FORM 10-Q

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

                 For the quarterly period ended December 31,1998

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


       Delaware                                             13-378585
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

Indicate  by check mark  whether  the  registrant  has filed all  documents  and
reports  required  to be filed by  Sections  12, 13, or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court. (X) Yes ( ) No

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.

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest  practicable date. As of February 10, 1999, 1,000
shares of common stock, $.01 par value, were outstanding.



<PAGE>





                           AKI, INC. AND SUBSIDIARIES

                               INDEX TO FORM 10-Q


Part I.           FINANCIAL INFORMATION

     Item 1.      Financial Statements

                       Consolidated Condensed Balance Sheet

                              -    June 30, 1998
                              -    December 31, 1998 (unaudited)

                       Consolidated Condensed Statements of Operations

                              -    October 1, 1997 through December 15, 1997
                                   (Predecessor) (unaudited)
                              -    December 16, 1997 through December 31, 1997
                                   (Successor) (unaudited)
                              -    Three months ended December 31, 1998 
                                   (Successor) (unaudited)
                              -    July 1, 1997 through December 15, 1997 
                                   (Predecessor)  
                              -    December 16, 1997 through December 31, 1997
                                   (Successor) (unaudited)
                              -    Six months ended December 31, 1998 
                                   (Successor) (unaudited)

                       Consolidated Condensed Statements of Cash Flows

                              -    July 1, 1997 through December 15, 1997 
                                   (Predecessor)  
                              -    December 16, 1997 through December 31, 1997
                                   (Successor) (unaudited)
                              -    Six months ended December 31, 1998 
                                   (Successor) (unaudited)

                       Consolidated Condensed Statement of  Changes in 
                              Stockholder's Equity

                              -    Six months ended December 31, 1998 
                                   (unaudited)

                       Notes to Consolidated Condensed Financial Statements



<PAGE>




         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>
PART I. FINANCIAL INFORMATION

  Item 1.      Financial Statements

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

                                                   June 30,        December 31,
                                                     1998              1998
                                                --------------    --------------
                                                                    (unaudited)
ASSETS

Current assets

Cash and cash equivalents...................     $      1,641       $     7,151
Accounts receivable, net....................           13,577            17,557
Inventory...................................            2,078             4,738
Income tax refund receivable................            5,155                -
Prepaid expenses............................              378               145
Deferred income taxes.......................              827               827
                                                -------------       -----------

    Total current assets....................           23,656            30,418

Property, plant and equipment, net..........           18,936            19,083
Goodwill, net...............................          151,842           149,916
Intangible assets, net......................            7,289             6,925
Debt issuance costs, net....................            5,272             5,630
Deferred income taxes.......................            3,869             3,302
Other assets................................              200               202
                                                -------------       -----------

    Total assets............................          211,064           215,476
                                                =============       ===========

LIABILITIES AND STOCKHOLDER'S EQUITY

Current liabilities

Current portion of capital 
 lease obligations..........................    $         609               656
Current portion of other notes payable......            1,330                -
Accounts payable, trade.....................            4,140             4,444
Accrued income taxes........................              100             1,127
Accrued interest............................              168             6,248
Accrued expenses............................            4,464             4,017
                                                 ------------        ----------

    Total current liabilities...............           10,811            16,492

Long-term portion of capital 
 lease obligations..........................            1,489             1,702
Revolving credit line.......................              -                 -
Senior notes................................          115,000           115,000
Deferred income taxes.......................            4,143             3,242
                                                -------------        ----------

    Total liabilities.......................          131,443           136,436
                                                -------------        ----------

Stockholder's equity

Preferred stock, $0.01 par, 8,700
 shares authorized; no shares
 issued or outstanding at 
 June 30, 1998 and December 31, 1998
 (unaudited)................................            -                    -
Common stock, $0.01 par, 1,000 shares
 authorized; 1,000 shares issued and 
 outstanding at June 30, 1998 and
 December 31, 1998(unaudited)...............            -                    -
Additional paid-in capital..................          100,862          100,862
Accumulated deficit.........................           (5,454)          (6,151)
Accumulated other comprehensive income......              (57)              59
Carryover basis adjustment..................          (15,730)         (15,730)
                                                -------------        ----------

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

    Total liabilities and 
     stockholder's equity...................    $     211,064        $ 215,476
                                                =============        ==========

