goodwill  totaling  approximately  $6,250  will  not be  amortized  in
     accordance with Statement of Financial  Accounting Standards (SFAS) No. 142
     - Goodwill  and Other  Intangible  Assets.  The results of  operations  are
     included in the financial  statements  since the date of  acquisition.  Pro
     forma  results had CP been  acquired at the beginning of fiscal 2001 are as
     follows:


<TABLE>
<CAPTION>

                                                             Three months ended              Nine months ended
                                                                 March 31,                       March 31,
                                                                 ---------                       ---------

                                                            2002            2001           2002            2001
                                                            ----            ----           ----            ----

<S>                                                    <C>             <C>             <C>            <C>
    Revenue  ...................................       $   35,472      $   35,332      $   91,515     $  100,290
    Income before extraordinary items...........            2,616           1,806           1,137          2,416
    Net income..................................            2,616           1,806           1,137          2,872


</TABLE>


     Interim financial statements

          The interim consolidated condensed balance sheet at March 31, 2002 and
     the interim  consolidated  condensed statements of operations for the three
     and nine months  ended March 31,  2002 and 2001,  the interim  consolidated
     condensed statements of cash flows for the nine months ended March 31, 2002
     and 2001 and the



<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)

     interim consolidated condensed statement of changes in stockholder's equity
     for the nine  months  ended  March  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, 2001 consolidated
     condensed  balance sheet was derived from the audited balance sheet for the
     year  then  ended.  In   management's   opinion,   the  unaudited   interim
     consolidated  condensed  financial  statements were prepared  following the
     same  policies  and  procedures  used  in the  preparation  of the  audited
     financial  statements  and  all  adjustments,  consisting  only  of  normal
     recurring adjustments to fairly present the financial position,  results of
     operations  and  cash  flows  with  respect  to  the  interim  consolidated
     condensed  financial  statements,   have  been  included.  The  results  of
     operations for the interim  periods are not  necessarily  indicative of the
     results for the entire year.

     Reclassification

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

2.   INVENTORY

          The following table details the components of inventory:

                                          March 31, 2002         June 30, 2001
                                          --------------         -------------
                                           (unaudited)            (unaudited)
     Raw materials
       Paper..........................     $     1,875           $     1,796
       Other raw materials............           3,956                 2,697
                                           -----------           -----------
         Total raw materials..........           5,831                 4,493
     Work in process..................           3,388                 1,837
                                           -----------            ----------

     Total inventory..................     $     9,219           $     6,330
                                           ===========           ===========

3.   RETIREMENT OF DEBT

          In fiscal 2001,  AKI purchased  $4,000 of AKI Senior Notes for $3,110.
     The notes were subsequently retired.

4.   AMENDED AND RESTATED CREDIT AGREEMENT

          On December  18, 2001,  AKI amended and restated its 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  are
     limited to a borrowing base  consisting of accounts  receivable,  inventory
     and  property,  plant  and  equipment  which  serve as  collateral  for the
     borrowings.  Interest on amounts borrowed under the term loan and revolving
     loan accrue at a floating  rate based upon either prime or LIBOR as elected
     by the  Company.  The  Company is required  to pay  commitment  fees on the
     unused portion of the revolving loan commitment.

5.   DISTRIBUTION

          On April 17,  2002,  AKI paid a  distribution  of $6,804 to Holding to
     fund the purchase of Holding Senior Discount  Debentures.  The distribution
     was  funded  through  borrowings  under the  amended  and  restated  credit
     agreement.


<PAGE>


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

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

General

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

Results of Operations

 Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2002

     Net Sales.  Net sales for the three months  ended March 31, 2002  increased
$2.4 million,  or 7.3%, to $35.5  million,  as compared to $33.1 million for the
three  months  ended March 31,  2001.  The  increase in net sales was  primarily
attributable to sales of sampling  technologies for advertising and marketing of
cosmetics by CP partially  offset by a decrease in volume and competitive  price
pressure  of  domestic  sales  of  sampling  technologies  for  advertising  and
marketing of  fragrance  products.  We believe the decline of domestic  sales is
predominately attributable to the weak economic conditions in the United States,
particularly in the advertising  industry.  We expect the significant decline in
sales of our core products, experienced in our third fiscal quarter, to continue
through the remainder of our fiscal year.  We cannot  predict if this trend will
worsen or when sales may increase in the future. We believe,  however,  that the
continuing decline in core product sales may be partially offset by sales of the
CP products.

