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 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.)

            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

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 HOLDING CORP. 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 HOLDING CORP. AND SUBSIDIARIES
             (a wholly-owned subsidiary of AHC I Acquisition 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...................     $      3,842       $     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....................           25,857            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....................            6,535             7,197
Deferred income taxes.......................            3,888             3,905
Other assets................................              200               202
                                                -------------       -----------

    Total assets............................          214,547           217,646
                                                =============       ===========

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
Senior discount debentures..................           26,020            27,776
Deferred income taxes.......................            4,143             3,242
                                                -------------        ----------

    Total liabilities.......................          157,463           164,212
                                                -------------        ----------

Stockholder's equity

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..................           78,364            78,364
Accumulated deficit.........................           (5,493)           (9,259)
Accumulated other comprehensive income......              (57)               59
Carryover basis adjustment..................          (15,730)          (15,730)
                                                -------------        ----------

    Total stockholder's equity..............           57,084            53,434
                                                -------------        ----------

    Total liabilities and 
     stockholder's equity...................    $     214,547        $  217,646
                                                =============        ==========

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

<PAGE>
<TABLE>
<CAPTION>
                                     
                                                                                                          
                                                 AKI HOLDING CORP. AND SUBSIDIARIES
                                       (a wholly owned subsidiary of AHC I Acquisition 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              4,149                503                  20               8,245
 Management 
  fees and
  other,net....                80                   -                 62                226                   -                 125
                -----------------   -----------------  -----------------  -----------------   -----------------   -----------------

 Income (loss)
  before
  income taxes                151                (606)            (1,880)             3,234                (606)             (1,702)

Income tax
 expense
 (benefit).....               154                (163)              (301)             1,441                (163)                201
                -----------------   -----------------  -----------------  -----------------   -----------------   -----------------

 Net income      
  (loss).......  $             (3)  $            (443) $          (1,579) $           1,793   $            (443)  $          (1,903)
                =================   =================  =================  =================   =================   =================





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


</TABLE>



<PAGE>


<TABLE>
<CAPTION>


                                                 AKI HOLDING CORP. AND SUBSIDIARIES
                                       (a wholly-owned subsidiary of AHC I Acquisition 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               1,756
     Amortization of debt issuance costs.....                               101                157                 329
     Deferred income taxes...................                              (460)              (163)               (918)
     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)               (773)
       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)              8,460
                                                              -----------------   ------------------  -----------------

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)                  -
   Dividend paid to AHC I Acquisition Corp....                               -                  -               (1,863)
                                                              -----------------   ------------------  -----------------

       Net cash provided by (used in) 
         financing activities..................                              57            143,556              (3,494)
                                                              -----------------   ------------------  -----------------

Net increase in cash and cash
  equivalents..................................                           4,178              2,277               3,309
Cash and cash equivalents, beginning of period.                             303                 -                3,842
                                                              -----------------   ------------------  -----------------

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 HOLDING CORP. AND SUBSIDIARIES
                                       (a wholly-owned subsidiary of AHC I Acquisition 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 HOLDING CORP. AND SUBSIDIARIES
                                       (a wholly-owned subsidiary of AHC I Acquisition 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      $   -      $     78,364  $  (5,493)  $          (57)   $  (15,730)  $57,084

Dividend to AHC I Acquisition Corp                                                                    
  (unaudited)..........................                                             (1,863)                                  (1,863)

Net income (unaudited).................                                             (1,903)                                  (1,903)
Other comprehensive income, net of tax:
  Foreign currency translation
   adjustment (unaudited)..............                                                                 116                     116
                                                                                                                            --------
Comprehensive income (unaudited).......                                                                                      (1,787)
                                           -------      -------    ------------  ----------  ---------------   -----------  --------
Balances, December 31, 1998 (unaudited)      1,000      $   -      $     78,364  $  (9,259)  $           59    $  (15,730)  $53,434
                                           =======      =======    ============  ==========  ===============   ===========  ========