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


<PAGE>
<TABLE>
<CAPTION>
                                     
                                                                                                          
                                                      AKI INC. AND SUBSIDIARIES
                                          (a wholly owned subsidiary of AKI Holding Corp.)
                                           CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                                                       (dollars in thousands)


                   Predecessor                   Successor                   Predecessor                     Successor
                -----------------   ------------------------------------  -----------------   --------------------------------------
                 October 1, 1997    December 16, 1997    Three Months       July 1, 1997      December 16, 1997       Six Months
                     through             through             Ended             through             through              Ended
                December 15, 1997   December 31, 1997  December 31, 1998  December 15, 1997   December 31, 1997   December 31, 1998
                -----------------   -----------------  -----------------  -----------------   -----------------   -----------------
                   (unaudited)         (unaudited)        (unaudited)                            (unaudited)         (unaudited)
<S>             <C>                 <C>                <C>                <C>                 <C>                 <C>


Net sales......  $         13,258    $          2,791  $          20,437  $          35,186   $           2,791   $          44,461
Cost of goods
 sold..........             9,187               1,978             13,660             22,809               1,978              29,081
                -----------------   -----------------  -----------------  -----------------   -----------------   -----------------

 Gross profit..             4,071                 813              6,777             12,377                 813              15,380

Selling, 
 general and 
 administrative
 expenses......             2,387                 483              3,294              5,703                 483               6,409
Amortization of
 goodwill and
 other 
 intangibles...               258                 177              1,152                568                 177               2,303
                -----------------   -----------------  -----------------  -----------------   -----------------   -----------------

 Income from
  operations...             1,426                 153              2,331              6,106                 153               6,668

Other expenses
  (income):
 Interest
  expense to
  stockholder(s)
  and affiliate               913                 739                -                2,143                 739                  -
 Interest 
  expense to
  others,net...               282                  20              3,244                503                  20               6,454
 Management 
  fees and
  other,net....                80                   -                 62                226                   -                 125
                -----------------   -----------------  -----------------  -----------------   -----------------   -----------------

 Income (loss)
  before
  income taxes                151                (606)              (975)             3,234                (606)                (89)

Income tax
 expense
 (benefit).....               154                (163)                (5)             1,441                (163)                786
                -----------------   -----------------  -----------------  -----------------   -----------------   -----------------

 Net income      
  (loss).......  $             (3)  $            (443) $            (970) $           1,793   $            (443)  $            (697)
                =================   =================  =================  =================   =================   =================





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


</TABLE>



<PAGE>


<TABLE>
<CAPTION>


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

                                                                 Predecessor                    Successor
                                                              -----------------   -------------------------------------
                                                                July 1, 1997      December 16, 1997      Six Months
                                                                  through             through              Ended
                                                              December 15, 1997   December 31, 1997   December 31, 1998
                                                              -----------------   ------------------  -----------------
                                                                                     (unaudited)         (unaudited)
<S>                                                           <C>                 <C>                 <C>    

Cash flows from operating activities:

   Net income (loss).........................                 $           1,793   $           (443)   $         (1,903)
   Adjustments to reconcile net income 
     (loss) to net cash provided 
     by operating activities:
     Depreciation and amortization of 
       goodwill and other intangibles........                             2,456                349               4,374
     Amortization of debt discount...........                               233                  6                   -
     Amortization of debt issuance costs.....                               101                157                 285
     Deferred income taxes...................                              (460)              (163)               (334)
     Other...................................                               (18)               (19)                116
     Changes in operating assets and 
       liabilities:
       Accounts receivable...................                             1,153               (366)             (3,980)
       Inventory.............................                                69                189              (2,660)
       Prepaid expenses, deferred charges
         and other assets....................                               (62)              (273)               (425)
       Income taxes..........................                               699                 -                6,182
       Accounts payable and accrued expenses.                            (1,036)            (6,472)              5,937
                                                              -----------------   ------------------  -----------------

       Net cash provided by (used in)
         operating activities................                             4,928             (7,035)              8,798
                                                              -----------------   ------------------  -----------------

Cash flows from investing activities:

   Purchases of equipment....................                              (807)               (91)             (1,657)
   Payments for acquisitions, net of cash
     acquired................................                                -            (134,153)                 -
                                                              -----------------   ------------------  -----------------

       Net cash used in investing
         activities..........................                              (807)          (134,244)             (1,657)