     Gross  Profit.  Gross  profit for the three  months  ended  March 31,  2002
increased $1.3 million,  or 9.4%, to $15.1 million, as compared to $13.8 million
for three months ended March 31, 2001. Gross profit as a percentage of net sales
increased to 42.5% in the three  months ended March 31, 2002,  from 41.7% in the
three months ended March 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,
changes in product mix and reduced premium labor and paper costs.

     Selling,  General  and  Administrative   Expenses.   Selling,  general  and
administrative  expenses  for the three  months  ended  March 31,  2002 was $5.0
million as compared to $5.0  million for the three  months ended March 31, 2001.
Selling, general and administrative expenses as a percent of net sales decreased
to 14.1% in the three  months  ended  March 31,  2002,  from  15.1% in the three
months ended March 31, 2001.  Increases in selling,  general and  administrative
expenses  primarily  due to an  increase  in  legal  fees  related  to a  patent
infringement  lawsuit  brought by AKI and expenses  related to the CP operations
were offset by a decrease in sales  commissions and incentive  bonuses and gains
on  foreign  exchange  transactions.   The  decrease  in  selling,  general  and
administrative  expenses  as a percent  of net sales  was  primarily  due to the
increase in net sales described above.

     Income from  Operations.  Income from operations for the three months ended
March 31, 2002 increased $1.1 million, or 15.1%, to $8.4 million, as compared to
$7.3 million for the three months ended March 31, 2001.  Income from  operations
as a percentage of net sales  increased to 23.7% in the three months ended March
31, 2002,  from 22.1% in the three months ended March 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 three  months ended March 31,
2002  decreased  $0.1 million,  or 2.3%,  to $4.2  million,  as compared to $4.3
million for the three months ended March 31, 2001. Interest expense as a


<PAGE>


percentage of net sales decreased to 11.8% in the three months ended March 31,
2002, from 13.0% in the three months ended March 31, 2001 primarily due to the
increase in net sales.

     Interest expense for AKI for the three months ended March 31, 2002 was $3.3
million as compared to $3.3  million for the three  months ended March 31, 2001.
Interest  expense as a  percentage  of net sales  decreased to 9.3% in the three
months ended March 31, 2002, from 10.0% in the three months ended March 31, 2001
due to the increase in net sales.

     Income Tax Expense. Income tax expense for the three months ended March 31,
2002 increased $0.5 million to $2.2 million.  The Company's  effective tax rate,
after consideration of non-deductible  goodwill  amortization,  was 39.1% in the
three months ended March 31, 2002, and 39.9% in the three months ended March 31,
2001.

     Income  tax  expense  for AKI for the three  months  ended  March 31,  2002
increased  $0.4  million  to $2.4  million.  AKI's  effective  tax  rate,  after
consideration  of  non-deductible  goodwill  amortization,  was 39% in the three
months ended March 31, 2002 and 2001.

     Extraordinary  Gain from Early Retirement of Debt.  Extraordinary gain from
early  retirement  of debt of $0.4  million for the three months ended March 31,
2001 resulted from the purchase and subsequent  contribution  of Senior Discount
Debentures  by  AHC  I  Acquisition   Corp.  The  contributed   securities  were
subsequently retired.

     EBITDA.  EBITDA for the three  months ended March 31, 2002  increased  $1.7
million,  or 17.4%, to $11.5 million,  as compared to $9.8 million for the three
months ended March 31, 2001.  The  increase in EBITDA  principally  reflects the
increase in gross profit  discussed  above.  EBITDA as a percentage of net sales
was  32.4%  and  29.6% in the  three  months  ended  March  31,  2002 and  2001,
respectively.   EBITDA  is  income  from   operations  plus   depreciation   and
amortization of goodwill and other intangibles.