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



</TABLE>





<PAGE>


                       AKI HOLDING CORP. AND SUBSIDIARIES
             (a wholly owned subsidiary of AHC I Acquisition 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 HOLDING CORP. AND SUBSIDIARIES
             (a wholly owned subsidiary of AHC I Acquisition 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 HOLDING CORP. AND SUBSIDIARIES
             (a wholly owned subsidiary of AHC I Acquisition 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 HOLDING CORP. AND SUBSIDIARIES
             (a wholly owned subsidiary of AHC I Acquisition 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                       4,188                    8,357

Net loss                               2,916                    3,897



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
                                          =============          ===============



<PAGE>


                       AKI HOLDING CORP. AND SUBSIDIARIES
             (a wholly owned subsidiary of AHC I Acquisition Corp.)
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                (dollars in thousands, except share information)





3.  CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS

         The following condensed balance sheet at June 30, 1998 and December 31,
     1998  (unaudited)  and  condensed  statements  of  operations,  changes  in
     stockholder  equity and cash flows for the six months  ended  December  31,
     1998  (unaudited)  for Holding  have been  prepared on the equity  basis of
     accounting  and  should  be  read  in  conjunction  with  the  consolidated
     statements and notes thereto. Comparative statements of operations and cash
     flows  for the  prior  year  have  not been  provided  as  Holding  was not
     effectively formed until December 15, 1997.


                                  BALANCE SHEET

                                          June 30, 1998        December 31, 1998
                                          _____________        _________________
                                                                  (unaudited)

Assets

Cash..............................        $      2,201         $             -
Investment in subsidiaries........              95,408         $        94,711
Deferred charges..................               1,263                   1,597
Deferred income taxes.............                  19         $           603
                                          _____________        ________________
    Total assets..................              98,891                  96,881
                                          =============        ================

Liabilities

Senior Discount Debentures........        $     26,020         $        27,776

Stockholder's equity

Common Stock, $0.01 par value, 1,000 
   shares authorized; 1,000 shares 
   issued and outstanding.........                   -                       -
Additional paid-in capital........              78,364                   78,364
Accumulated deficit...............              (5,493)                  (9,259)
                                          _____________        ________________
    Total stockholder's equity....              72,871                   69,105
                                          =============        ================
                                                                     
    Total liabilities and 
       stockholder's equity.......        $     98,891         $         96,881
                                          =============        ================



<PAGE>


                       AKI HOLDING CORP. AND SUBSIDIARIES
             (a wholly owned subsidiary of AHC I Acquisition Corp.)
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                (dollars in thousands, except share information)





3.   CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS
     (Continued)


                             STATEMENT OF OPERATIONS


                                                                  Six Months
                                                                     Ended
                                                               December 31, 1998
                                                               _________________
                                                                  (unaudited)

Equity in losses of subsidiaries....................           $           (697)
Interest expense....................................                     (1,791)
                                                               _________________


       Loss before income taxes.....................                     (2,488)
Income tax benefit..................................                       (585)
                                                               _________________
                                                                                
                    
       Net loss.....................................           $         (1,903)
                                                               =================
                                                                    




                                   STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY

<TABLE>
<CAPTION>

                                                                                   
                                                       Common Stock                 Additional   
                                                       ------------                  Paid-in        Accumulated
                                                  Shares            Amount           Capital          Deficit           Total
                                                  ------            ------           -------          --------          -----
<S>                                               <C>               <C>              <C>              <C>               <C>    

Balances, June 30, 1998.......................     1,000             $ -             $ 78,364         $(5,493)          $ 72,871
Dividend to AHC I Acquisition Corp.
     (unaudited)..............................        -                -                 -             (1,863)            (1,863)
Net loss (unaudited)..........................        -                -                 -             (1,903)            (1,903)
                                                  ------            ------           --------         --------          ----------
Balance, December 31, 1998 (unaudited)             1,000             $ -             $ 78,364          (9,259)           $69,105
                                                  ======            ======           ========         ========          ==========
                                                                         