                                                              -----------------   ------------------  -----------------

Cash flows from financing activities:

   Payments under capital leases 
     for equipment...........................                              (249)               (24)               (301)
   Net proceeds (repayments) on 
     line of credit..........................                             2,362             (6,700)                  -
   Proceeds from issuance of senior increasing
     rate notes, net of offering costs........                               -             119,735                   -
   Proceeds from issuance of common stock.....                               -              76,000                   -
   Redemption of preferred stock..............                               -              (8,678)                  -
   Repayment of loans payable to stockholder..                           (1,851)           (36,649)                  -
   Repayment of other notes payable...........                              (50)                -               (1,330)
   Dividends paid on preferred stock..........                             (155)              (128)                  -
                                                               -----------------   ------------------  -----------------

       Net cash provided by (used in) 
         financing activities..................                              57            143,556              (1,631)
                                                              -----------------   ------------------  -----------------

Net increase in cash and cash
  equivalents..................................                           4,178              2,277               5,510
Cash and cash equivalents, beginning of period.                             303                 -                1,641
                                                              -----------------   ------------------  -----------------

Cash and cash equivalents, end of period.......               $           4,481     $        2,277    $          7,151
                                                              =================   ==================  =================


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


<PAGE>



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

                                                                 Predecessor                    Successor
                                                              -----------------   -------------------------------------
                                                                July 1, 1997      December 16, 1997      Six Months
                                                                  through             through              Ended
                                                              December 15, 1997   December 31, 1997   December 31, 1998
                                                              -----------------   ------------------  -----------------
                                                                                     (unaudited)         (unaudited)
<S>                                                           <C>                 <C>                 <C>    

Supplemental information:

   Cash paid (received) during the period for:
     Interest to stockholder(s)................               $           1,146     $           -      $             -
     Interest, other...........................                             459                  3                  89
     Income taxes..............................                           1,222                 -               (5,062)


Significant non-cash activities:

   Assets acquired under capital lease.........               $              -     $           -       $           561


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


</TABLE>


<PAGE>



<TABLE>
<CAPTION>



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


                                                                                               
                                                                                               Accumulated
                                              Common Stock          Additional                    Other         Carryover           
                                           --------------------      Paid-in      Retained    Comprehensive       Basis
                                           Shares       Dollars      Capital      Earnings        Income       Adjustment    Total
                                           -------      -------    ------------  ----------  ---------------   -----------  --------

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

Balances, June 30, 1998................      1,000      $   -      $    100,862  $  (5,493)  $          (57)   $  (15,730)  $79,621

Net income (unaudited).................                                               (697)                                    (697)
Other comprehensive income, net of tax:
  Foreign currency translation
   adjustment (unaudited)..............                                                                 116                     116
                                                                                                                            --------
Comprehensive income (unaudited).......                                                                                        (581)
                                           -------      -------    ------------  ----------  ---------------   -----------  --------
Balances, December 31, 1998 (unaudited)      1,000      $   -      $    100,862  $  (6,151)  $           59    $  (15,730)  $79,040
                                           =======      =======    ============  ==========  ===============   ===========  ========




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



</TABLE>

<PAGE>


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




1.   BASIS OF PRESENTATION

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

     Acquisition of Arcade Holding Corporation

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

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

<PAGE>

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





1.   BASIS OF PRESENTATION (Continued)

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


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

     Acquisition of fragrance sampling business of Minnesota Mining and 
     Manufacturing Company