  Nine Months Ended March 31, 2002 Compared to Nine Months Ended March 31, 2002

     Net Sales.  Net sales for the nine months  ended  March 31, 2002  decreased
$6.4  million,  or 7.0%,  to $85.2  million as compared to $91.6 million for the
nine months ended March 31, 2001.  The decrease was  primarily  attributable  to
decreases in volume of domestic sales of sampling  technologies  for advertising
and marketing of fragrance,  cosmetic and consumer products, partially offset by
sales of sampling technologies for advertising and marketing of cosmetics by CP.
We believe the decline in domestic sales is  predominately  attributable  to the
weak economic  conditions in the United States,  particularly in the advertising
industry.  We expect the  significant  decline in sales of our core  products to
continue  through the  remainder of our fiscal year.  We cannot  predict if this
trend will worsen or when sales may increase in the future. We believe, however,
that the  continuing  decline in core product  sales may be partially  offset by
sales of the CP products.

     Gross  Profit.  Gross  profit  for the nine  months  ended  March 31,  2002
decreased  $2.9 million,  or 8.3%, to $32.2 million as compared to $35.1 million
for nine months ended March 31, 2001.  Gross profit as a percentage of net sales
decreased to 37.8% in the nine months  ended March 31,  2002,  from 38.3% in the
nine months ended March 31, 2001.  The decrease in gross profit and gross profit
as a percentage  of net sales is  primarily  due to the decrease in sales volume
and changes in product mix partially  offset by reduced  premium labor and paper
costs.

     Selling,  General  and  Administrative   Expenses.   Selling,  general  and
administrative  expenses for the nine months ended March 31, 2002 decreased $0.2
million,  or 1.4%,  to $13.8  million as compared to $14.0  million for the nine
months ended March 31, 2001. The decrease in selling, general and administrative
expenses was primarily due to a one-time severance charge in fiscal year 2001, a
decrease in  personnel  in fiscal year 2002 and a decrease in sales  commissions
and incentive bonuses partially offset by an increase in legal fees related to a
patent  infringement  lawsuit  brought by AKI and a bonus  compensation  payment
related to the CP acquisition. Selling, general and administrative expenses as a
percent of net sales  increased to 16.2% in the nine months ended March 31, 2002
from  15.3% in the nine  months  ended  March  31,  2001,  primarily  due to the
decrease in net sales.

     Income from  Operations.  Income from  operations for the nine months ended
March 31, 2002 decreased $3.0 million,  or 17.9%, to $13.8 million,  as compared
to $16.8 million for the nine months ended March 31, 2001.


<PAGE>


Income from  operations as a percentage  of net sales  decreased to 16.2% in the
nine months  ended  March 31,  2002,  from 18.3% in nine months  ended March 31,
2001.  The decrease 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 nine months ended March 31, 2002
decreased $1.0 million,  or 7.8%, to $11.9 million, as compared to $12.9 million
for the nine months ended March 31, 2001.  Interest  expense as a percentage  of
net sales  decreased to 14.0% in the nine months ended March 31, 2002 from 14.1%
in the nine  months  ended March 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 the  repurchased  and retired  Senior
Discount  Debentures and Senior Notes and reduced average  borrowings  under the
revolving loan and the promissory note to a stockholder.

     Interest expense for AKI for the nine months ended March 31, 2002 decreased
$0.7 million,  or 6.9%,  to $9.4  million,  as compared to $10.1 million for the
nine months ended March 31, 2001.  Interest expense as a percentage of net sales
was 11.0% in the nine  months  ended March 31,  2002 and 2001.  The  decrease in
interest  expense,  including the  amortization of deferred  financing costs, is
primarily due to a decrease in interest  expense  related to the repurchased and
retired Senior Notes and reduced average borrowings under the revolving loan and
a promissory note to an affiliate.

     Income Tax Expense.  Income tax expense for the nine months ended March 31,
2002 decreased $0.8 million to $2.2 million.  The Company's  effective tax rate,
after consideration of non-deductible  goodwill  amortization,  was 39.5% in the
nine months  ended  March 31, 2002 and 41.4% in the nine months  ended March 31,
2001.

     Income  tax  expense  for AKI for the nine  months  ended  March  31,  2002
decreased  $0.8  million  to $3.1  million.  AKI's  effective  tax  rate,  after
consideration of  non-deductible  goodwill  amortization,  was 39.0% in the nine
months ended March 31, 2002 and 2001.