</TABLE>





<PAGE>


                       AKI HOLDING CORP. AND SUBSIDIARIES
             (a wholly owned subsidiary of AHC I Acquisition Corp.)
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                (dollars in thousands, except share information)




3.   CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS
     (Continued)

                             STATEMENT OF CASH FLOWS

                                                                  Six Months
                                                                     Ended
                                                               December 31, 1998
                                                               _________________
                                                                  (unaudited)

Cash flows from operating activities:
   Net loss............................................          $       (1,903)
   Adjustments to reconcile net loss to net cash 
    provided by operating activities:
      Net change in investment in subsidiaries.........                     697
      Amortization of debt discount....................                   1,756
      Amortization of debt issuance costs..............                      44
      Deferred income taxes............................                    (585)
      Increase in debt issuance costs..................                    (347)
                                                               _________________
               
   Net cash used by operating activities...............                    (338)
                                                               _________________


Cash flows from financing activities:
   Dividend to AHC I Acquisition Corp. ................                  (1,863)

Net decrease in cash and cash equivalents..............                  (2,201)
Cash and cash equivalents, beginning of period.........                   2,201
                                                               _________________

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



4.   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>

ITEM 2.

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

General

         As of December 31, 1998, the capital stock of AKI, Inc. (the "Company")
accounts  for  all of the  assets  of AKI  Holding  Corp.  ("Holding").  Holding
conducts all of its business  through the Company.  The sales of 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)  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

<PAGE>

equity  investments  by certain prior  stockholders,  which was  contributed  to
Merger Corp. Immediately following the Acquisition, Merger 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 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")  totaling  $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 Holding 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 Holding 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 Holding 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 Holding 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 as

<PAGE>

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 $2.1 million, or 105.0% to $4.1 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 20.1% 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  capitalization  of  Holding  and  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 $63,000,  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  increased  $0.3  million to $0.3 million as compared to $0.0
million for the three months ended  December 31, 1997 due to the increase in the
loss before taxes,  partially offset by an increase in  non-deductible  goodwill
amortization.   Holding's   effective   tax   rate,   after   consideration   of
non-deductible  goodwill was 32.8% in the three months ended  December 31, 1998,
and 45.0% in the three  months  ended  December  31,  1997.  The decrease in the
effective  tax  rate  is due to the  portion  of  the  interest  expense  on the
Debentures which is non-deductible for income tax purposes.

         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.

<PAGE>

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 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

<PAGE>

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.

         Interest  Expense.  Interest  expense for the six months ended December
31, 1998,  increased $4.8 million, or 141.2% to $8.2 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 18.4% 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  $1.1 million or 84.6% to $0.2 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.  Holding's  effective tax rate,  after  consideration of
non-deductible goodwill amortization, was 89.7% in the six months ended December
31, 1998,  and 37.9% in the six months ended  December 31, 1997. The increase in
the  effective  tax rate is due to the  portion of the  interest  expense on the
Debentures which is non-deductible for income tax purposes.

         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.



<PAGE>



Liquidity and Capital Resources

         At December  31,  1998,  Holding'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.

         As  of  December  31,  1998,  Holding  had  consolidated  indebtedness,
including accrued interest, in an aggregate amount of $151.4 million, consisting
primarily of Holding's $27.8 million (net of unamortized original issue discount
of $22.2 million) of 13 1/2% Senior Discount Debentures and 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.

         Holding's  cash flow,  and  consequently  its ability to service  debt,
including its obligations under the Debentures, is dependent upon the cash flows
of the Company and the payment of funds by the Company to Holding in the form of
loans,  dividends or otherwise.  The Company has no  obligations,  contingent or
otherwise,  to pay any amounts due  pursuant  to the  Debentures  or to make any
funds available therefor.

         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 its
liquidity,  capital  resources and cash flows from existing  operations  will be



<PAGE>






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 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




<PAGE>



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 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.

<PAGE>


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 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.

<PAGE>


         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 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

<PAGE>


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 HOLDING CORP.

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