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

     Refinancing of Bridge Loans

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

<PAGE>


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



1.   BASIS OF PRESENTATION (Continued)

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

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

      Interim financial statements

         The interim consolidated  condensed balance sheet at December 31, 1998,
     the interim  consolidated  condensed statement of operations for the period
     from October 1, 1997 through  December 15, 1997,  the interim  consolidated
     condensed  statement of  operations  for the period from  December 16, 1997
     through December 31, 1997, the interim consolidated condensed statements of
     operations  for the three and six  months  ended  December  31,  1998,  the
     interim consolidated  condensed statement of cash flows for the period from
     October  1, 1997  through  December  15,  1997,  the  interim  consolidated
     condensed  statement  of cash flows for the period from  December  16, 1997
     through December 31, 1997, the interim consolidated  condensed statement of
     cash flows for the six  months  ended  December  31,  1998 and the  interim
     consolidated condensed statement of changes in stockholder's equity for the
     six months ended December 31, 1998 are unaudited,  and certain  information
     and footnote disclosure related thereto, normally included in the financial
     statements  prepared  in  accordance  with  generally  accepted  accounting
     principles,  have been omitted. In the opinion of management, the unaudited
     interim consolidated condensed financial statements were prepared following
     the  same  policies  and  procedures  used in  preparation  of the  audited
     financial  statements  and  all  adjustments,  consisting  only  of  normal
     recurring adjustments to fairly present the financial position,  results of
     operations  and  cash  flows  with  respect  to  the  interim  consolidated
     condensed  financial  statements,   have  been  included.  The  results  of
     operations for the interim  periods are not  necessarily  indicative of the
     results for the entire year.



<PAGE>


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




1.   BASIS OF PRESENTATION (Continued)

         The accompanying  unaudited interim  consolidated  condensed  financial
     statements  as of  December  31, 1998 and for the three and six months then
     ended and for the period from December 16, 1997 through  December 31, 1997,
     present the financial  position and results of operations of the Company on
     the  basis  of  accounting  described  above  and,  accordingly,   are  not
     comparable with the audited  financial  statements for the period from July
     1, 1997  through  December 15, 1997,  nor with the  unaudited  consolidated
     condensed financial  statements for the period from October 1, 1997 through
     December 15, 1997.

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

                                        Unaudited Pro Forma Results for the

                                  Three Months Ended        Six Months Ended
                                   December 31, 1997        December 31, 1997
                                   _________________        _________________

Net sales                          $     18,383                $  43,099

Income from operations                      197                    3,558

Interest expense                          3,267                    6,516

Net loss                                  2,297                    2,658




<PAGE>


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





2.   INVENTORY

         The following table details the components of inventory:

                                         June 30, 1998        December 31, 1998
                                         -------------        -----------------
                                                                 (unaudited)
              Raw materials
                  Paper                   $        556         $          1,069
                  Other raw materials              786                    2,098
                                         -------------         ----------------

              Net raw materials                  1,342                    3,167
              Work in process                      736                    1,571
                                         -------------         ----------------

              Net inventory               $      2,078         $          4,738
                                          ============         ================


3.   SUBSEQUENT EVENTS

         On February 1, 1999, the former  president and chief executive  officer
     terminated  his  employment  with  the  Company.  Under  the  terms  of his
     employment agreement, the Company is required to pay $500 as severance. The
     Company will record a charge in this amount during its fiscal third quarter
     of 1999.



<PAGE>



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

General

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



     The Acquisition

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

<PAGE>


     Corp.  merged with and into the Predecessor and the combined entity assumed
     the name AKI, Inc.  Acquisition  Corp. then  contributed its $1 of cash and
     all of its ownership interest in AKI, Inc. to AKI Holding Corp. ("Holding")
     for 1,000 shares of Holding's common stock.

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

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

    Results of Operations

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


<PAGE>


     Three Months Ended December 31, 1998 Compared to Three Months Ended
     December 31, 1997

         Net Sales.  Net sales for the three  months  ended  December  31, 1998,
     increased  $4.4 million , or 27.5%,  to $20.4  million as compared to $16.0
     million for the three months ended  December 31, 1997.  The increases  were
     primarily attributable to the $2.9 million growth of the Company's European
     revenues and the addition of business in connection with the 3M Acquisition
     (as defined).  Other  increases were  attributable to increases in domestic
     sales of cosmetic  sampling products and sales of consumer product samples,
     partially offset by decreases in certain fragrance industry sampling.

       
         Gross  Profit.  Gross profit for the three  months  ended  December 31,
     1998, increased $1.9 million, or 38.8%, to $6.8 million as compared to $4.9
     million  for three  months  ended  December  31,  1997.  Gross  profit as a
     percentage  of net  sales  increased  to 33.3% in the  three  months  ended
     December 31, 1998,  from 30.6% in the three months ended December 31, 1997.
     The increase in gross profit and gross profit as a percentage  of net sales
     is primarily  attributable to the increase in net sales discussed above and
     reductions  in  raw  materials  costs,  offset  by a  decrease  in  certain
     fragrance  samples volume and pricing and increased  costs  associated with
     the outsourcing of European production.