     Extraordinary  Gain from Early Retirement of Debt.  Extraordinary gain from
early  retirement  of debt of $1.4  million for the nine months  ended March 31,
2001 resulted from the purchase and subsequent  contribution  of Senior Discount
Debentures  by  AHC  I  Acquisition   Corp.  The  contributed   securities  were
subsequently retired.

     Extraordinary  gain from early  retirement  of debt for AKI of $0.5 million
for the nine months  ended March 31, 2001  resulted  from the purchase of Senior
Notes by AKI. The purchased securities were subsequently retired.

     EBITDA.  EBITDA for the nine months  ended March 31,  2002  decreased  $2.2
million,  or 9.0%,  to $22.2  million as compared to $24.4  million for the nine
months ended March 31, 2001.  The  decrease in EBITDA  principally  reflects the
decrease in gross profit  partially  offset by the decrease in selling,  general
and administrative expenses discussed above. EBITDA as a percentage of net sales
was  26.1%  and  26.6%  in the  nine  months  ended  March  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 March 31, 2002, we had consolidated indebtedness in an aggregate amount of
$151.5 million (excluding trade payables,  accrued  liabilities,  deferred taxes
and other non-current  liabilities),  of which approximately $26.4 million was a
direct obligation of Holding relating to its debentures and approximately $125.1
million  was a direct  obligation  of AKI  relating  to its  notes,  term  loan,
revolving  loan and promissory  note to affiliate.  Borrowings at March 31, 2002
included  $11.5 million under the revolving loan and $9.8 million under the term
loan that were incurred to acquire CP and $0.4 million on the promissory note to
affiliate.  At March 31, 2002 we had $8.5 million  available under the revolving
loan. At March 31, 2002,  AKI also had $23.1  million in additional  outstanding
liabilities (including trade payables,  accrued liabilities,  deferred taxes and
other non-current liabilities).

     Holding's   principal   liquidity   requirements   are  for  debt   service
requirements under the debentures.  AKI's principal  liquidity  requirements are
for debt service requirements and fees under the notes, term loan and revolving


<PAGE>


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 nine months  ended March 31,  2002,  cash  totaling  $3.7
million  was used by  operating  activities  primarily  due to the  increase  in
accounts receivable and a decrease in accrued interest and accrued income taxes,
offset partially by an increase in accounts payable and accrued expenses. During
the nine months ended March 31, 2001, cash totaling $1.2 million was provided by
operating   activities   resulting  from  net  income  before  depreciation  and
amortization  and an increase  in accrued  income  tax,  partially  offset by an
increase in accounts  receivable  and decreases in accounts  payable and accrued
expenses.

     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 are limited to a borrowing base consisting
of accounts receivable,  inventory and property, plant and equipment which serve
as collateral for the  borrowings.  Interest on amounts  borrowed under the term
loan and  revolving  loan accrue at a floating  rate based upon either  prime or
LIBOR.  The initial rate of interest under the restated credit agreement was 125
basis points higher than the interest rate of the previous credit agreement. The
Company  is  required  to pay  commitment  fees  on the  unused  portion  of the
revolving loan commitment.

     In the  nine  months  ended  March  31,  2002  and  2001,  we  had  capital
expenditures of approximately $0.9 million and $2.4 million, respectively. These
capital  expenditures  consisted  primarily  of the  purchase  of  manufacturing
equipment and upgrading our computer systems.

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

     We may from time to time evaluate additional potential acquisitions.  There
can be no assurance that  additional  capital sources will be available to us to
fund  additional  acquisitions  on  terms  that we find  acceptable,  or at all.
Additional  capital  resources,  if available,  may be on terms  generally  less
favorable   and/or  more  restricted  than  the  terms  of  our  current  credit
facilities.

     As of March 31,  2002,  AKI had  purchased  and retired $4.0 million of AKI
Senior Notes originally issued in 1998.

     On April 17,  2002,  Holding  purchased  $11.1  million of  Holding  Senior
Discount  Debentures  for $6.8 million.  The purchase price was funded through a
$6.8 million distribution received from AKI. AKI funded the distribution through
borrowings under it's credit agreement.  The effects of this transaction will be
included in the Company's fourth quarter.