         Selling,  General and  Administrative  Expenses.  Selling,  general and
     administrative  expenses  for the three  months  ended  December  31, 1998,
     increased  $0.4  million,  or 13.8% to $3.3  million  as  compared  to $2.9
     million for the three  months  ended  December  31,  1997.  The increase in
     selling,  general and administrative  expenses was primarily due to changes
     in executive  compensation  following the  Acquisition  and increased sales
     commissions  related  to the  increase  in net sales  offset  partially  by
     reduced advertising expenditures and staff reductions. As a result of these
     factors,  selling,  general and administrative expenses as a percent of net
     sales  decreased to 16.2% in the three months ended  December 31, 1998 from
     18.1% in the three months ended December 31, 1997.

         Income from  Operations.  Income from  operations  for the three months
     ended December 31, 1998 increased $0.7 million,  or 43.8%,  to $2.3 million

<PAGE>

     as compared to $1.6 million for the three  months ended  December 31, 1997.
     Income from  operations as a percentage of net sales  increased to 11.3% in
     the three  months ended  December 31, 1998,  from 10.0% in the three months
     ended December 31, 1997,  principally as a result of the factors  described
     above,  offset  by the  increase  in  amortization  of  goodwill  and other
     intangibles resulting from the Acquisition and the 3M Acquisition.

         Interest Expense.  Interest expense for the three months ended December
     31, 1998,  increased $1.2 million, or 60.0% to $3.2 million, as compared to
     $2.0 million for the three months ended December 31, 1997. Interest expense
     as a percentage  of net sales  increased to 15.7% in the three months ended
     December 31, 1998 from 12.5% in the three  months ended  December 31, 1997.
     The increase in interest expense is a result of the recapitalization of the
     Company in connection with the Acquisition.

         Management Fees and Other, Net.  Management fees and other, net for the
     three  months  ended  December  31,  1998,  were   approximately   $62,000,
     substantially unchanged from the three months ended December 31, 1997.

         Income Tax  Benefit.  The income tax benefit for the three months ended
     December 31, 1998 was  unchanged  from the three months ended  December 31,
     1997.

         EBITDA.  EBITDA for the three months ended December 31, 1998, increased
     $1.5 million, or 50.0%, to $4.5 million as compared to $3.0 million for the
     three  months  ended  December  31,  1997,  principally  as a result of the
     factors described above. EBITDA is income from operations plus depreciation
     and amortization of goodwill and other intangibles.

     Six Months Ended December 31,1998 Compared to Six Months Ended December 31,
     1997.

         Net  Sales.  Net sales for the six  months  ended  December  31,  1998,
     increased  $6.5  million,  or 17.1%,  to $44.5 million as compared to $38.0
     million for the six months  ended  December 31, 1997.  The  increases  were
     primarily attributable to the $4.3 million growth of the Company's European
     revenues  and  the  addition  of  business  in   connection   with  the  3M

<PAGE>

     Acquisition.  Other  increases were  attributable  to increases in domestic
     sales of cosmetic  sampling  products,  partially  offset by  decreases  in
     certain fragrance industry sampling.

         Gross Profit.  Gross profit for the six months ended December 31, 1998,
     increased  $2.2  million,  or 16.7%,  to $15.4 million as compared to $13.2
     million for the six months  ended  December  31,  1997.  Gross  profit as a
     percentage of net sales decreased to 34.6% in the six months ended December
     31,  1998,  from 34.7% in the six  months  ended  December  31,  1997.  The
     increase in gross profit is primarily  attributable  to the increase in net
     sales discussed  above. The decrease in gross profit as a percentage of net
     sales is due to a decrease in certain fragrance samples volume and pricing,
     changes  in  product  sales  mix,   increased  costs  associated  with  the
     outsourcing of European  production and increased costs associated with the
     initial production runs of certain customer products,  offset by reductions
     in raw materials costs.

         Selling,  General and  Administrative  Expenses.  Selling,  general and
     administrative  expenses  for the  six  months  ended  December  31,  1998,
     increased $0.2 million, or 3.2% to $6.4 million as compared to $6.2 million
     for the six months  ended  December  31,  1997.  The  increase  in selling,
     general  and  administrative  expenses  was  primarily  due to  changes  in
     executive  compensation following the Acquisition and costs associated with
     the  transition  of  the  3M  Acquisition   offset   partially  be  reduced
     advertising expenditures,  staff reductions and realized gains from foreign
     currency  transactions  in Europe.  As a result of these factors,  selling,
     general and administrative  expenses as a percent of net sales decreased to
     14.4% in the six  months  ended  December  31,  1998 from  16.3% in the six
     months ended December 31, 1997.

         Income from Operations. Income from operations for the six months ended
     December 31, 1998,  increased  $0.4  million,  or 6.3%,  to $6.7 million as
     compared to $6.3 million for the six months ended December 31, 1997. Income
     from  operations as a percentage of net sales decreased to 15.1% in the six
     months ended December 31, 1998, from 16.6% in the six months ended December
     31,  1997,  principally  as a result of the  increase  in  amortization  of
     goodwill and other  intangibles  resulting from the  Acquisition and the 3M
     Acquisition and the factors described above.

<PAGE>


         Interest  Expense.  Interest  expense for the six months ended December
     31, 1998,  increased $3.1 million,  or 91.2% to $6.5 million as compared to
     $3.4 million for the six months ended December 31, 1997.  Interest  expense
     as a  percentage  of net sales  increased  to 14.6% in the six months ended
     December 31, 1998 from 8.9% in the six months ended  December 31, 1997. The
     increase in  interest  expense is a result of the  recapitalization  of the
     Company in connection with the Acquisition.

         Management Fees and Other, Net.  Management fees and other, net for the
     six months ended  December 31, 1998,  were $0.1 million as compared to $0.2
     million for the six months ended  December 31,  1997.  Management  fees and
     other, net as a percentage of net sales were relatively constant in the six
     months ended December 31, 1998 and 1997.

         Income  Tax  Expense.  Income  tax  expense  for the six  months  ended
     December  31,  1998,  decreased  $0.5  million or 38.5% to $0.8  million as
     compared to $1.3 million for the six months ended  December 31, 1997 due to
     the decrease in income before income taxes, partially offset by an increase
     in non-deductible goodwill amortization.  The Company's effective tax rate,
     after consideration of non-deductible  goodwill amortization,  was 39.0% in
     the six months ended  December 31, 1998,  and 37.9% in the six months ended
     December 31, 1997.

         EBITDA.  EBITDA for the six months ended  December 31, 1998,  increased
     $1.9  million,  or 20.9%,  to $11.0 million as compared to $9.1 million for
     the six months  ended  December 31,  1997,  principally  as a result of the
     factors described above. EBITDA is income form operations plus depreciation
     and amortization of goodwill and other intangibles.

     Liquidity and Capital Resources

         At December 31, 1998, the Company's cash and cash  equivalents  and net
     working  capital  were  $7.2  million  and  $13.9  million,   respectively,
     representing  an increase in cash and cash  equivalents of $5.5 million and
     an increase  in net working  capital of $1.1  million  from June 30,  1998.
     Account  receivables,  net, at December  31, 1998  increased  29.3% or $4.0
     million over the June 30, 1998 amount, primarily due to increased sales.

<PAGE>

         As of December 31,  1998,  the Company had  consolidated  indebtedness,
     including  accrued  interest,  in an  aggregate  amount of $123.6  million,
     consisting primarily of the Company's $115.0 million principal amount of 10
     1/2% Senior Notes due 2008. At December 31, 1998,  the Company's  revolving
     credit facility (the "Credit Agreement") provided for additional borrowings
     of approximately $19.4 million, subject to a borrowing base calculation and
     the  achievement of certain  financial  ratios and compliance  with certain
     conditions.

         Capital expenditures for the twelve months ending December 31, 1999 are
     expected to be approximately $3.0 million.  Based on borrowings outstanding
     as of December 31, 1998,  the Company  expects total cash payments for debt
     service for the twelve months ending December 31, 1999 to be  approximately
     $14.1  million,  consisting  of $12.1  million in interest  payments on the
     Notes,  $0.9 million in capital  lease  payments,  and $0.1 million in fees
     under the Credit  Agreement.  The  Company  also  expects  to make  royalty
     payments of  approximately  $1.0 million  during the twelve  months  ending
     December  31,  1999.  The  Company  believes  that its  liquidity,  capital
     resources  and cash flows from  existing  operations  will be sufficient to
     fund  budgeted  capital  expenditures,  working  capital  requirements  and
     interest payments on its indebtedness,  including the Notes, for the twelve
     months ending December 31, 1999.