     Capital  expenditures  for the  three  months  ending  June  30,  2002  are
currently  estimated  to be  approximately  $0.6  million.  Based on  borrowings
outstanding as of March 31, 2002, we expect total cash payments for debt service
for the three  months  ending June 30, 2002 to be  approximately  $0.6  million,
consisting  of $0.3  million in  principal  payments  under the term loan,  $0.1
million in interest  payments  under the term loan and $0.2  million in interest
and fees under the revolving  loan.  We also expect to make royalty  payments of
approximately $0.2 million during the three months ending June 30, 2002.

     At March 31,  2002,  Holding's  cash and cash  equivalents  and net working
capital  were $1.3  million  and $21.3  million,  respectively,  representing  a
decrease  in cash and cash  equivalents  of $3.4  million and an increase in net
working capital of $11.1 million from June 30, 2001. Account  receivables,  net,
at March  31,  2002  increased  64.4% or $11.6  million  over the June 30,  2001
amount,  primarily  as a result  of the  seasonality  associated  with our sales
revenue.


<PAGE>


Seasonality

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

Recently Issued Accounting Standards

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

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

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

Forward-Looking Statements

     The  information   provided  in  this  document  contains   forward-looking
statements that involve a number of risks and uncertainties. A number of factors
could  cause  actual  results,  performance  or  achievements  of our company or
industry results to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking  statements.  These
factors  include,  but are not  limited  to:  the  possible  trend of  customers
decreasing their use of our products;  economic conditions in general and in our
market areas, specifically the advertising market; our significant indebtedness;
integration of the CP acquisition;  the competitive  environment in the sampling
industry in general and in our  specific  market  areas;  changes in  prevailing
interest rates; inflation;  changes in cost of goods and services; changes in or
failure to comply with postal  regulations or other federal,  state and/or local
government regulations;  liability and other claims asserted against us; changes
in operating  strategy or development  plans;  the ability to attract and retain
qualified  personnel;  labor  disturbances;  changes in our capital  expenditure
plans; and other factors.  We also advise you to read the section entitled "Risk
Factors"  in the  Company's  annual  report  on Form 10K  filed  with the SEC on
September 18, 2001.

     In addition, such forward-looking statements are necessarily dependent upon
assumptions,  estimates and dates that may be incorrect or imprecise and involve
known and  unknown  risk,  uncertainties  and other  factors.  Accordingly,  any
forward-looking  statements  included herein do not purport to be predictions of
future  events  or  circumstances  and  may  not  be  realized.  Forward-looking
statements can be identified by, among other things,  the use of forward-looking
terminology  such as  "believes,"  "expects,"  "may,"  "should,"  "seeks,"  "pro
forma,"  "anticipates,"  "intends"  or the  negative of any such word,  or other
variations  or  comparable  terminology,   or  by  discussions  of  strategy  or
intentions. Given these uncertainties,  readers are cautioned not 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.


<PAGE>


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We  generate  approximately  25% of our sales from  customers  outside  the
United States,  principally in Europe.  International sales are made mostly from
our foreign  subsidiary  located in France and are primarily  denominated in the
local currency.  Our foreign subsidiary also incurs the majority of its expenses
in the local currency and uses the local currency as its functional currency.

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

     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 March 31,  2002,  there  were no forward
exchange contracts outstanding.


                            PART II OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits

                  None


         (b)      Reports on Form 8-K

                  On March 5, 2002, AKI Holding Corp. filed a Form 8-K/A
                  reporting the acquisition of substantially all of the assets
                  and the assumption of certain  liabilities of Color Prelude,
                  Inc.


<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:  May 15, 2002                        By:   /s/ Kenneth A. Budde
                                                 -----------------------------
                                                 Kenneth A. Budde
                                                 Senior Vice President &
                                                   Chief Financial Officer
                                                   (Principal Financial and
                                                   Accounting Officer)

                                           AKI, INC.

Date:  May 15, 2002                        By:   /s/ Kenneth A. Budde
                                                 -----------------------------
                                                 Kenneth A. Budde
                                                 Senior Vice President &
                                                   Chief Financial Officer
                                                   (Principal Financial and
                                                   Accounting Officer)


<PAGE>