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

    3M Acquistion

         On June 22, 1998, the Company acquired the fragrance  sampling business
     of the Industrial and Consumer  Products  division of Minnesota  Mining and
     Manufacturing  Company ("3M") for $7.25 million in cash and assumption of a
     liability  of $182,000 to one of the  customers  of the  business  (the "3M
     Acquisition").  3M's fragrance  sampling business was predominantly a sales

<PAGE>


     and  distribution  business  as it  outsourced  the  manufacturing  of  the
     products it sold. The company did not assume such outsourcing  arrangements
     and relocated such operations to its existing  facilities in Chattanooga to
     utilize the then excess manufacturing  capacity at such facilities.  Except
     for  several  sales and  technical  employees,  the  Company did not extend
     employment to any employees from 3M.

    Cost Reduction Program

         The Company has implemented a comprehensive  program designed to reduce
     annual  operating  costs.  The  comprehensive  cost  reduction  program was
     developed by the Company in connection with an evaluation of its operations
     conducted by manufacturing  consultants with significant  experience in the
     printing  industry  and is  designed  to improve  the  Company's  operating
     efficiency  through (i) reduced  materials  cost derived  from  scrap/waste
     reduction and from more effective purchasing (savings of approximately $1.2
     million annually), (ii) streamlined manufacturing processes that reduce the
     amount of time required to prepare for successive production runs utilizing
     the same  equipment  and that reduce the amount of time  equipment is under
     utilized  by  improved   scheduling   of   production   runs   (savings  of
     approximately  $2.2 million annually),  and (iii) rationalized  staffing in
     the product support area (savings of approximately  $0.6 million annually).
     Management  expects  the  benefit  of the  materials  cost  reductions  and
     rationalized  staffing which were implemented in July 1998 will be realized
     in Fiscal 1999, while the streamlined manufacturing process is not expected
     to be  implemented  and realized until the fiscal year ended June 30, 2000.
     Approximately  fifty  percent of the estimated  annual  savings for reduced
     materials  costs  (partially  as the result of reduced  paper  pricing) and
     reduced  staffing  levels have been  realized as of December 31, 1998.  The
     amount of  operational  savings  ultimately  realized  may be  affected  by
     changes in product mix that may take place.

     Seasonality

         The  Company's  sales are seasonal due to the timing of its  customers'
     major advertising  campaigns,  which have  traditionally  been concentrated
     prior to the Christmas and spring  holiday  seasons.  Sales are  recognized
     when  products  are  shipped.  As a  result,  a higher  level of sales  are
     reflected in the Company's first two fiscal quarters ended December 31 when

<PAGE>

     sales from such advertising campaigns are principally  recognized while the
     Company's fourth fiscal quarter ended June 30 typically reflects the lowest
     sales level of the fiscal year. Sales seasonality may be affected from time
     to time as the Company's new product  technologies  are introduced and gain
     acceptance by its customers.

     Recently Issued Accounting Standards

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

     Year 2000 Issues

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

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

<PAGE>

     on a timely basis to ensure Year 2000 compliance, the Year 2000 issue could
     have a material adverse effect on the Company.

         To date,  the Company  has spent  $11,000 on Year 2000  compliance  and
     expects  additional  expenditures  of  approximately  $40,000 during Fiscal
     1999.  Although the Company expects the above referenced  expenditures will
     be  sufficient  to ensure the Company is Year 2000  compliant,  the Company
     anticipates  budgeting an additional  $49,000 for any  unforeseen  problems
     arising with respect to Year 2000  compliance  between July 1, 1999 and the
     Year 2000. All  expenditures  with respect to Year 2000  compliance will be
     funded from working capital.

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

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

    Subsequent Event

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

     Forward-Looking Statements

         The information  provided herein  contains  forward-looking  statements
     that involve a number of risks and uncertainties. A number of factors could
     cause actual results, performance,  achievements of the Company or industry
     results to be materially difference from any future results, performance or
     achievements expressed or implied by such forward-looking statements. These
     factors include, but are not limited to: the competitive environment in the
     sampling  industry in general and in the Company's  specific  market areas;
     changes in prevailing interest rates;  inflation;  changes in cost of goods

<PAGE>

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



<PAGE>



ITEM 6.                    EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits

                  27.1   Financial Data Schedule
                  27.2   Financial Data Schedule

         (a)      Reports on Form 8-K

                  None.


                                   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, INC.

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